Here's something most nonprofit board members don't realize until it's too late: when you volunteer to serve on a board, you're taking on real legal responsibility. That means if something goes wrong—a donor claims their gift was misused, an employee files a discrimination lawsuit, or regulators find a compliance issue—you could be on the hook personally. Your house. Your savings. Your retirement account. That's where Directors and Officers (D&O) insurance comes in.
D&O insurance protects both your nonprofit organization and the individual board members who serve it. Think of it as a safety net that catches you when someone claims you made a bad decision, breached your fiduciary duty, or failed to properly oversee the organization. And with nonprofits holding nearly $14 trillion in assets and facing increasing scrutiny, this protection matters more than ever.
Why Nonprofit Board Members Face Real Liability Risks
Let's be clear: most nonprofit board members will never face a lawsuit. But the risk is real enough that you need to take it seriously. About 63% of nonprofit organizations have reported a D&O claim in the past 10 years—that's twice the rate of private companies. And while federal and state laws provide some volunteer protection, these laws have significant gaps.
The Volunteer Protection Act sounds reassuring, but it only shields you from simple negligence. It won't protect you if you act with gross negligence, engage in willful misconduct, or show "flagrant indifference" to someone's rights. And here's the kicker: you can still be personally liable for failing to pay employee withholding taxes, even if you thought you were protected.
Consider this real case: directors of a nonprofit nursing home were found personally liable for $2.25 million because they failed to remove a CFO and administrator who were clearly mismanaging the organization. The court ruled they breached their duty of care—and that meant their personal assets were at risk. Or take the lawsuit against the Foodbank of Southern California, where board members were accused alongside executives of misusing state and federal funds. These aren't hypothetical scenarios—they're happening to well-meaning volunteers who thought they were just helping out.
The Three Biggest Threats to Nonprofit Boards
Based on recent claim data, three types of problems account for most D&O insurance claims against nonprofits:
Employment disputes are by far the biggest issue. A staggering 85% of nonprofit D&O claims are employment-related, and these claims generate 94% of all claims dollars. We're talking about allegations of wrongful termination, discrimination, harassment, and retaliation. The average employment practices claim costs between $150,000 and $200,000 to resolve—money that few nonprofits have sitting around, and that board members definitely don't want coming out of their personal accounts.
Donor lawsuits are the second major threat. When donors give money for a specific purpose and believe the nonprofit misused those funds, they sue. In one case, a donor contributed money specifically for helping impoverished children with education and healthcare, but the board decided to put some of it toward a building expansion instead. The donor sued for misappropriation, seeking the full contribution back plus interest. Even Fidelity Charitable, the country's largest charity by assets, faced a lawsuit from donors who made a $100 million gift to combat Lyme disease and claimed it was mishandled.
Regulatory actions are the third category to watch. State attorneys general and the IRS take nonprofit compliance seriously. One youth soccer club expanded from serving one county to three counties but never updated their charter documents. The attorney general brought action against the board. Another nonprofit president misused federal grant money over 10 years, leading to regulatory enforcement. And if your nonprofit tries to influence legislation in ways that violate IRS guidelines, you could lose your tax-exempt status—and board members could face lawsuits from donors who relied on that status.
How D&O Insurance Protects You and Helps You Recruit Better Boards
D&O insurance does three critical things: it pays for your legal defense, covers settlements if you lose or decide to settle, and pays judgments awarded against you. That last part is huge—even if a court finds you personally liable, the insurance steps in to protect your personal assets.
Here's what many nonprofits don't realize: D&O insurance isn't just about protection after something goes wrong. It's actually one of your best recruitment tools. Concern about personal liability is a major barrier to getting qualified people to join nonprofit boards, especially for organizations working in high-risk areas like healthcare or serving vulnerable populations. When you can tell prospective board members that the organization carries robust D&O coverage, you remove a significant objection. You're essentially saying, "We take your commitment seriously enough to protect you."
Most D&O policies cover not just board members and officers, but also your CEO and other staff members. Some policies even extend coverage to volunteers. And the coverage typically starts the moment a claim is made against you, regardless of when the alleged wrongful act occurred, as long as it happened after your policy start date.
The cost is more reasonable than you might think. For small to mid-sized nonprofits, D&O insurance typically runs between $500 and $2,585 per year. Compare that to the $35,000 average claim cost—or the $100,000 that one in ten claims reaches—and it's clear this is money well spent. And if you're shopping for coverage, you can often reduce costs by excluding Employment Practices Liability Insurance if you don't have employees, or by choosing a higher deductible.
What to Look for When Buying D&O Coverage
Not all D&O policies are created equal, and understanding what you're buying matters. First, check whether the policy includes Employment Practices Liability Insurance (EPLI). Given that 85% of nonprofit claims are employment-related, this coverage is essential for most organizations with employees.
Pay attention to coverage limits and deductibles. A typical starting point is $1 million in coverage with a $1,000 deductible, but your needs depend on your nonprofit's size, activities, and risk profile. If you're handling large grants or managing significant assets, you might need higher limits.
Also look at whether the policy covers regulatory proceedings and investigations, not just lawsuits. Remember that attorney general investigation we mentioned? You want coverage that kicks in when regulators come knocking, not just when papers are filed in court.
Finally, review the exclusions carefully. Most policies won't cover intentional wrongdoing, fraud, or personal profit—and that's appropriate. But make sure legitimate business decisions and good-faith mistakes are covered, even if they turn out poorly.
Beyond Insurance: Building a Culture of Smart Governance
D&O insurance is essential, but it's not a substitute for good governance. The best way to reduce your liability risk is to actually understand and fulfill your duties as a board member. That means showing up to meetings, asking questions when something doesn't make sense, reviewing financial statements, and speaking up when you see potential problems.
Many nonprofits combine D&O insurance with strong indemnification provisions in their bylaws. Indemnification means the nonprofit agrees to cover board members' legal expenses and liabilities related to their service. Check whether your organization's bylaws include this language—and if they don't, consider proposing an amendment.
Education matters too. Make sure new board members receive orientation about their legal duties and responsibilities. Many of the liability problems nonprofits face stem from board members simply not understanding what's expected of them. When everyone knows their role and takes it seriously, the risk of problems drops significantly.
Serving on a nonprofit board is meaningful work. You're contributing your time and expertise to causes you care about, and you're helping your community. D&O insurance shouldn't discourage you from serving—it should give you the confidence to serve boldly, knowing that if something goes wrong despite your best efforts, you and your fellow board members are protected. That peace of mind lets you focus on what really matters: advancing your nonprofit's mission and making a difference.
