Top Five Insurance Mistakes Nonprofits Make and How to Avoid ThemYou probably volunteer on the board of a nonprofit because you believe in the cause and want to make a difference, but that doesn’t absolve you from liability. Directors and officers (D&O) insurance for nonprofits protects board members and the organizations they serve from the financial impact of a lawsuit.
Key Takeaways
- D&O lawsuits can name both the nonprofit and individual board members personally.
- D&O insurance covers legal defense costs, judgments, and settlements tied to management/oversight claims.
- DEI policy shifts, cyber incidents, and federal funding cuts are all raising nonprofit D&O risk right now.
- D&O policies have three “sides” of coverage (A, B, C) — most boards should confirm all three are in place.
- Even small, well-run nonprofits face real personal-liability exposure, not just large organizations.
What Is D&O Insurance for Nonprofit Board Members?
D&O lawsuits are not just a problem for publicly traded for-profit companies—private companies and even nonprofit organizations may also face lawsuits.
Various stakeholders—including investors, donors, employees, customers, vendors, regulators, and competitors—may file lawsuits accusing an organization of mismanagement. Lawsuits frequently name both the organization itself and the individual officers or board members responsible for running it. These individuals may be held personally liable.
In the event of a D&O lawsuit, your D&O insurance policy will cover legal costs associated with your defense, as well as judgments or settlements, under the terms of the policy. Without this protection, many nonprofits do not have the financial reserves necessary to survive a major lawsuit or indemnify their board members.
Nonprofit Board Members Take on Personal Risk
Some nonprofit board members underestimate their risk. Although nonprofits exist to support a cause, the stakes are still high. In the fourth quarter of 2024, nonprofits held a total value of nearly $14 trillion, according to FRED.
The board members tasked with carrying out the nonprofit’s vision may be held accountable when things go wrong.
For example, NPQ says the directors of a nonprofit nursing home were found personally liable for breaching their duty of care for failing to remove the organization’s CFO and administrator once it became apparent that they were mismanaging the organization. The U.S. Court of Appeals for the Third Circuit upheld a $2.25 million jury verdict against the directors.
In another case, CBS News says a lawsuit has been filed against the Foodbank of Southern California, its CEOs, and 12 board members, accusing them of misusing state and federal funds for their own gain.
Why Nonprofit D&O Risk Is Rising in 2026
D&O lawsuits may stem from many different types of accusations, such as mismanagement, breach of duty, misleading statements, self-dealing, or misuse of funds. The risk of a lawsuit always exists, but it may be higher right now due to legislative, economic, and social issues. For a broader look at what’s changing, see our roundup of nonprofit risk trends to watch.
Key trends include:
- The debate over DEI puts organizations in a no-win situation. Many organizations are stepping away from their DEI initiatives amid a changing political climate and the risk of anti-DEI lawsuits. Forbes has even created a list of major companies that are cutting DEI. However, as Zeff Law Firm warns, cutting DEI programs creates new legal risks.
- Data breaches and cyberattacks are a growing risk. Board members may face liability for failing to implement appropriate cybersecurity measures or for mishandling a cyber incident.
- Cuts to federal grants have had a significant impact on many nonprofits. Many nonprofits already operate on tight budgets. When funding is threatened, though, their financial situation may become especially tense. Missteps are more likely to lead to catastrophic failures. This means disputes may be more likely, which could contribute to more lawsuits.
Protecting Your Board and Your Vision
Nonprofit organizations provide valuable services, and their board members make this possible. Unfortunately, lawsuits could put nonprofit organizations in jeopardy and expose their boards to personal liability. These are exactly the kind of gaps we cover in insurance mistakes nonprofits make.
Board members can reduce their risk by complying with regulations, following the organization’s bylaws, and acting in the best interest of the organization and its stakeholders. However, there are still risks, even when you act prudently. Disputes may arise over mistakes or actions with unintended consequences. There’s also a risk of accusations that turn out to be unfounded but nevertheless result in costly legal expenses. D&O insurance provides important protection.
Do Small Nonprofits Need D&O Insurance Too?
In Heffernan’s experience working with nonprofit boards, one of the most common misconceptions is that a small budget means small risk — lawsuits don’t scale with organization size. A small nonprofit’s board members can be held just as personally liable as a large organization’s, and legal defense costs don’t shrink to match a smaller budget. If you’re just getting started, what new nonprofits should know about insurance is a good next read, and the Nonprofit Risk Management Center offers additional guidance on right-sizing coverage for smaller boards.
This is a good time to review your D&O insurance.
- Are the limits sufficient? If your nonprofit has grown, your exposures may have grown as well, meaning you might want to consider higher limits.
- Do your board members have adequate coverage? D&O insurance provides three “sides” of coverage. Side A covers the directors and officers when the company cannot indemnify them. Side B covers the company through reimbursement when the company can indemnify the directors and officers. Side C covers the company when it is named in a lawsuit.
- Do you need other types of coverage? In addition to D&O insurance, your nonprofit may need employment practices liability insurance, cyber insurance, and other types of coverage.
Don’t Let Your Board Carry Risk It Doesn’t Have To
Board members who volunteer their time shouldn’t have to risk their personal assets. Heffernan has helped more than 4,000 nonprofit organizations build D&O programs that protect boards without straining tight budgets.
