A nonprofit full of passionate, committed employees. A privately held business with great camaraderie. Both great places to work that feel like family.

These organizations purchase workers compensation, health, and property and general liability insurance to protect their employees and property while transferring risk from their balance sheets. But in many cases, they unknowingly leave their management team and outside board members vulnerable to lawsuits.

Nonprofits and private companies usually don’t expect to be sued by employees, customers, private shareholders, creditors, regulators, the government or competitors—but they are. Commonly, allegations fall under breach of fiduciary duties of care, obedience and loyalty, which require directors & officers to act in good faith and with the best interest of the corporation.

Consider the following examples:

• A group of investors alleges that certain directors & officers failed to disclose material facts, and provided them with inaccurate information and misleading statements. The complaint includes causes of action for negligent misrepresentation and breach of fiduciary duties. The defense and settlement exceeds $1 million.
• A regulator investigates a nonprofit, alleging misuse of public grant monies for purposes not associated with the nonprofit’s charitable purpose. Although the government finds no wrongdoing, the investigation and defense cost exceed $150,000.

These organizations aren’t alone. Unlike most public companies, many nonprofits and private companies don’t recognize the need for D&O liability insurance until they face a lawsuit. This mistake may require significant financial and personnel resources to settle and defend lawsuits—all of which a D&O policy could cover.

Think about your own book of business. Are you neglecting a significant market opportunity? According to the U.S. Small Business Administration, the U.S. is home to more than 28 million small businesses. And according to the National Center for Charitable Statistics, there are 1.5 million tax-exempt public charities and private foundations in the U.S.—a number that doesn’t even include the 368,337 other types of nonprofits, such as chambers of commerce, fraternal organizations and civic leagues.

Not sure you can convince these types of clients a D&O policy is necessary? Here are a few arguments you can cite that might help you make the sale:

• Bad business decisions can be more visible for a small business.
• A client may have unique conflicts of interest due to complexity of responsibilities.
• Quality directors will not serve without D&O coverage.
• Without D&O insurance, the personal assets of directors & officers are at risk.
• The cost of defending a corporate lawsuit can be high, regardless of the outcome.

A D&O policy can be a powerful asset for helping private and nonprofit organizations manage their risk cost-effectively.

Brad Lacey is vice president, professional lines at V3 Insurance Partners.