Why law firms need directors and officers insurance part 1
Why do law firms need directors and officers insurance
Approximately 20 percent of all U.S. corporations are nonprofit, which indicates a significant exposure to directors and officers all over the country. Even worse, many of these directors don’t realize they have liability exposure.
The function of nonprofit directors
The primary function of nonprofit directors is to maintain financial stability and provide the necessary resources to help the organization.
While many for-profit corporations are subject to various performance standards and behaviors with reporting requirements and regulatory agencies, nonprofits are mainly exempt from these regulations. Many nonprofit directors and officers must implement their internal information systems and performance criteria.
Also, because many nonprofit directors and officers are frequently subjected to less scrutiny, there is a higher probability of litigation regarding their fiduciary role.
In addition, the resources of many nonprofit organizations are insufficient to provide directors and officers with the most desirable support. As a result, decision-making may be hindered by incomplete information, adequate time, and the inability to investigate and document relevant factors carefully.
The legal climate
While many states make it difficult to prove negligence against directors and officers, that doesn’t mean they should rely upon those immunities and limitations as protection. Especially because, while even their defenses may eventually prevail, the bills associated with the defense can grow very quickly.
With the litigiousness of today’s society, board members commonly face lawsuits for an extended list of wrongdoings, including discrimination, harassment, wrongful termination of employees, inefficient administration or supervision, waste of assets, misleading reports, and other misrepresentations.
In addition to lawsuits and potential judgments, the cost to defend an organization can be prohibitive. Current studies show that the cost to defend a lawsuit can run anywhere from $35,000 to $100,000.
Directors’ and Officers’ liability insurance is most often associated with large for-profit companies; however, they are not the only ones that need it. Nonprofit directors and officers may have an even more demanding job because the operations may be less familiar to the individual, and they are at a higher risk for litigation.
There are two types of nonprofit organizations, each having a different form of exposure for its directors and officers. The first is a Public Benefit nonprofit organization, which exists to serve the community at large, such as a religious organization or academic institution. The second type of organization is a mutual benefit nonprofit organization formed to serve its members. Examples include trade associations, cooperatives, and social organizations.