The biggest mistake charities and NPOs make when it comes to insurance

Directors and officers of NPOs have the same personal liability risk as the CEO of Microsoft.

Yep, if you’re a director or officer of a charity or Non-Profit Organisation with no or low wage roll and lots of lovely volunteers, your risk is the same as a director or officer of a huge PLC. Because your personal liability as a leader isn’t linked to size or turnover or wage bill.

You might assume that because your directors, officers and trustees are doing something noble and not for gain, that people won’t make a claim against them. But, since we live in an increasingly litigious society, where there’s blame, there’s often a claim.

The biggest risk charities and NPOs make when it comes to insurance is not protecting the personal liability of its directors and officers.

So here are 5 things all charities and NPOs need to know about personal liability risk and management liability insurance:

#1 ‘Directors and officers’ doesn’t just mean directors and officers

The word ‘Director’ is ambiguous and broad, so just because you don’t have director in your title doesn’t mean you’re not exposed. ‘Directors and officers’ also includes trustees, company secretaries, H&S officers and anyone else involved in the strategic governance of the organisation.

#2 Your personal assets are at risk

A common misconception is that as a director, you’re protected personally by liability insurance. But liability insurance only covers the company for injuries or damage, not its directors. Which means all your personal assets (your home, your car, your financial investments) could be at risk if a claim is made against you.

#3 Management liability insurance isn’t as expensive as you might think

With fundraising getting harder and funding getting scarcer, NPO budgets are understandably tight. You might assume that management liability insurance will cost thousands of pounds, but it could be cheaper than you think:

“We recently quoted for a not-for-profit fishery board in Scotland, funded by grants and donations and staffed by volunteers. They were pleasantly surprised that they could get management liability cover for around £500.” Richard Wright, Management Liability Insurance Expert 

Plus, most management liability packages include three types of cover (Directors & Officers, Corporate Legal Liability and Employment Practices Liability) making it even better value for money.

#4 The real value of ML insurance is in the legal defence costs

Management liability insurance is a type of ‘catastrophe’ cover. Claims are rare but can be catastrophic with potential defence and legal bills running into tens, even hundreds of thousands of pounds. As a not-for-profit director, it’s unlikely you would be able to afford the cost of defending yourself in the event of a claim. So, although management liability insurance would cover awards and payouts, the real value is cover for legal defence costs.

#5 Claims are more often brought by employees than by shareholders

You might think that claims are more likely to come from a shareholder, but claims often come from a disgruntled or injured employee pursuing an individual (like a Health and Safety Officer) after a failed employer’s liability claim.

A word on…

The Companies Act 2006

You might be wondering why directors are personally liable in the first place? It’s all thanks to The Companies Act brought about in 2006 which legally binds company directors and officers to 7 core statutory duties:

1. Act within powers: use your authority for proper purposes.
2. Promote the success of the company: act in good faith and consider stakeholders, employees, and the environment.
3. Exercise independent judgment: Don’t be unduly influenced by others.
4. Exercise reasonable care, skill, and diligence
5. Avoid conflicts of interest: Avoid situations where personal or business interests clash with company interests.
6. Not accept benefits from third parties: Refuse bribes, gifts or inducements.
7. Declare interests in transactions

If you’re a charity or NPO and you want to protect your directors, officers and trustees from personal liability claims, ask us about management liability insurance or simple directors and officers insurance.

Email Richard on richard.wright@macbeths.co.uk or call 0118 916 5480