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Times are tough and budgets are tight but if you think you’ll save a few bucks by cutting Directors and Officers (D&O) liability insurance, you might want to think again.

Though D&O insurance might make up a large percentage of a small nonprofit’s budget, an organization would find it difficult to attract board members without it, according to Katherine Berkman, chairman of San Francisco-based Calender-Robinson Co. “It’s hard to get qualified board members to sit on your board (without D&O insurance),” she said.

D&O insurance protects a corporation’s directors and officers from liability in case a lawsuit is brought against them relating to a company’s or nonprofit’s business.

If an economic downturn creates a situation where people have to be let go, Berkman said, that could create the potential for more claims in employment practices for such things as wrongful termination. “It’s more on a case-to-case basis than on a blanket across the board basis,” she said.

Nonprofits should consider the following features when selecting appropriate D&O coverage:

Scope of coverage. The broad coverage offered under many nonprofit D&O policies is ordinarily preferable.
Look for a policy with a broad definition of “insured.” The definition should include the organization (often called “entity” coverage) and all past, present and future board members, employees, and volunteers.
A broad definition of “wrongful act” and “claim.” The definitions of “wrongful act” and “claim” determine the policy’s scope of coverage -- what actions the policy covers.
Preferred policies provide coverage for claims for wrongful termination, discrimination, and harassment. An insurer might agree to provide a defense for claims filed with administrative agencies (for example, the EEOC or local human rights commission) in addition to coverage for lawsuits seeking money damages.
Deductibles. Most nonprofit D&O policies offer several options for the policy deductible. The premium generally increases when the insured selects a lower deductible (also known as the “retention”).
Type of coverage for defense costs. A growing number of nonprofit D&O policies require that the insurer will pay the litigation costs as the organization incurs them. “Duty to defend” policy defines the insurer’s obligation to pay defense costs as incurred. For most nonprofits, this provision is essential. One major nonprofit D&O insurer reports that its defense costs for an employment claim average between $35,000 and $103,000.
Annual premium. Many nonprofit insurance buyers regard the annual premium as the most important determining factor in comparing D&O policies.

Buying a low-cost policy that provides inadequate coverage is a waste of precious financial resources. Conversely, choosing the most expensive policy will not guarantee the best coverage.