Ensuring That Good Deeds Go Unpunished (Mitigating Risks When Serving on Non-Profit Boards)
Whether from a sense of responsibility to the community at large or the opportunity to combine the passion for a particular non-profit organization with managerial or fund raising skills, sooner or later many clients find themselves sitting on a non-profit’s board of directors. Unfortunately, despite some legislative protections, sitting on a non-profit board can expose an individual to liability risks. To help ensure that these organizations and our clients are able to continue pursuing “the mission,” we recommend conducting a risk assessment. Such an assessment should help all parties – the board member and the organization – understand the threats they could face from a lawsuit related to board service and the costs and limitations of insurance to mitigate those threats.
Good Managerial Practices Can Mitigate Some Risk
Non-profit organizations face liabilities that are substantially the same as those facing their for-profit brethren. Potential liabilities can include employment related lawsuits, claims of financial mismanagement and breach of a fiduciary duty.
For example, while non-profit organizations rely on the hard work of a network of volunteers and their interactions with the public, those volunteers are still considered employees, giving the non-profit exposure to employment related causes of action such as wrongful termination, discrimination and harassment, claims of financial mismanagement, and claims of breach of a fiduciary duty in addition to personal injury (libel, slander) and property damage
Good management practices can help mitigate potential liabilities that are within the organization’s control. For example, a meal delivery organization should make sure that the drivers delivering food have valid driver’s licenses and good driving records. Similarly, by working with a reputable collector or dealer when adding to its collection, an art museum might forestall a claim of theft by the country where the treasure originated. Unfortunately, all risks cannot be anticipated or managed.
Volunteer Immunity Laws Do Not Prevent Lawsuits
The Volunteer Protection Act enacted by Congress in 1997 (“VPA”) was both lauded as a way to encourage volunteers (including board members) by limiting lawsuits against them and vilified for providing a road map for attorneys seeking to bring effective lawsuits against volunteers and non-profits. In fact, some states have enacted laws that provide additional protection to volunteers and non-profits over and above the protection provided by the VPA.
Nevertheless, relying exclusively on these laws to protect a volunteer or board member is analogous to not wearing a seat belt while driving a car and hoping that the car’s air bag will provide enough protection. Volunteer immunity laws don’t prohibit bringing legal action even if they might bar an eventual claim. In the meantime, board members and the charity itself could face large expenses defending a lawsuit even if an award on such action is never made. Directors and Officers (D&O) liability insurance coverage can provide extra protection not provided by federal or state law.
Evaluate Your Non-Profit’s Directors and Officers (D&O) Liability Insurance
Non-profit D&O policies are designed to protect a charity’s directors and officers against costs associated with defending employment related lawsuits, claims of financial mismanagement and breach of a fiduciary duty and possible losses from adverse judgments. When evaluating a D&O policy, some of the issues to consider, with the help of a competent insurance agent, include:
- What is the financial rating of the insurance carrier providing this coverage? Generally, we recommend carriers with an A+ or A++ rating from A. M. Best (www.bestreview.com).
- Does the agent/agency have expertise in the field of non-profit insurance work?
- Is the policy a “claims-made” policy? This type of policy covers lawsuits filed during the policy period, even though the cause of action might have occurred prior to the insurance being in force. If the coverage is cancelled or not renewed and then a lawsuit is filed, the director and organization won’t be covered, absent an “extended reporting period” rider.
- Is the policy an “occurrence” policy? This covers lawsuits whose cause of action occurs while the policy is in force.
- What are the policy limits? Multiple claims can exhaust policy limits. Some states have specified minimum limits for all 501(c)3 organizations.
- Is defense coverage within, or in addition to, policy limits? Having defense coverage in addition to policy limits provides greater coverage and, conceivably, greater incentive for the insurance company to vigorously defend a lawsuit.
- Does the policy allow the insurance company or the non-profit to select the attorney?
- Does the policy have a “failure to provide insurance” exclusion? Such an exclusion removes coverage for lawsuits by alleging that the director or organization did not purchase either the correct insurance or sufficient insurance. If possible, have this exclusion removed.
- If changing insurance policies or carriers for a “claims-made” policy, make sure the new policy’s retroactive date for coverage is far enough in the past to protect against an uninsured claim.
- Is the employment-related coverage appropriately broad or narrow? An “Employment Practices Liability” rider may be available and appropriate.
Assess Your Personal Excess Liability Coverage
Take particular care to understand the extent to which your individual excess (umbrella) liability policy covers your non-profit board activities. Some umbrella policies extend liability protection to non-profit board members for specific perils such as bodily injury, death, personal injury (libel/slander) and property damage to others – expanding the coverage limits provided by the organization. Some insurers, typically those focused on the high net worth market, offer very broad coverage for “actions or failure to act” as a non-profit board member. On the other hand, policies offered by more mass market insurers typically do not extend liability protection to non-profit board member activity and only offer additional coverage at a separate price. However, it’s important to bear in mind that such additional coverage typically sits on top of any primary D&O coverage carried by the non-profit. If the non-profit has less than the required D&O coverage, the board member would be out-of-pocket for the difference between the non-profit’s actual coverage and any required minimum coverage amount.
Contributing your time and talents by serving on a non-profit organization’s board ought to be a rewarding experience. To that end, be sure to discuss your board positions with your Aspiriant client service team so we can help ensure that you and your organization have appropriate and cost effective insurance in place.