Non-Profit Directors and Officers
How many of us have felt the compulsion to become active in a charity, a sports booster club, an alma mater or any number of worthwhile activities? Once you become active, start going to events, help raise funds, eventually the inevitable question is asked….will you consent to sit on our board of directors? Your reaction could run the emotional spectrum of “how do I get out of this”, to “wow what an honor”. If you do decide to sit on the board, you have now accepted not only the responsibility of a board member, but also a potentially tremendous exposure to your personal assets. Unfortunately, most members of non-profit boards of directors are blissfully unaware of the staggering exposure to economic loss they personally face.
What is the exposure? Much like a “for-profit” organization, the board of directors of a non-profit organization are charged with the ultimate responsibility of the actions and liabilities of the organization. As a member of the board, you could be held liable for activities of the organization that cause harm to others. Some actual losses include:
Misuse of funds
Offensive behavior and sexual harassment
Failing to supervise the CEO
Waste of assets
Libel and slander
Acting beyond authority and scope
Failure to deliver services
Pretty scary stuff, but doesn’t state corporation law include language that the non-profit organization must indemnify the members of the board in the event of a loss? True, but how many of us would trust our personal assets to the assets of the typical non-profit organization.
Now that we understand the exposure, how do we mitigate, eliminate, or transfer the risk? Let’s assume that simply quitting the board is not an option.
Many feel that elimination of the risk is found through federal and state law limiting the exposure of those serving on non-profit boards. In fact, both federal and state laws contain language that essentially states you cannot be held liable for losses while sitting on a non-profit board. The specific language states:
“A director shall discharge the duties of the position of director in good faith in a manner the director reasonably believes to be in the best interest of the corporation and with the care an ordinarily prudent person in a like position would exercise under similar circumstance. A person who so performs those duties IS NOT LIABLE BY REASON OF BEING OR HAVING BEEN A DIRECTOR OF THE CORPORATION.”
So the State says you can’t be held liable…..end of story? Hardly. Take special interest in the part that says you must discharge the duties of the position in good faith. In reality, this means if you sit on a non-profit board in name only, you will not be protected by the law. You must be active, attend meetings, and make prudent decisions.
Perhaps an even more important “requirement” for avoiding liability under the law, is that of “no compensation.” A person must serve without compensation of any type (except for reasonable expense reimbursement) for the law to protect them. What many people fail to realize is compensation can take many forms other than straight cash. How about the free membership you might get for sitting on the board or the free admission to special events? Given the wide array of “perks” for sitting on a board, the afore mentioned “prudent” person needs to be very diligent in avoiding any compensation or the law does not help him or her.
We have established that although the law gives some protection, there are definitely gaps where a person could be sued. So we need to look further.
Another method for reducing or eliminating your exposure while sitting on a non-profit board is Directors and Officers insurance. Directors and Officers insurance is purchased by the non-profit organization and is designed to cover the board and the officers of a non-profit organization in the event of a covered loss. Unfortunately, many non-profit organizations do not purchase Directors and Officers insurance because they feel it is not necessary or is too expensive. In the absence of Directors and Officers insurance or bountiful non-profit assets, YOU become the insurer.
Ok, now what? You’re concerned about the loopholes in the laws, your non-profit organization can’t afford Directors and Officers insurance, what do you do? Don’t despair, there are simple and inexpensive methods for covering yourself through your own personal insurance.
Excess Liability/Umbrella policies often provide broad comprehensive coverage for those that sit on a non-profit board of directors.
Ironically, the language that provides coverage on most excess liability/umbrellas is found in the exclusions. The specific language to look for is:
“We do not cover any damages for any covered person’s actions or failure to act as an officer or member of a board of directors of any corporation or organization. THIS EXCLUSION DOES NOTAPPLY TO A NOT-FOR-PROFIT CORPORATION OR ORGANIZATION, OR TO A CONDOMINIUM OR COOPERATIVE ASSOCIATION.”
Making sure you carry excess liability/umbrella coverage containing the above language goes a long way to protecting you for the liability you accept when sitting on a non-profit board. You don’t, however, want to use your coverage if it isn’t necessary. Therefore, below is a short “due diligence check list” you should perform prior to consenting to sit on a non-profit board:
Ø Check to see if the board you are considering has an active engaged board that follow “Robert’s Rules” and keeps and disperses complete board meeting minutes.
Ø Review the bi-laws and make sure there is a statement regarding no board compensation being allowed. Make sure this statement is followed!
Ø Review the financials and the security surrounding the financials.
Ø Be an active member and stay within your scope.
Do not accept any form of compensation.
Ø Ascertain whether or not the non-profit organization carries Directors and Officers coverage. Have your personal risk manager review the coverage.
Ø Ask your personal risk manager to review your excess liability/umbrella language to ensure it provides coverage for your actions as a member of a non-profit board.
The author of this document is Bruce Humphrey who is the CEO of PCG Agencies, Inc.