January 31, 2013

Protecting Your Personal Liability: What Every Non-profit Board Member Should Know

Volunteer service on a non-profit board can be a rewarding experience, providing both a community benefit and personal satisfaction.  Yet, people often do not realize that an unpaid volunteer board member owes essentially the same duties to the entity and its members, as do professional board members for Fortune 500 companies.  Likewise, a director or officer of a non-profit board can be personally liable to a third party, a member of the organization or even the non-profit entity itself.

It’s for this reason a non-profit board of directors should have a clear understanding of their duties, as well as the exposure to their personal liability in the event of an injury claim, accident or breach of board duties. More importantly, they need to understand the insurance protection available to protect their personal liability while they’re providing this valuable community service.

There are many common misconceptions about serving on a non-profit board that can lead to an under appreciation on the necessity of comprehensive Director and Officer (D&O) Liability insurance.  For example, one may assume that a non-profit entity itself would be the target in a lawsuit or the non-profit would protect the director or officer in the event of a lawsuit.  This assumption is wrong, as it is often the entity itself or a member of the entity suing on behalf the entity that is the Plaintiff.  Further, an individual might think that as long as she does not steal or misappropriate funds of the non-profit entity, she will not get sued.  This again is a major misconception, as all it takes is one renegade member or the slightest bit of controversy over the direction of the non-profit to lead to a lawsuit where the board members are individually named.

Directors and officers must understand that they could be personally liable for a judgment in these situations, and that even what may seem as the most frivolous lawsuit, still may be costly to defend, making appropriate D&O coverage imperative. While laws may vary from state to state, following are some examples of instances where directors and officers of non-profit organizations are sued, even when the directors and officers act with the best intentions:

  • The board allegedly fails to procure the requisite insurance coverage for the organization or its members
  • A member or donor is unhappy with the way that funds of the organization are being spent
  • A member is unhappy with the selection and cost of third-party service providers and contractors
  • A member is unhappy with an increase in annual or monthly dues
  • There are allegations that the board fails to share enough information with the members

In short, a board member can be sued for almost anything imaginable – all it takes is one litigious or upset individual. The Community First team at ProSight Specialty understands the issues faced by non-profit directors and officers, which is why Directors and Officers Liability coverage with optional Employment Practices Liability and Fiduciary Liability coverage is available at ProSight.