Many times, as business men and
women in the community, we are
offered opportunities to serve on executive boards for our local churches
and nonprofit organizations. These are
excellent opportunities to participate in
community outreach and offer a chance to
give back to the community.
“Before accepting a position on these
boards, a person should be aware of the
possibility of lawsuits against these organizations and how these legal proceedings
can impact the individual board members,”
says Dale Zellmer, regional director —
Gallagher Religious & Non-Profit Practices
Group at Arthur J. Gallagher Risk
Management Services Inc. “Determine
your exposure and how best to mitigate
any potential liability.”
Smart Business talked with Zellmer for
more insight into things you should consider as you prepare to serve on nonprofit
boards.
Are nonprofit board members individually
responsible for board actions?
They can be, especially if an employee or
stakeholder feels that the actions of any or
all of the individual board members
harmed them.
Are lawsuits against nonprofits a common
occurrence?
One of the myths associated with nonprofit organizations is that there are few
sources of claims since nonprofits don’t
have shareholders. While it is true that the
vast majority of lawsuits filed against nonprofit boards are filed by current or former
employees alleging wrongful employment
practices, nonprofits serve large and varied
constituencies to which their boards owe
specific fiduciary duties similar to duties
owed by corporate boards. These constituencies are potential plaintiffs in legal
actions brought against nonprofit boards.
Who are the potential claimants?
1) Current Employees — a current
employee or former staff member of a nonprofit may bring actions alleging a host of wrongful acts, including wrongful termination, discrimination, sexual harassment
and Americans with Disabilities Act violations.
2) Outsiders — Third parties that have a
relationship with the nonprofit may allege
harm caused by the nonprofit and/or its
directors, officers or employees. Outside
sources can be vendors, funders or another nonprofit.
3) Clients/church members — The people you are trying to help — your service
recipients — may bring claims against
directors and officers alleging wrongdoing.
4) Donors — A nonprofit’s contributors
may sue directors and officers alleging misuse of a restricted gift.
What can be done to protect the individual
board members?
Many state laws protect us from suits
against directors and officers of charitable
organizations. However, these laws provide limited immunity for certain volunteers, not nonprofits, under certain circumstances. The federal Volunteer Protection
Act (VPA) preempts state laws except
when they specifically provide greater protection. The VPA and its state-based counterparts do not prohibit suits. Even if one
of these laws allows your volunteers to
escape liability, substantial funds are
required to defend even a frivolous claim.
The best option for most nonprofits and
their individual board members is to carry
directors’ and officers’ (D&O) insurance.
What should we know about D&O insurance?
There are a wide variety of policies available. Each organization and board needs to
evaluate both the organization’s and the
individual’s needs. Desirable characteristics include: broad definition of insured,
advancement of defense costs and broad
coverage for employment practices liability.
For nonprofits, a broad definition of
insured includes ‘any natural person who
was, is or becomes a director, trustee, officer, employee, committee member or volunteer,’ as well as the nonprofit itself.
Obviously, a policy that advances defense
costs is very beneficial. Funds needed for
the nonprofit’s mission won’t be tied up if
there is legal action that requires defense.
Reimbursement language in a policy may
require the nonprofit to pay all costs and
attorney fees out of pocket and wait for
repayment by the insurer. This could seriously stretch the nonprofits resources as
D&O cases are often expensive and
lengthy.
On employment practices liability, make
sure what is and isn’t covered is clear and
meets your needs.
DALE ZELLMER is regional director — Gallagher Religious &
Non-Profit Practices Group at Arthur J. Gallagher Risk
Management Services Inc. Reach him at (281) 655-6720 or at
[email protected].
