Giving something back Featured

8:00pm EDT September 25, 2007

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 dale_zellmer@ajg.com.