Many of us have been asked to serve on a nonprofit board for organizations such as the YMCA, the local church, a museum, library, or civic group. What if, while a member of that board, you make a decision and one or several of the members do not like the outcome or allege you breached your duty as a director or officer? A legal suit is filed against you and the board. What happens now? Who will pay for your defense attorney? Did you know your personal assets may be exposed by participating as a board member for a nonprofit organization? You could lose everything you have worked for just by making one decision while serving in a position for which you aren’t even paid!
Many people hold the common misperception that directors (including trustees) and officers of nonprofits do not have a meaningful exposure to their personal liability. The reality of today’s tenuous legal environment is quite the opposite:
A. Nonprofit directors and officers (D&Os) have an even more demanding job because the affairs of the organization may be less familiar to the individual and may be conducted under less efficient conditions than in a business corporation.
B. Just because you serve on a nonprofit does not lower the legal standards of conduct. Standards are at least as high if not higher than for profit D&Os.
C. Damages recoverable from D&Os of even a relatively small nonprofit organization can easily exceed the net worth of many individuals.
If you serve on a board, ask if the organization has a D&O policy in place. Many homeowners’ policies have endorsements that will offer coverage for voluntary activities but your independent insurance agent should be consulted to verify you have coverage.
Rather than have your personal liability as a first line of defense to cover a potential claim, the organization should have a D&O policy in place to protect and attract the services of quality individuals. For minimal cost, the organization will have coverage for decisions made by board members. Again, talk to an independent insurance agent about this coverage.
Do you currently serve on a nonprofit board? Have you or your board faced a lawsuit? Share your experience with us!