Becoming a member of a nonprofit board of directors can be a rewarding experience. The giving of your time, talent or treasure to an organization that you feel passionately about is truly a joy and can have a tremendous impact.
Liability exposures can potentially threaten your livelihood and personal finances, though. When interviewing organizations (and yes, you should interview them just as they interview you), be prepared to ask and be able to answer the following questions:
- What are the goals of the organization and current board?
- Can my skills, experience or expertise impact the mission?
- How much time and/or money am I required to give and/or raise?
- What is the legal and fiduciary responsibility of being a board member and does the group have Directors & Officers Insurance (D&O)
Claims against nonprofit and corporate officers tend to be disruptive and costly to an organization. The primary objective of a nonprofit board of directors is to provide oversight and direction to the organization so that it can successfully fulfill its mission. Although nonprofit boards are typically not subject to the same level of scrutiny as those in the for-profit sector, they nonetheless owe fiduciary duties to the nonprofit organization and its grantees and donors. Any perceived breach of these fiduciary responsibilities can lead to legal action.
Board members can be exposed to lawsuits brought forward by any number of constituencies – including staff, other directors, vendors, beneficiaries, donors and members.
D&O would provide coverage against “wrongful acts” which might include actual or alleged errors, omissions, misleading statements, neglect or breach of duty on the behalf of the board of directors. Nonprofit D&O policies typically include protection for employment-related claims. Employment practices liability (EPLI) claims are the leading cause of D&O claims against nonprofits and account for a significant portion of the overall liability issues that they face.
Since the 1991 amendments to the Civil Rights Act, which gave employees the ability to seek jury trials and punitive damages for mental anguish and emotional distress, employment-related lawsuits have become a serious concern for both for-profit and not-for-profit organizations. With increasingly high costs to defend, settle and pay compensatory awards, the need for EPLI protection is especially imperative for cash-strapped organizations and their boards (The Liability Exposure of Nonprofit Board Members, Zurich Insurance 2011).
You can still be “one of the good guys” by working with a nonprofit that you believe in, but heightened accountability and transparency, along with a society that has become more and more litigious, makes it necessary for you to protect your personal finances. The group you work with should care enough about your personal protection and ensure that D&O coverage is in place as part of their insurance program.