Are Your Board Members Protected?

Published on Tuesday, March 02, 2010
ARTICLES

Many organizations don't realize that board members, even those serving in a voluntary capacity, have personal liability exposure with respect to the performance of their duties for the not-for-profit. Relying on Voluntary Immunity Statutes to provide the right protection is just not good enough.

The good news is that a properly structured Directors & Officers Liability policy can protect the board members and the entity in question.

Directors & Officers Liability insurance responds, in essence, to claims for financial damages arising out of the management of the organization. Although non-profits do not have shareholders, they do have obligations to: the clients they serve, employees, members and the general public. And in a litigious society, directors are vulnerable to claims from any one of these sources.

Board members have a duty to make decisions in the best interest of the organization, and they can be held personally liable for those decisions. While the by-laws may make provisions for indemnification of claims brought against board members, there may not be sufficient resources for providing an adequate defense or for covering damages awarded by a court, thus putting the board members' assets at risk.

The costs can be staggering. In one instance, the state attorney general sued a large charitable foundation alleging the trustees were excessively compensated and devoted insufficient time and resources to the foundation's intended purpose. The suit was settled for over $5 million, not including the cost of the foundation's defense.

Reliance on Volunteer Immunity Statutes is an inadequate risk management strategy on several counts. While the statutes may provide some protection for non-compensated (volunteer) individuals, they do not protect the entity. These statutes extend only to damages awarded; they do not provide defense costs, even during litigation to determine whether volunteer immunity statutes apply. Also, protections are written at the state level; they do not extend to federal law.

Directors & Officers Liability policies are generally broad in scope, and the pricing structure and deductibles contemplate the organization's size and activities. Working with a broker who understands the unique exposure risks of nonprofits and can consider the needs of your organization, can help you identify the most useful protection for it.

Sherryl Adsit, CIC, RPLU is the Senior Account Manager and Laura S. Dodge, CIC, is Executive Protection Division Manager at Moody Insurance Worldwide. Write them at sadsit@moodyinsurance.com and ldodge@moodyinsurance.com, respectively.