legal & regulatory issues small business

Protecting Yourself as You Do Good for Others

insurance (Photo credit: Alan Cleaver)

You are a member of a non-profit board of directors.  The organization works with at risk youth.  An employee engages in conduct that brings the non-profit negative publicity and the inevitable lawsuits.  Or, the organization fires an employee and the former employee files a employment discrimination complaint.   In both cases, the complaints name individual members of the board of directors as well as the organization, its officers and certain employees as defendants.  What happens now ?  Who hires and, perhaps more importantly, pays for defense counsel ?  Is it you ? Who pays for any settlement or judgment ?  Does your homeowners insurance step in ?  If you are a professional who carries professional liability insurance, will it step in ?  Does the non-profit have directors & officers liability insurance (D&O) and does it cover this type of matter?

Giving back to the community by lending time and talent to non-profit boards of directors is a rewarding experience;  you, the non-profit and the community enjoy great benefits.  Lawsuits never materialize.  However, when someone files a lawsuit and names the board members, the lawsuit exposes the individual board member to potential liability, to the expense of retaining defense counsel and the possibility of funding, at least a portion, of a settlement or judgment.  Without some sort of insurance to pay the bills, the individual board member is responsible for his counsel fees and any settlement or judgment share.

Most insurance coverage that individuals carry do not cover such lawsuits.  Homeowners insurance and their umbrella policies are unlikely to pay for the costs of defense or a settlement or judgment in these cases.  Automobile policies likewise will not cover these lawsuits. If you are a professional who carries professional liability insurance, it is also unlikely to cover these lawsuits.

To protect itself and its board of directors, non-profits should carry D&O insurance.  Such insurance protects individual members of the board, the organization itself and, depending on the policy, volunteers of the organization.  Depending on the terms of the D&O policy, it will pay for the costs of defending a lawsuit, which maybe more expensive than any settlement, pay the settlement or judgment (assuming the policy covers the underlying acts) and provide peace of mind to all involved.  Remember that you do not have to be negligent or engage in an act of malfeasance to be sued; the lawsuit need not be meritorious for the board member to be forced to retain counsel to defend a meritless suit.

Although some states, including Virginia, have statutes that limit the amount for which a member of a non-profit board is ultimately responsible, the statutes have limitations and do not compensate the members for the costs of defending the lawsuit.  Before volunteering for a board of directors position, ask the organization about its insurance coverage.  If it does not have D&O insurance, suggest that it obtain it.  If purchasing such insurance requires board approval, make acquiring it one of your first goals.  If you are already a board member, examine the organizations insurance coverage.  If the organization does not have proper coverage, work with the organization to obtain it.  It will protect not only you but the organization and its assets as well.


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