Corporate Executives Beware: You Need Insurance Protection When Serving on a Nonprofit Board

Robyn Michaelson

Michaelson, Robyn L.Many corporate executives generously serve as directors and officers of nonprofit organizations. While they are undoubtedly inundated with meetings and workshops focusing on corporate risk management at their day job, they may not consider potential liability arising from their philanthropic work. Just as a corporate director may face lawsuits, even those lacking merit, for allegedly breaching fiduciary obligations to shareholders, so, too, a nonprofit director may face similar allegations of wrongdoing for a broad range of activities including, for example, allegedly permitting the mismanagement of funds or approving an employee’s termination. Even if the director ultimately prevails after a trial on the merits, the nonprofit may not possess the financial means to indemnify her or his legal fees. Before any such issue threatens financial well-being, it is prudent for any individual joining a nonprofit organization to take the time to make sure the nonprofit has appropriate insurance coverage. So what is appropriate coverage?

Are the volunteers covered?

Because officers of a corporation are subject to the risk of litigation when performing their duties, states allow—or, in some instances, mandate—the corporate entity to indemnify the individual directors and officers. Many insurance companies market and sell policies to nonprofits to help manage these indemnification obligations, including coverage for claims asserted against their directors and officers. Directors and Officers (“D&O”) and Professional Liability Insurance are most commonly used to help protect the financial interests of the individuals volunteering with a nonprofit entity. Although each insurance policy is unique and must be carefully reviewed for the precise terms and conditions, as a general matter, D&O policies cover the individual directors and officers, as well as the entity in some situations. Frequently, in this area, Professional Liability Insurance policies cover volunteers and staff. It is imperative to carefully analyze the language to confirm the policy covers everyone acting on behalf of the organization.

When evaluating a D&O or Professional Liability Insurance policy, be sure it covers a broad range of potential claims. If the nonprofit has employees, look for a policy that covers alleged Employment Practices Liability, such as wrongful termination or discrimination. If the organization offers social services, be sure that the definition of “professional services” is broadly worded to cover alleged wrongful acts arising from the individuals’ and entity’s activities in this regard.

Additionally, the timing of when an insurer is obligated to pay defense costs is an important consideration when purchasing this type of insurance. Unlike some large corporations, nonprofits may not have the financial means to advance defense costs until a claim is ultimately resolved. Accordingly, duty to defend policies are more favorable to the insured. For the same reason, when purchasing insurance, the nonprofit should be sure that any deductible or self-insured retention is low enough to adequately protect the entity and individuals in the event of even a modestly sized a claim. Before joining a nonprofit entity, you should ask for a copy all insurance policies to make sure the Board has proper coverage.

Finally, corporate D&O policies often provides outside directorship liability coverage. That is, the for-profit entity’s D&O policy covers service by an insured individual on a nonprofit board and may serve as a backstop if the nonprofit’s coverage is lacking. The language of these provision varies significantly and the individual may, in some instances, be required to notify the insurer of any new nonprofit endeavors she or he undertakes as a prerequisite to coverage.

Is the nonprofit organization covered?

As a fiduciary of the nonprofit entity, board members should perform reasonable due diligence to inquire whether there is adequate insurance coverage for claims asserted against the entity, as well. Commercial General Liability (“CGL”) may cover standard “slip and fall” cases and, depending on the policy language, may offer coverage for a broad range of claims. Some insurers, such as the Nonprofits Insurance Alliance Group, do not offer standalone D&O coverage; rather, it is bundled with general liability policies. The entity’s insurance portfolio should comprehensively reflect and address the particular activities it pursues and risks it faces. For example, property insurance may be appropriate to protect property owned or leased by the organization and personal property (such as files and computer equipment, for example) in which the entity has an insurable interest. If the organization sells goods, consider whether purchasing product liability insurance is prudent, or if your general liability insurer will add product liability coverage to the entity’s existing general liability policy. If the organization requires that its volunteers drive as a part of their job function, consider purchasing auto insurance. Nonprofit organizations address a wide range of issues and risks, and so should their insurance.

On a going forward basis, board members would be wise to remain apprised of any potential alleged wrongful acts, claims, subpoenas, demands for monetary relief, lawsuits or insurance claims. As a for-profit company would, nonprofit entities should regularly review the organization’s risk profile and determine whether any changes to its insurance portfolio are warranted.