Recently I had an email conversation with one of my clients about the personal liability their board members take on through their service to the organization. I thought it might be valuable to share this information with everyone.
We try to simplify the process for our nonprofit clients. But, the simple truth is that there are a lot of vital parts to an effective insurance program. Done right, these parts will work together to give you the protection you need. So, it’s important to know how they fit together.
I am not a lawyer and cannot advise you on the law or what could or would happen in the event of a lawsuit. I can tell you that people sue for many reasons; some valid some not. People can sue the organization, its employees, board members, and volunteers together and separately. They can sue for any amount of money. However, the claimant must be able to establish actual monetary damages to support their claim. Your defense and defense costs are included as part of both your General Liability policy and your Directors & Officers policy. The organization, its employees, and its volunteers are all covered under these two policies and will be afforded a defense in the event of a covered claim.
I encourage you to speak with your lawyer about how and why people can sue you and for how much. Also, review and consult with your lawyer about the legal language and parameters of the Volunteer Protection Act.
Risks and Likelihood of a claim:
It is not possible for me or anyone else to determine what might happen and what possible damages might be claimed against you. We insure hundreds of nonprofits and hundreds of events. My experience is that claims are unpredictable and random. In other words, I can’t tell you that if your organization has a certain level of assets or your event has a certain number of attendees you are more or less likely to have a claim. Nor can I tell you that the size of your organization or the size or your event merits a certain amount of insurance protection.
I can tell you that the purpose of insurance is to protect assets. So, if there are significant assets at risk you will want to consider higher limits of insurance. Additionally, your first course of action should always be good risk management (i.e. proper board education, attention to safety, etc.). Unfortunately, even with proper insurance and risk management there is no way to eliminate 100% of the risk associated with the operations and activities of your organization.
Insurance and Protections:
General Liability - General Liability coverage provides protection for claims of bodily injury and property damage. In other words, if a third party is injured or a third party’s property is damaged because of the operations or actions of your organization.
Directors & Officers – Directors & Officers Liability coverage provides protection for the management liability of the board as well as liability arising from employment related practices. In other words, there is protection for the claims associated with the operational decisions made by the board and staff. There should also be protection for claims associated with harassment, wrongful termination, discrimination, etc.
Volunteer Protection Laws
The Volunteer Protection Laws hold that outside of their fiduciary duties of care, loyalty and obedience nonprofit board members cannot be held personally responsible for the debts, acts or omissions of a nonprofit organization. Individual board members who may be held responsible for damages are protected by the indemnity clause in the organization’s bylaws as well as by Directors & Officers Coverage.
The Volunteer Protection Laws also hold that nonprofit board members cannot be deemed liable for the payment of claims or lawsuits arising out of the operations of the organization provided 1) they were acting within the scope of their responsibilities at the time the claim happened, 2) they are not guilty of willful or criminal misconduct, and 3) they are properly licensed or certified if required.
The exceptions to this are for claims associated with automobiles and sexual misconduct. Make sure you have some type of auto coverage this would mean Hired & Non-owned Auto Liability if your organization does not own a vehicle. Make sure your D&O coverage includes Employment Related Practices coverage which provides coverage for sexual harassment claims. And, make sure you have Improper Sexual Harassment coverage included with your General Liability if you work with a high risk populations such as youth, the elderly, or developmentally disable people.
Board members can be named on a lawsuit regardless of the Volunteer Protection laws but will be defended by the insurance company for a covered claim or loss.
Again, please consult with your lawyer about the specifics of the laws and how they apply to your board members.
Current Coverages and Limits:
Many organizations shy away from certain coverages due to cost constraints. While I understand this, the cost of an uncovered claim or even just the defense costs can put a nonprofit out of business. Don’t have the “it won’t happen to us” attitude. If you are going to create an insurance program then do it right and buy ALL of the coverages that you need to have proper protection.
The standard for as long as I have been in the insurance industry (over 25 years) is to by $1,000,000 liability limits. Frankly, I’m not sure why that is… Everything else has increased exponentially, including lawsuits, but people still think that $1,000,000 is a sufficient limit. I urge to consider the activities of your organization, the risks you face and the assets at risk and determine what the correct amount is for you.
Note that failure to purchase the right coverages at the right levels can be construed as a breach of the board’s fiduciary duties. In which case, they would likely not be protected under the law and may not be protected under the D&O coverage.
Personal Liability Coverage:
I cannot address the coverage afforded by the various Homeowners and Umbrella policies held by your organizations’s individual board members. I recommend that you refer them to their own agent or broker for advice on their personal liability exposures. Personal Homeowners and Umbrella policies may or may not provide coverage for nonprofit board participation but usually they do not.
Look to your broker and your insurance company for risk management help and resources. If you work with a broker who is a nonprofit insurance specialist he or she will be able to help you with risk management. And, if your coverage is with an insurance company that specializes in policies for nonprofits then that company will also have risk management resources you can access.
In a nutshell, in order to protect your board and your organization it’s important to look at all aspects of the law and the coverages available.