Are Your Board Members Protected? Why D&O Insurance for Nonprofits is a Must
Members of boards of directors, even of nonprofits, often make important strategic and financial decisions for the organizations they manage. These decisions could result in a liability, with a single unfortunate incident jeopardizing an individual's livelihood or even career. Worse, accusations against a board member could cause potential donors to shy away from an organization, representing a significant loss in revenues.
With such a high potential risk for personal liability, it is important board members protect their personal assets and careers if charges are ever brought against the organizations they serve. Board members of international organizations, who may be perceived as having significant assets, could face increased risks.
In 2011, one of the nation’s largest international charitable organizations was the subject of a criminal investigation by the Attorney General of the state where the organization operated, regarding misuse of grant money. The board of this organization could have been held liable if it failed to implement proper controls or oversight to deter fraud or misuse.
The Importance of Protecting Nonprofit Board Members
It is common knowledge that for-profit businesses are at risk of liability. Unfortunately, nonprofits are also at risk for liabilities that can significantly disrupt the organization's ability to accomplish its mission. International nonprofits are especially vulnerable.
“When you are operating outside the United States, expatriate organizations are looked at as deep pockets,” says Clements' Peter James. “Even though some countries are less litigious, it is always still an issue of concern.”
If a nonprofit is sued, board members can be held personally liable for the actions of the organization as they have fiduciary duties to the nonprofit as well as its beneficiaries and donors. This means the personal assets of a nonprofit’s directors and officers are at risk.
“When you are a director or officer of a nonprofit, your personal assets are at stake, but at lot of them don't know that,” says James. “Individuals volunteer, but don’t realize their involvement is more than ‘just helping’ when their personal assets are at stake.
“I think a lot of nonprofits overlook this element,” James continues. “They think, ‘You love my cause! You’ll never sue me!’ but that’s not the case.”
Risks Faced by Board Members
Any liability scenario could lead to a costly and disruptive investigation. Organizations involved in fundraising or grants are especially at risk. Competition for grant money often leads to serious questions about how grant funds are utilized. Any perceived improper use of grant funds can lead to a legal case. Fundraising presents a similar risk, as donors could perceive a mismanagement of funds raised and pursue legal action.
“Nonprofits are different than for profit corporations because they don’t have shareholders,” says James. “But they do have a requirement to manage the organization’s assets and put procedures in place to reduce fraud or misuse. If there were an issue of insolvency because of mismanagement of the funds, that could result in a lawsuit against the organization.”
Failing to provide proper oversight to deter fraud can also leave nonprofit board members liable if grant or fundraising money is misused. Something as simple as failing to keep proper expense records can lead to a serious lawsuit.
Managing Liability Exposure for Board Members
A common assumption is that nonprofit organizations are protected by law from liability, but this is not always the case. Whether a donor, employee or a beneficiary sue for a perceived mistreatment by the nonprofit, including in relation to the core services provided by the nonprofit, the liability could lie with the board and directors, and this may vary based on the country of operation.
However, there is a way to manage risk posed both to an organization and its board members: directors and officers (D&O) liability coverage. An umbrella policy can be purchased by organization for the entire board, with modified limits for board members with significant assets purchased by the organization or the individual board member.
D&O coverage can be highly customized, with the extent of the protection, and ultimately the cost, varying based on the limitations and exclusions listed in the policy. The insurance will cover costs of mounting a defense or paying a settlement. Even for startups, D&O liability coverage is crucial. This layer of protection ensures that the organization, as well as its employees, are safeguarded against perils overseas.
By learning about potential liabilities faced by international nonprofit board members, an organization’s directors and officers are positioned to strategically manage risk and ensure continuing operations. Speaking with an insurance professional experienced in helping to protect international nonprofit board members can give nonprofits a clear understanding of how they can protect their personal assets in the event of a liability claim.