5/24/2012 1:30 AM ET|
Financial dangers of good deeds
Volunteering to serve on the board of your favorite nonprofit may carry hidden risks to your wallet. Find out what you can do to protect yourself.
No good deed goes unpunished.
That old cliché reflects a danger faced by those who volunteer their time and expertise to nonprofit boards.
Whether it is a charity, civic organization, church or library, serving on a nonprofit board can jeopardize your personal property and assets if lawsuits arise.
Legal claims -- citing such matters as wrongful termination, sexual harassment, discrimination or on-site injury -- may affect more than just the organization's ledger sheet. Board members who assume they are protected from lawsuits and personal liability could be in for a rude awakening.
Some states offer immunity for board members who don't receive a salary or other compensation should civil damages arise from actions performed in an official capacity. But that protection doesn't extend to what the statutes define as "intentional conduct, wanton or willful conduct or gross negligence." Interpreting that level of egregiousness isn't always easy, though, and a board member's viewpoint may ultimately not be shared by a plaintiff, judge or jury.
"Gross negligence" could rear its head as a result of either direct action or inaction, and lack of oversight can come back to haunt a board. For example, if a background check slips through the cracks for an employee or volunteer who works with kids, members of the board could find themselves in deep trouble if a sexual assault takes place. A mix-up that delays getting a contractor to fix a loose handrail is an accident -- and a lawsuit -- waiting to happen. And letting a donor have one glass of wine too many at an event sets the stage for a costly mishap.
With these hazards in mind, many nonprofit organizations choose to buy directors and officers liability insurance. These policies and related products can help insulate board members -- often volunteers tasked with important decisions -- from unexpected grabs at their personal property and money.
"Where we see a lot of the exposure for nonprofits is in how they are handling money," says Carl Godziek, a client executive with RJ Ahmann, a Minnesota insurance and risk management company that specializes in D&O and other nonprofit policies. "It can be a big issue if they have restricted funds. They can run into allegations that they are sending money in the wrong place," he says.
A large donor, for example, may disagree with a financial decision and sue board members individually for financial mismanagement of the organization.
Soured business relationships can also pose a direct liability risk.
"Nonprofits have other businesses relying on them," Godziek says. "They've got suppliers and all these different partnerships. If there is mismanagement of the organization that causes strain on those affiliated partners, they may be bringing suit against the nonprofit that has caused them hardship."
Directors and officers of nonprofit corporations are particularly at risk if they take a personal role in a loan or debt, especially if they commingle their assets with those of the nonprofit -- an error in judgment that could also lead to criminal prosecution.
Board members also have a fiduciary responsibility to the organization and its employees, particularly when it comes to taxes. Not only are all taxes relating to wages expected to be handled accurately, the IRS also demands that board members make sure that all of the organization's efforts and decisions are within the scope of its tax-exempt status.
Even those requirements can prove to be a matter of interpretation. For example, if the IRS deems executive compensation glaringly high at an organization, board members may be blamed for allowing it.
As is often the case with legal disputes, even when an organization or one of its chiefs believes there has been no wrongdoing, a judge or jury may see things otherwise. Even if an organization is vindicated, a legal battle can be costly.
"Defense costs are another reason why directors and officers want liability coverage," Godziek says. "The defense of claims often costs more than the payouts. There can easily be six figures worth of defense costs."
The broad scope of what might be considered "wrongful acts" is another concern, he says. A community member with no direct association with the organization might sue board members individually because of a decision to eliminate a specific program.
Think of a hockey player who suffers a traumatic injury during a game whose financially devastated family sues the association and its board members for damages.
"That gets back to management issues and is something, potentially, that a D&O policy helps with," Godziek says. "The family may try to claim the organization didn't properly train its people, or that they didn't ensure that there were enough referees on the ice. There are all sorts of things (that) can tie back to mismanagement."
"I think there are a lot of reasons why people choose not to volunteer to be on a board that go beyond liability risks," Godziek says. Nevertheless, he thinks an organization that takes steps to protect its board members will be better positioned to attract the talent and expertise it needs.
"One of the reasons they might come to someone like us (for a D&O policy) is that they get a new board member with a high net worth and they want to make sure they are protected," he says. "A lot of times, too, maybe for larger nonprofits, they are looking to attract sophisticated individuals. They want to make sure they have protection for them so that they can attract quality board members."
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