Nonprofit Board Liability: Understanding the Risks and Protections
Serving on the board of a nonprofit is a meaningful way to support an organization and its mission. Board members help make important decisions, oversee finances, establish policies, and guide the future of the organization. While board service is typically a volunteer role, it can also come with significant responsibilities and potential personal liability.
For nonprofit organizations in Delaware, Pennsylvania, and New Jersey, understanding those responsibilities and the protections available to board members can help reduce risk and give volunteers greater confidence in their roles.
What Responsibilities Come With Serving on a Nonprofit Board?
Board members have a responsibility to act in the best interests of the organization and help ensure it operates according to its mission. Three primary duties are commonly associated with nonprofit board service: the duty of care, the duty of loyalty, and the duty of obedience.
Duty of care means board members should make informed, reasonable decisions and act with the level of care someone would reasonably be expected to exercise in a similar position. This can include reviewing financial information, asking questions, participating in board discussions, and making decisions in good faith.
Duty of loyalty requires board members to put the interests of the nonprofit ahead of their own personal interests. Board members should be transparent about potential conflicts of interest and avoid using their position for personal or financial gain.
Duty of obedience involves supporting the organization’s mission and ensuring that board decisions and policies are consistent with that mission. Board members may also have responsibilities related to complying with applicable laws and properly overseeing the organization’s funds.
These responsibilities are an important part of effective nonprofit governance. They can also create potential exposure if a board member is accused of failing to fulfill them.
Where Can Board Members Face Liability?
Even when board members are acting in good faith, decisions made on behalf of a nonprofit can sometimes lead to disputes or legal claims.
For example, a board could face allegations involving:
- How the organization handled or spent its funds
- Decisions that allegedly harmed the nonprofit
- Conflicts of interest
- Employment-related decisions
- Failure to follow organizational policies
- Actions that were inconsistent with the nonprofit’s mission
When a claim is brought against a board member, the potential consequences can extend beyond the organization itself. Legal defense costs and other expenses can become significant, which is why nonprofits should consider both risk management practices and insurance protection.
What Protections Are Available to Nonprofit Board Members?
Nonprofit board members may have several forms of protection available to them, but none should be viewed as a substitute for a comprehensive risk management and insurance program.
Volunteer Protection Laws
Federal and state laws provide certain protections for individuals serving as volunteers. The federal Volunteer Protection Act of 1997, for example, can provide protection for individuals acting within the scope of their responsibilities, subject to specific conditions and limitations.
These protections do not eliminate every potential source of liability, particularly when conduct falls outside the protections provided by the law.
Indemnification
Many nonprofits also include indemnification provisions in their bylaws. These provisions may require the organization to help cover certain legal expenses incurred by board members as a result of their service.
However, indemnification ultimately depends on the organization’s ability and obligation to provide that protection. If a nonprofit does not have sufficient financial resources to cover significant legal expenses, relying solely on indemnification could leave a gap.
Insurance
Insurance can provide another important layer of protection when a claim falls outside other available protections or when the cost of defending a claim becomes substantial.
Why D&O Insurance Matters for Nonprofits
Directors and officers (D&O) insurance is specifically designed to address certain claims involving the decisions and actions of an organization’s directors and officers.
For nonprofits, this coverage can be particularly important because board members are often volunteers who may be hesitant to accept a leadership position if doing so could put their personal finances at significant risk.
D&O insurance can help provide protection for covered claims alleging wrongful acts by directors and officers in their capacity with the organization. The specific coverage provided will depend on the policy’s terms, conditions, exclusions, and limits.
Other Insurance Coverages Nonprofits Should Consider
Protecting the board is only one part of managing a nonprofit’s overall risk. Depending on how an organization operates, additional insurance may be important.
Commercial General Liability can help protect against covered claims involving bodily injury and property damage arising from the nonprofit’s operations.
Workers’ Compensation can help cover medical expenses and lost wages for employees who are injured in connection with their work, subject to applicable state requirements.
Commercial Auto can provide protection when employees or volunteers use vehicles on behalf of the organization and an accident occurs.
The right combination of coverage will depend on the nonprofit’s operations, employees, volunteers, property, vehicles, and other exposures.
Building a Stronger Risk Management Strategy
Insurance is an important part of protecting a nonprofit, but effective risk management starts with understanding where potential problems can arise.
Nonprofits can take proactive steps by educating board members about their responsibilities, regularly reviewing organizational policies, addressing conflicts of interest, and making sure financial decisions are consistent with the organization’s mission.
Regularly reviewing insurance coverage is another important step. As a nonprofit grows or changes how it operates, its insurance needs may change as well.
Protecting the People Behind the Mission
Nonprofit organizations depend on dedicated board members, employees, and volunteers to carry out their missions. Giving those individuals a clear understanding of their responsibilities and providing appropriate protections can help create a stronger foundation for the organization.
If your nonprofit operates in Delaware, Pennsylvania, or New Jersey, McHugh Insurance Group can help you evaluate your current insurance program and identify potential gaps in coverage.
Contact McHugh Insurance Group to review your nonprofit’s insurance and risk management program today.
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