A primer on personal protection — start with insurance and documentationBeing a member of a nonprofit board comes with a number of responsibilities, both to the organization you serve and to the government regulators who have jurisdiction over your organization. But when do those responsibilities become liabilities? It's only natural to worry about being held legally liable for things that happen in your organization.
Here's how to protect yourself.
Do I have personal liability?
If your nonprofit is incorporated, you're protected from personal liability if someone under the organization's employ is harmed on the job. Just like corporations in the private sector, nonprofit incorporation provides cover for individuals on the board. This isn't a blanket protection, though.
For example, you wouldn't be personally liable if an employee were injured performing routine tasks of his or her job. You may be held personally liable, however, if you were responsible for ensuring appropriate safety training for employees and you neglected to work with the executive director to do so.
What if I'm a volunteer?
If you volunteer for the board, great news. The Volunteer Protection Act (VPA) of 1997 and state protections for volunteers are in place to encourage volunteerism and offer a shield from lawsuits. Before the legislation, many public service programs that rely on volunteers expressed concern that potential volunteers were deterred due to liability risks. The VPA came through as a way to protect volunteers, including voluntary board members, from personal liability for wrongdoing within the organization.
In addition to the VPA, volunteers are also protected by state law. In places where state law offers weaker protection than the VPA, the federal VPA prevails. In other places, state law offers additional protections beyond those outlined in the VPA. State provisions to the VPA are allowed as long as the provisions are compatible with the federal law.
What if I'm at fault?
While uncommon, there are situations in which you could be held personally liable as an individual. These situations primarily fall under tort liability and fiduciary liability.
Tort liability is a risk when you personally injure someone or cause them to be injured. This isn't limited to physical injuries. Tort liability also covers emotional, financial and reputational harm. Importantly, you don't have to intend to harm someone for it to be considered a tort.
For example, if you're responsible for hiring someone to fix a loose handrail and fail to do so, you could be held liable if someone falls as a result. If you had the handrail fixed but the repair person did a shoddy job, your liability risk is minimized.
Your fiduciary responsibility to the board may also open you up to individual liability. You can make yourself vulnerable to this by:
- Serving as the guarantor on a corporate loan that defaults
- Failing to provide the documents necessary for tax reports
- Failing to ensure the proper payment of payroll taxes or filing of necessary tax returns
- Intentionally committing fraud
- Mixing personal funds with organizational funds
Together these concerns make up the duty of loyalty and duty of care that each board member is required to honor.
What about indemnification clauses?
An indemnification clause in the bylaws protects board members from liability. Under indemnification, the organization agrees to cover legal fees and other costs associated with legal action against a board member.
Indemnification clauses can make it easier to attract quality board members. From the perspective of the high-quality recruit, though, there can be some limits to the reach of the clauses. For example, in the case of a small nonprofit, the organization may not be able to make good on the promise to cover legal fees due to lack of funds.
It's also important to remember that indemnification covers board members only when they're found to have been acting in good faith — not when they knowingly cause harm.
Should the board have insurance?
Many nonprofits opt to purchase directors and officers liability insurance (commonly known as D&O) to protect themselves when exposed to liability — particularly small nonprofits with limited funds and an indemnification clause in the bylaws.
D&O insurance covers legal fees from both tort liability (when someone falls at an event the organization holds, for example, or personal property is damaged at an event held at a donor's home) and being sued for wrongful termination. D&O insurance is recommended for nonprofits with even one employee, since the legal fees and settlement costs for a wrongful termination suit can be ruinous to a small organization.
While D&O insurance generally covers both the nonprofit as a whole and individual board members, this isn't always the case. If your board opts for this insurance, clarify with the insurance broker to make sure you have appropriate coverage for your needs.
How can the board protect itself from liability?
Often, the best protection from liability risk is a well-informed board. If you're well-versed in the bylaws and put forth a good faith effort to place the organization's needs before your own, your chances of being sued are minimal.
That said, you can take two specific steps to further reduce the risk:
Establish an internal audit committee
An audit committee will ensure the proper checks and balances are being applied to your organization's financial dealings. An audit committee also helps spread responsibility so that no single person bears the burden of perfect record keeping.
Implement best practices
Best practices are highly specific to any given industry, so do your research.
In an educational or health care setting, for example, the privacy of students or patients is crucial (and federally protected). In a fine arts nonprofit, copyright of artists' works might be something you need to tend to. Tweeting high-resolution images from a gallery show might set you up for a lawsuit.
Every organization also benefits from a universally understood code of conduct. The code can be as explicit or broad as you need, but might include social media guidelines, how to talk about your nonprofit within and outside your organization, and how to behave with vendors, employees, volunteers and donors. Similarly, nonprofits with paid staff should maintain personnel policies and procedures.
While you can't control whether or not someone decides to sue, you can control your own conduct — which will lessen your vulnerability to risk.
This article draws on the expertise of Grace Davies, a Minneapolis-based attorney with special interest in product liability, medical malpractice and employment discrimination.