Could this happen to our organization?
D&O Insurance is an extremely important, albeit frequently overlooked, insurance coverage for any non-profit organization. Although, on one hand, the directors and officers of non-profits usually don't face the catastrophic exposures from the types of losses seen in for-profit companies, on the other hand, their risk of personal liability can be greater for non-profit directors and officers than for corporate ones.
What types of suit would be handled on a D&O policy?
About 90% of D&O suits against non-profit organizations are employment-related: Sexual harassment by managers (particularly when not properly addressed by upper management); wrongful termination of an employee; ADA or EEOC non-compliance, etc. These types of claims can be costly to defend, expensive to settle, and cause troubling morale problems among remaining staff members, as well as an injured reputation in the community.
The remaining 10% of suits in this category can be the most devastating to a non-profit organization. Most suits here deal with breach of fiduciary duty, alleging that the board of directors is not appropriately using and protecting the assets and resources of the non-profit organization. These suits may be brought by a donor, a concerned citizen, or the Attorney General. Here are two examples of actual breach of fiduciary duty claims brought against non-profit organizations:
- A small non-profit housing advocacy group helped a group of twenty low-income families obtain government-subsidized loans to purchase a group of low-income condominiums. Not long after the purchases were completed, the real estate market took a serious downturn. Many of the condos were worth less than the outstanding amount of the loans. Several of the homeowners sued the non-profit and its board of directors for misrepresentation of the benefits of home ownership and failing to warn them of the possible loss in home value.
- The board of directors of the non-profit had turned over fundraising duties to a for-profit fundraiser, but did not review the terms of the contract or question the fee being paid to the fundraiser. The Attorney General sued the board of directors and the organization itself, alleging improper fiduciary oversight and misuse of funds. The lawsuit alleged that the for-profit fundraising organization was fraudulently representing that the funds would be used for drug rehabilitation and education when, in fact, 90 percent of the proceeds were going to the for-profit fundraiser. The board of directors were held liable, because they should have been aware of the fraudulent actions of the for-profit fundraiser, and should not have permitted the non-profit organization to take part in the scheme.
Volunteer Protection Act
The Volunteer Protection Act of 1997 took important steps to protect the personal assets of Directors, Officers, and volunteers of charitable organizations, however, there are some important areas in which a law suit can still reach an organization's directors or officers.
What organizations are included?
The Volunteer Protection Act applies only to 501(c)(3) type organizations. This means organizations described in Section 501(c)(3) of the Internal Revenue Code of 1986. In general, charitable, educational, religious, and other social benefit organizations fit into this group. There are other types of non-profit corporations that don't fit under the 501(c)(3) guidelines and these organizations are not covered by the Volunteer Protection Act.
What is a volunteer?
The Volunteer Protection Act defines a volunteer as an “individual performing services without receipt of compensation (other than reasonable expense reimbursement), or any other thing of value in lieu of compensation in excess of $500 per year.” This definition is broad enough to include the directors and officers, but anyone who receives any sort of compensation is excluded from this protection.
The $500 compensation rule doesn't just apply to cash changing hands. For example, weekend retreats which are partially social or which include family members and which are funded by the non-profit organization may be applied towards the $500 per year limitation.
Gross Negligence
The legislation contains a specific exclusion for harm caused by a volunteer's “willful or criminal misconduct, gross negligence, reckless misconduct, or a conscious, flagrant indifference to the rights or safety of the individual harmed by the volunteer.” This certainly makes sense - the law shouldn't protect us after egregious wrongdoing. However, it includes the phrase “gross negligence,” which is a rather broad term. Since it is questionable exactly what conduct falls within the scope of “gross negligence,” courts are often precluded from dismissing a lawsuit against a volunteer until the presence or lack of “gross negligence” may be established.
Claims by Non-Profit Organizations
The legislation does not eliminate liability in any claim brought by the non-profit organization for which the volunteer serves. It is not entirely clear, but it appears that the exception would not apply (meaning that the liability limitation would exist) for derivative lawsuits brought on behalf of the organization by a member or other constituent.
Civil Rights Violations
The statute's liability limitation does not apply if the volunteer is found to have violated a federal or state civil rights law or a committed sexual offense as defined by applicable state law.
This exception significantly reduces the benefits of this legislation in the context of employment claims against volunteer directors or officers. Employment claims alleging illegal discrimination or sexual harassment may fall within this exception.
Protection under other forms of Insurance
Many directors of non-profit organizations are also directors or officers of the for-profit companies with whom they are regularly affiliated. Under certain circumstances, coverage under their company's D&O policy can be extended to their service in non-profit organizations. In general, if your service on the non-profit board is at the request of your company, or if you are a director or office or the company, and specifically have Outside Directorship coverage on your company's D&O, you will have some protection here.
In addition, many of the higher-end homeowners forms have begun including D&O coverage for the policy holder's participation in non-profit organizations. These endorsements are usually automatically included on the form, and generally specify that the position must be non-remunerative and that the organization be a registered 501(c)(3) non-profit. If the position meets these criteria, the personal liability coverage on the homeowners form will respond to suits brought against the insured.
The problem with both of these lies in the by-laws of the organization. These will almost always include an indemnity clause, which states that the organization will indemnify its officers, directors, employees, and agents for any action, suit, or proceeding brought against him or her, due to his or her actions on behalf of the organization. Therefore, the individual director or officer may have some protection from outside insurance, but the organization may still be responsible for reimbursing that individual's insurance carrier for costs incurred defending and/or settling the claim. The organization still needs D&O insurance to fit this need.
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