You’ve been asked to serve on the board of a nonprofit. You’re happy to contribute to an organization that serves such a great purpose, but you’re also worried. If anything goes wrong, will you be protected? It’s not the sort of concern you want to dismiss. If you’re serving on a nonprofit board, take time to understand the risks involved.
What risks are common?
You might be wondering who would sue a nonprofit. As it turns out, a lot of people would. In fact, Property Casualty 360° reports that, according to a recent survey, nonprofits face twice as many Directors & Officers (D&O) lawsuits as public and private companies.
Just like for-profit corporations, nonprofits can face legal action from a wide range of sources, including employees, business partners and suppliers. Lawsuits can also come from donors, or even from the very people the nonprofit is trying to help.
The legal claims can likewise cover a range of issues, including:
- Allegations of mismanagement, breach of duty or improper handling of financial matters
- Breach of contract or failure to pay for goods and services
- Failure to properly screen, manage or train employees or volunteers who commit misdeeds
- Employment liability issues, such as discrimination or wrongful termination
Can board members be held personally liable?
Being a member of a board doesn’t necessarily shield you from personal liability. Even if you’re working on a purely voluntary basis, you could still become the subject of a lawsuit.
The board members at the Lemington Home for the Aged know the risk of personal liability first hand. According to Nonprofit Quarterly, the U.S. Court of Appeals for the Third Circuit upheld a $2.25 million verdict against the directors based on the CFO’s mismanagement.
What precautions should be taken?
Serving on a nonprofit board can be a very rewarding experience. However, to keep the situation from devolving into something that could damage both your reputation and your finances, it’s important to take some basic precautions.
- Review all relevant laws, including state and federal regulations. Research these regulations thoroughly so you understand everything that applies to you.
- Follow official policy on reporting any possible conflicts of interest. Even if you don’t think it’s important, anything that could be interpreted as a conflict must be disclosed.
- Understand and adhere to the nonprofit’s bylaws and your personal duties, assuming they do not contradict state or federal regulations.
- Seek and apply the advice of experts when necessary. Volunteer board members may not have the background knowledge needed to make certain decisions, so they should enlist the help of someone who does.
- Make sure you have the right insurance coverage. For example, D&O insurance provides important protection against many of the risks involved in serving on a nonprofit board. If you are sued, a D&O policy can cover defense costs, settlements and judgements. See what coverage the nonprofit organization provides and consider getting additional coverage on your own.
Have questions? Higginbotham can help. Contact us to learn more.