The short answer is you need to understand what that commitment exposes you to. Joining a board of a nonprofit is an important step in assisting a worthwhile cause and promoting the social benefits it offers the community. It is critical to the potential board member to think of the work not as an opportunity to occupy some of your free time with activities near and dear to your heart, but as a business venture, in more respects other than just the IRS definitions. With business comes risk, and in a form many of the charitably inclined do not consider – personal liability. As an unpaid non-profit board member, your decisions, input, and voting creates a personal liability. Consider your actions to the appropriation of funds, what implication does that suggest?
Members of the board and/or officers of a nonprofit could be sued individually or as a group. Clients of the organization you are serving can even sue in regard to issues such as discrimination (racial, sexual, religious, age, and sexual-orientation). Board members and officers can be included in these suits. Money disputes, such as misappropriated earmarked donations, special grants, and donor expectations, can often become a target of a lawsuit that includes board members. With the recent market turmoil, board members have faced litigation if there was reasonable doubt to the foundation and endowments investments. Lately this has included whether the investment strategy was inappropriate, investments are illiquid, or a general lack of investment policy.
Well now that I have your attention and maybe I made you a bit more uncomfortable about your commitments, some simple steps can be taken to ensure you and other board members are appropriately protected. The first step in protecting your liability is Directors and Officers Insurance coverage (D&O). It can be costly at times but to protect your personal liability, nonprofit organizations should not only have coverage but be aware of the appropriate level needed. D&O insurance is purchased by the company itself on behalf of its board members. This will be your first line of defense and a critical one should a lawsuit surface. Coverage is also provided for the costs of defense such as legal fees and other court costs.
In addition to the obvious legal protection, some nonprofits cannot secure grants and governmental funding without the proper insurance, especially in many of the Health and Human service areas. Without D&O coverage many professionals cannot join a board, thereby limiting the talent pool needed for the organization.
It may seem inappropriate to ask questions related to insurance and liability but it is imperative. It also shows that as a steward of the organization’s goals you care about the group and understand the intricacies of proper structure. Risk management is in everyone’s best interest.
For informational purposes only. Neither Fragasso Financial Advisors nor LPL Financial offers legal advice or services.
Daniel Dingus is Managing Director and Chief Portfolio Strategist at Fragasso Financial Advisors, a Pittsburgh-based investment and financial planning firm. Due to industry regulations, comments are not permitted on this blog. If you would like to contact the author, please email us at blog@fragassoadvisors.com. Dan can also be reached for comment at 412-227-3200.