Serving on the board as a director or officer for a non-profit organization is often an altruistic action that many of us accept because it feels good to passionately support a cause that we believe in; however, it is rare that appropriate consideration is given to the risks associated with these types of affiliations. This is what I like to call the “Do Gooder Risk”.
Although the exposure is perhaps less than for-profit, publicly traded companies, Director and Officer (D&O) liability does exist for non-profit directors and officers based upon the size of the non-profit entity, number of staff and level of grant and/or investment activity. Classifications of non-profit D&O claims involve breach of duty, mismanagement, conflicts of interest, harassment and wrongful termination – to name a few. All things that can turn doing good into a bad situation.
There are two areas that are important to consider when contemplating D&O insurance, albeit these are not the only considerations.
1. Employment Related Issues: To the extent staff exists, employer liability extending to non-profit’s directors and officers are real regardless of an entity’s tax status. Failure to address discriminatory employment practices and overlooking instances of alleged harassment can result in exposure for a non-profit director or officer. In fact, employment practice suits constitute the single largest area of claim activity under D&O policies..
2. Sarbanes-Oxley: Although most provisions of the Sarbanes-Oxley Act apply to public companies, at least two criminal provisions apply to non-profit organizations: provisions prohibiting retaliation against whistleblowers; and, the destruction, alteration or concealment of certain documents or the impediment of investigations. We have also seen claims that extend the duty of the independent and competent audit committee provision to non-profit healthcare institutions.
Being mindful that the 1997 Volunteer Protection Act (VPA) establishes a minimum level of protection for volunteers (including directors, officers and trustees) of non-profit organizations for harm caused by certain acts or omissions, this protection only applies to individuals who receive no compensation or nothing of value in lieu of compensation in excess of $500 per year. Regardless, the VPA does not shield a non-profit organization, nor its directors and officers from being sued.
We certainly do not discourage participation with non-profit organizations, because doing good feels good. But we do recommend that thoughtful consideration is given to director and/or officer affiliations. Coverage for individual non-profit D&O liability can be very inexpensive and can sometimes be extended from a personal excess liability policy at very little cost. We recommend your organization review its D&O and other insurance coverage on a regular basis.
For more information on mitigating the risk for this and other related matters, please contact Jeff Cline of BCU Risk Advisors at (312) 795.0604.