Nonprofits Need Protection Against D&O Liability Risks -- Maybe More than For-Profits?

Thursday, October 1, 2009
Nonprofit directors and officers may have a more demanding job than their for-profit counterparts because the affairs of the organization may be less familiar to the individual and may be conducted under conditions that are not conducive to making good business decisions.

The applicable legal standards of conduct for nonprofit directors and officers are at least as high, and perhaps higher, than the standards applicable to their for-profit counterparts.  In addition, damages recoverable from directors and officers of even a relatively small nonprofit organization can easily exceed the net worth of many individuals.

Why it is difficult for nonprofit directors to perform their duties

The primary role of nonprofit directors and officers is to maintain financial stability and provide the resources and environment to accomplish the goals of the organization. The unique nature of nonprofit organizations presents directors and officers with difficult challenges in performing this role.  Some of the reasons it is difficult for nonprofit directors and officers include:

1.    Many for-profit corporations are subject to external forces, which tend to monitor corporate performance and dictate standards of behavior. Reporting requirements and oversight by regulatory agencies also serve to identify and guide for-profit corporate performance and behavior.  These external forces are largely absent for nonprofit organizations.

2.    Because nonprofit directors and officers are frequently subjected to less external scrutiny than their for-profit counterparts, a greater tendency may exist to become complacent, reactive and perhaps careless in the fulfillment of their fiduciary role.

3.    The potential for inadvertent misconduct is further heightened by the director's and officer's commitment to the nonprofit agency. For many, service as a nonprofit director or officer is a part time activity with little or no compensation.

4.    The resources of many nonprofit organizations are insufficient to provide directors and officers with the most desirable support. As a result, decision-making may be hindered by incomplete information, insufficient time and inability to carefully investigate and document relevant factors.

The legal climate and the need for D&O liability insurance

There is a tendency among nonprofit directors and officers to rely too heavily upon the immunities and limitations provided by various state laws. Although they may win their court case, large legal bills will be incurred.  In addition, directors and officers cannot be confident of prevailing in court.

In today's litigious society, nonprofit organizations and their board members commonly face lawsuits for an extended list of alleged wrongdoings: Discrimination (age, race, sex, employment, membership), Harassment, Wrongful termination of employees, Inefficient administration or supervision, Waste of assets, Misleading reports or other misrepresentations, Libel and slander, Failure to deliver services, Acts beyond the granted authority.

Almost any day-to-day decision or action by anyone in a nonprofit organization can trigger a lawsuit that could not only hurt the organization financially, but also threaten the personal assets of those nonprofit trustees and executives.

D&O liability coverage has evolved into a very broad, much-needed coverage form for any nonprofit organization. Premiums are relatively low for the broad protections provided by this policy.
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