Nonprofit Good Deeds Can Put You in Danger

BOSTON ( MainStreet) -- No good deed goes unpunished.

That old cliche reflects a danger faced by those who volunteer their time and expertise to nonprofit boards.
Volunteering your time and expertise to a nonprofit board could expose your wealth to risks.

Whether it is a charity, civic organization, church or library, serving on a nonprofit board can jeopardize your personal property and assets if lawsuits arise.

Legal claims -- citing such matters as wrongful termination, sexual harassment, discrimination or on-site injury -- may affect not just the organization's ledger sheet. Board members who assume they are protected from lawsuits and personal liability could be in for a rude awakening.

Some states offer immunity for board members who get no salary or compensation should civil damages arise from actions performed in an official capacity. But even that protection only goes so far and doesn't extend to "intentional conduct, wanton or willful conduct or gross negligence." Interpreting that level of egregiousness isn't always easy, though, and a board member's viewpoint may ultimately not be shared by a plaintiff, judge or jury.

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"Gross negligence" could rear its head as a result of either actions or inaction, and lack of oversight can come back to haunt a board. If a background check slips through the cracks for an employee or volunteer that works with kids, the board may find themselves in deep trouble if a sexual assault takes place. A mix-up that delays getting a contractor to fix a loose handrail is an accident -- and lawsuit -- waiting to happen. Letting a donor have one glass of wine too many at an event sets the stage for a costly accident.

With these hazards in mind, many nonprofit organizations buy Directors and Officers Insurance. These policies, and related products, can help insulate board members -- often volunteers tasked with important decisions -- from unexpected grabs at their personal property and money.

"Where we see a lot of the exposure for nonprofits is in how they are handling money," says Carl Godziek, a client executive with RJ Ahmann, a Minnesota-based insurance and risk management firm that specializes in D&O and other nonprofit policies. "It can be a big issue if they have restricted funds. They can run into allegations that they are sending money in the wrong pace."

A large donor, for example, may disagree with a financial decision and sue board members individually for financial mismanagement of the organization.

Soured business relationships can also pose a direct liability risk.

"Nonprofits have other businesses relying on them," Godziek says. "They've got suppliers and all these different partnerships. If there is mismanagement of the organization that causes strain on those affiliated partners, they may be bringing suit against the nonprofit that has caused them hardship."

A director or officer of a nonprofit corporation is particularly at risk if they take a personal role in a loan or debt, especially if they commingle their assets with those of the nonprofit (an error of judgment that could also lead to criminal prosecution).

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Board members also have a fiduciary responsibility to the organization and its employees. Specifically, that responsibility centers on taxes. Not only are all the taxes relating to wages expected to be handled accurately; the IRS also demands that board members make sure that all of the organization's efforts and decisions are within the scope of their tax-exempt status.

Even those requirements can prove to be a matter of interpretation. For example, if the IRS deems executive compensation to be egregiously high at an organization, board members may be blamed for allowing it.

As is often the case with legal disputes, even when an organization or one of its overseers believe they did nothing wrong, a judge or jury may see things otherwise. A legal battle, even when vindicated, can be very costly.

"Defense costs are another reason why directors and officers want liability coverage," Godziek says. "The defense of claims often costs more than the payouts. There can easily be six figures worth of defense costs."

The broad scope of what might be considered "wrongful acts" is another concern, he says. A community member with no direct association with the organization might sue board members individually due to a decision to eliminate a specific program.

Think of a hockey player who suffers a traumatic injury during a game whose financially devastated family sues the association and its board members for damages.

"That gets back to management issues and is something, potentially, that a D&O policy helps with," Godziek says. "The family may try to claim the organization didn't properly train its people, or that they didn't ensure that there were enough referees on the ice. There are all sorts of things can tie back to mismanagement."

"I think there are a lot of reasons why people choose not to volunteer to be on a board that go beyond liability risks," Godziek says.

Nevertheless, he thinks an organization that takes steps to protect its board members will be better positioned to attract the talent and expertise it needs.

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"One of the reasons they might come to someone like us for a D&O policy is that they get a new board member with a high net worth and they want to make sure they are protected," he says. "A lot of times too, maybe for larger nonprofits, they are looking to attract sophisticated individuals. They want to make sure they have protection for them so that they can attract quality board members."

-- Written by Joe Mont in Boston.

>To contact the writer of this article, click here: Joe Mont.

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