Are directors of a non-profit corporation at risk?

[Rob]

If a non-profit is incorporated, how do you explain the need for D&O insurance since many of the directors/officers of such entities believe they are protected since they are incorporated?

[Santa Rosa Ins Broker]

Why do we need Directors and Officers Coverage?


The General Liability policy you carry only provides coverage for Liability resulting from Bodily Injury, Physical Damage, Personal Injury and Advertising Injury.

What board/trustee behaviors might lead to claims other than BI, PD, PI or AI (Above)?

* Bad faith actions
* Mismanagement of affairs
* Failure to maintain adequate reserves
* Failure to maintain the books and records
* Failure to maintain correct insurance
* Failure to enforce the rules and regulations
* Failure to enforce the covenants/by-laws

D&O Insurance is meant to protect an officiating body from claims that aren’t covered by General Liability (such as those noted above).

Indentures, indemnity agreements or any other contract are not guaranteed to work and are not guarantees against litigation.

All you need is a creative attorney who alleges willful misconduct (right or wrong) and it has to be disproved. The legal expenses are worth the price of the policy.




Courtesy of Timothy E. Wahl 2005

[TheInsKid]

DIFFERENCES BETWEEN PROFESSIONAL LIABILITY AND GENERAL LIABILITY

Although Professional Liability is similar to the standard general liability policy in that each covers legal liability of the insured for occurrences that give rise to claims and suits from injured third parties, there are significant differences between the two coverages. The general liability form covers the insured for bodily injury or property damage of others arising from the premises or operations or products of the insured. The professional liability policy responds to, on the other hand, injuries to others due to the rendering or failure to render a professional service.

Professional liability policies do not use the terms “bodily injury” and “property damage” in their insuring agreements, but instead use the term “injury”, which is undefined in the contract. Such injury must arise out of the insured’s supplying of or lack thereof, of professional services. The policy defines the scope of professional services undertaken by each professional. If the definition is broad coverage, then coverage may depend on those activities described in the actual application of the insured. For instance, a physician may be in general practice and may undertake minor surgery, as well as medical treatment for his or her patients.

Regardless of the differences between general and professional liability policies, the professional who operates from an office (example would be a CPA, Public Official, etc.) or hospital (Medical Personnel) both types should have both General Liability and Professional Liability written in conjunction with each other, preferably in the same company. By having both coverages with the same company, you may avoid disputes as to which insurer is obligated to provide coverage in a borderline situation.

[pita3333]

InsKid: Your statments are correct....however the original question was referring to Directors and Officers (D&O) coverage not professional.

[Rob]

Actually, I understand all of that already i.e. difference between GL and E&O and D&O. My question is this: What is the response when someone says their D&O exposure is minimal because the organization is a incorporated? In other words, how do you explain that being incorporated won't protect them from being sued personally?

[LadyBroker]

Hey, Rob,

I am not a professional lines expect, but I was just reading your last post, and you have a statement about your Ds & Os not being sued since the entity is incorporated? The thing is, that doesn't matter...the Ds&Os are on the hook for all those kinds of claims listed in the posts above, as the Directors and Officers. If the entity does not carry D & O insurance, and the board is sued, there is NO coverage for the Loss, nor for the Defense. The GL policy specifically excludes professional claims. It doesn't matter if the entity is incorporated or not. I think you are thinking about how being incorporated gives the owners and officers a corporate veil, and that the GL coverage certainly shields them to a large extent from being personally sued.

Does that help?

Bottom line -- if your entity has a board, then they should have D & O coverage.

Have a great day!

[scott]

Incorporation of a nonprofit provides little protection for the directors. They are personally liable for their actions while on the board.

The Corp agrees to indemnify the directors (see the nonprofit's bylaws, the indemnification section). However, indemnification only helps until the Corps assets are gone.

Then what?

The director gets to give up his home, retirement accounts and other assets...

Some directors will try to fall back on state volunteer immunity laws. That, however will not help for federal issues such as ADA, etc.

[Rob]

Incorporation of a nonprofit provides little protection for the directors. They are personally liable for their actions while on the board.

The Corp agrees to indemnify the directors (see the nonprofit's bylaws, the indemnification section). However, indemnification only helps until the Corps assets are gone.

Then what?

The director gets to give up his home, retirement accounts and other assets...

Some directors will try to fall back on state volunteer immunity laws. That, however will not help for federal issues such as ADA, etc.

Thanks Scott, that's what I was looking for. Do you have a source for this that I can show a director?

[scott]

Tell him you got the advice directly from an expert in D&O insurance for nonprofits.

Tell him to Google "nonprofit directors and officers insurance" my article in Guidestar will be the first listing to come up.

[GRCinCA]

While it is a great idea to illustrate the need for D&O insurance by pointing to articles written by capable professionals like Scott - it might really help your sales process if you cite state law specifically. It is a good idea to become familiar with the law in your state. Are you in CA? In CA there are some pretty specific rules regarding insurance and liability written into the California Nonprofit Public Benefit Corporation Law.

Go here and read section 5239

http://caselaw.lp.findlaw.com/cacodes/c ... -5239.html

Ask your client if he sees plenty of room for an over-enthusiastic attorney to work? I am no attorney, but I read that and I think to myself that there are plentiful circumstances in which a board member or executive director could be held liable for damages.

If you can’t help this particular board member sees the value in D&O insurance than pivot to the personal umbrella. Ask if he is aware if his PUP has any exclusion regarding serving on the board of a corp? This will help illustrate that he really is putting his personal assets on the line by serving on the board. It may also help you add another personal lines household to your agency!

[Rob]

This is actually a community association where I have been asked to serve on the board as a director. D&O insurance quotes have been obtained as well as GL quotes but their first priority currently is an event that is upcoming. The VP said he did see the value of D&O insurance in our litigious environment but said "but we're incorporated so we have some protection".

I guess what I'm trying to understand myself is this: My agency is a corp and if my agency and myself are named in a suit, and I didn't have E&O insurance, and assuming the corporate veil couldn't be pierced, then the plaintiff could get a judgement against my corporation but not me personally. So I don't understand, and therefore can't explain, why a director doesn't enjoy the same protection in a non-profit corporation?

[scott]

Rob,

Apples and Oranges

Where does it say you can not be sued for your actions as an individual working within a corporation?

You screw up my insurance, I sue you and I sue the agency. The your employer will usually indemnify you as an employee acting within the scope of employment - however, without insurance or corporate assets that indemnification is worthless. In my suit against you, an individual, you are still on the hook.

The protection you refer to within a corporation is protection for the stockholders. If I sue the corporation the most I can get are the assets of the corporation - I can not go to the owners. Assuming the corporate veil holds.

[Rob]

Scott,

If I'm an officer of a corporation and I screw up your insurance, are you saying that you could sue me personally rather than just the corporation's assets? Aren't I personally protected by the corporate veil?

[scott]

The corporate structure protects owners from losing their assets - it does not protect employees - stockholders can only lose their investment. Employees are protected by the assets of the corporation and insurance. If there are no assets and no insurance an employee is without protection from a lawsuit by a 3d party.

Corporate owners can still be sued as individuals for their actions - that's why stockholders are "an insured" on the GL for actions that come out of their position as stockholders. Also, EEs are insureds.

You are driving on company business and you kill a pedestrian. Do you really think that the pedestrian's family can't sue you because you work for a company?

Business Law 101 - contact your attorney - state laws vary in the details - the above, however is based on common law. You are responsible for your actions.

[texican]

Non-paid Directors for a non-profit organization/corporation such as a P.O.A. are protected by the Volunteers Protection Act; but that doesn't stop them from being sued. A local P.O.A. and their directors in my small town were sued by an unhappy property owner; they spent 7 years in legal paper, finally went to court and was thrown out. The legal fee's amounted to over $50,000, which the D&O coverage would have covered, if they had a policy. They now have D&O coverage.