Board Director & Officer Risks in Serving a Nonprofit

By John Trefry | February 10, 2014

According to a recent Towers Watson Directors & Officers (D&O) Liability Survey, 63 percent of nonprofit organizations reported a D&O claim in the past 10 years. Neglecting to prepare for such claims can lead to financial trouble for an organization and its leadership. Independent agents can help educate nonprofits on these important risks.

Nonprofit leaders juggle enormous and varied responsibilities each day – including managing tight budgets, engaging volunteers and contributors, and serving those in need. Individuals often find themselves on nonprofit boards or in executive positions at these organizations driven by the passion they have for supporting vital community issues, but forget that it is equally as important to first carefully review the “business” of the organization. Because so many nonprofits are singularly focused on their particular cause, organizations often neglect to identify and protect against risks that may leave the nonprofit – and its board members and officers – exposed.

One significant risk nonprofits often overlook involves financially exposing board members and officers. Many do not realize that these individuals can be held financially responsible for actions taken by, or against, the nonprofit organization, employees and other board members.

If a nonprofit becomes the target of a lawsuit and faces high legal bills and other financial burdens, board members could be responsible for footing the bill with their personal finances. Individuals considering joining a nonprofit board should check if the organization has secured risk management solutions and are properly protecting their leaders’ finances and reputations.

For example, one nonprofit has hosted a popular concert series for more than 30 years, which raises more than $500,000 each year for the organization’s programs. After ending a relationship with a vendor that supported the concert series, the nonprofit was unexpectedly sued. Due to proactive risk management planning, the organization was prepared for and protected against the lawsuit. With the right D&O insurance coverage, the organization ensured that the $500,000 raised through the concert series was dedicated to enriching visitors’ experience rather than paying legal fees.

Before joining a nonprofit board or accepting a role as an officer for an organization, it is important to ask questions and examine the business structure of the non-profit. Some questions include:

  • What risk management practices does the organization have to prevent or minimize exposure to litigation?
  • What types/amount of insurance protection does the nonprofit have in the event of a lawsuit or other legal obligation?
  • Who sits on the organization’s board of directors or table of advisors to provide guidance in good times and bad?
  • What processes are used to identify quality organizational leaders, reliable employees, volunteers and benefactors of programs?
  • What role does operations play in the organization’s overall strategy, risk assessment or business planning?

While many of these questions can be addressed by the organization’s leadership, consulting the nonprofit’s advisors can provide additional insight. Insurance agents can address most risk-related questions, including whether the organization has adequate insurance to cover unexpected defense costs and address settlements and judgments arising from lawsuits.

Addressing these exposures allows nonprofit directors and officers to serve with confidence, allowing them to put their full time and effort into supporting the cause without fear of personal financial risk.

nonprofit

About John Trefry

Trefry is the fiduciary liability product manager for Travelers Bond & Financial Products.

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Insurance Journal West February 10, 2014
February 10, 2014
Insurance Journal West Magazine

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