Understanding the Risks and Responsibilities of Nonprofit Board Members
Nonprofit organizations play a vital role in providing essential social services to communities. Essential social services that benefit communities and their members are provided by nonprofit organizations. However, for these organizations to thrive, they require a dedicated and knowledgeable volunteer Board of Directors. While serving on a nonprofit board is a noble endeavor, it is not without its risks. Board members can be subject to personal liability for their decisions and actions. In this article, we will explore the risks and responsibilities associated with being a nonprofit board member and discuss the available protections.
Your organization cannot survive without a solid volunteer Board of Directors assigned to elect officers, adopt policies and make major financial decisions for the organization. Although the members of the board are volunteers, there is a certain amount of risk involved in holding one of these positions. Specifically, even when acting in good faith, board members are subject to personal liability, which may affect their personal financial status because of their business decisions.
Organizations and their Board of Directors understand the risks involved as volunteers, their responsibilities as board members and the ways in which they can protect themselves from personal liability.
Assessing Risks and Governance Responsibilities
To mitigate the potential personal liability of board members, nonprofit organizations should establish a volunteer risk management committee. This committee’s primary role is to identify and address the risks associated with serving on the board. Additionally, it is crucial to educate board members about their governance responsibilities, including legal and fiduciary duties. The risk committee should ensure that the organization operates within its mission, manages funds appropriately, and avoids accepting donations with conditions. Furthermore, it is essential to prevent individuals with personal agendas from joining the board and ensure that professional contacts are not used in dealings with the nonprofit.
Furthermore, the risk committee should ensure the following:
- The organization is working within its stated mission
- Funds are spent according to the mission and spending decisions are known to donors
- The organization does not accept donations with conditions
- Individuals with personal agendas are not allowed to sit on the board
- Board members are not using professional contacts in dealings with the nonprofit
Understanding the Duties of Nonprofit Board Members
Once the risks are assessed and the Board of Directors is aware of those risks, they must also understand the responsibilities associated with the positions they hold. Legally, board members have three main duties:
- Duty of Care: The individual should act in the way that a reasonable person would in a similar position and under similar circumstances. Acting under good faith is an essential part of the functions of the board.
- Duty of Loyalty: The individual should place the organization’s financial interests as the primary responsibility. As a board member, one should not use their position for personal gain, financially or otherwise. In addition, individuals should remain honest about business ventures that pose a conflict of interest when acting as a representative of the organization.
- Duty of Obedience: The individual should try to further the mission of the nonprofit by supporting board decisions and implementing policies as they are outlined.
In addition to these responsibilities, board members must also ensure that the non-profit follows all tax requirements, complies with anti-trust laws, abides by civil rights laws and manages funds effectively.
Protections for Nonprofit Board Members
To safeguard board members from personal liability, various protections are available:
- Federal and State Statutes: The federal Volunteer Protection Act shields individuals acting in good faith within the scope of their position, as long as their actions are not criminal, negligent, or reckless. State volunteer protection statutes must provide at least the same level of protection as the federal law.
- Indemnification Provisions: Many nonprofit organizations have indemnification provisions in their bylaws, which state that the organization will cover legal expenses incurred in a lawsuit. However, the provision may become null and void if the board member acted in bad faith or if the organization lacks sufficient funds.
- NonProfit Insurance Coverage: Nonprofit organizations should consider purchasing insurance to provide additional coverage beyond indemnification provisions. The following policies are relevant:
Nonprofits should consider the following policies:
- Commercial General Liability (CGL) Insurance: Protects volunteers and employees from bodily injury and personal injury claims.
- Workers Compensation Insurance: Some states allow organizations to cover volunteers in the event that they are injured while on the job.
- Automobile Liability Insurance: Coverage is needed for volunteers operating vehicles while working on behalf of the organization.
- Directors’ and Officers’ Liability (D&O) Insurance: Protects directors and officers against employees, clients and community members serviced by the organization. Specifically, D&O provides coverage for discrimination, harassment and wrongful termination claims. Provisions within the Americans with Disabilities Act of 1990, the Family and Medical Leave Act of 1993 and the Civil Rights Act of 1991 have led to claims against nonprofit organizations and their respective boards.
- Personal Liability Insurance
As representatives of the nonprofit, directors and officers need protection, as they will be held liable along with the organization in the event of any wrongdoing.
Nonprofits should strongly consider D&O insurance since most individuals will not volunteer on a board with the knowledge that they are risking their personal assets in the event of litigation. Proper insurance coverage and other risk management strategies can help ensure that your organization and its Board of Directors are protected against liability.
Material posted on this website is for informational purposes only and does not constitute a legal opinion or medical advice. Contact your legal representative or medical professional for information specific to your legal or medical needs.