Personal Liability Associated with Non-Profit Board Membership

Sitting on a non-profit board can be very rewarding with significant contributions to the community and to causes close to your heart. However, there are a number of potentially very serious financial risks associated with non-profit board participation.

Non-profit does not mean non-accountability. Non-profit board members are largely held to the same levels of responsibility and accountability as other board members. And just like other boards, a board member‘s private assets may be placed at risk in case of many lawsuits.

So what kind of lawsuits do non-profit board members face? They are the same types of claims that we have all become far too familiar with in the age of Enron, WorldCom, Tyco, Arthur Andersen, and the more recent calamities in the financial industries. They include claims for financial mismanagement, fraud and tax evasion. Though not entirely unique to non-profits, there is particularly acute financial exposure for malfeasance related to fundraising and grant activities.

Perhaps the greatest, but least anticipated hazard for non-profit board members is exposure for employment discrimination lawsuits. When entering a non-profit board, one typically does not consider this risk. However, when you think about it, these types of claims are perhaps more likely in the non-profit world than in the for-profit world. Unlike for-profit institutions, non-profits often have very narrow causes with very precise visions and mission statements with which they expect their employees to agree. Unfortunately, these expectations do not always mesh well with the laws regarding employment discrimination.

A lawsuit does not necessarily mean liability in any of these areas. However, defense of these suits can be astronomically expensive. It is not uncommon for the legal costs associated with an employment case to go well above $100,000. So even if you win in the end, it may be a very hollow and costly victory in the absence of protections.

There are a number of protections that can be put in place in case you are considering going down this road. First of all, the non-profit should have D&O (Directors and Officers) insurance coverage for board members. If it doesn‘t, you would be wise to think long and hard about sitting on that board. Due to the high number of employment discrimination claims with over 99,000 filed against employers (profit and non-profit) in 2010 alone, you would be wise is at all within the financial means of the organization to insist on Employment Practices Insurance (EPL) as well. In the event, they don‘t have it or can‘t afford it, proceed with the greatest of caution.

In addition to D&O and EPL coverage, you might want to also look into PLUP coverage (Personal Liability Umbrella Policy). If you already have a PLUP, you might want to sit down with your agent to evaluate the adequacy of protection for non-profit board activities. A PLUP will under certain circumstances provide some protection for liability while sitting on a non-profit board. Typically, the coverage is available only if the position is unpaid. Again, this is something you would need to discuss with your insurance agent along with additional or alternative coverage.

In addition to the insurance coverages which are a must for anyone embarking on non-profit board participation, you would be wise to look closely at the operations of the non-profit to determine the potential risks. Like any company, some non-profits are just poorly managed. On the one hand, the board may be able to assist in correcting the mismanagement. On the other, there are some levels of mismanagement and/or impropriety that suggest finding another opportunity for non-profit and community service. This is something that you may need to discuss with your CPA, your lawyer, your insurance agent, your financial advisors, and anyone else that may have reservations about participation with a poorly managed non-profit.

Again, keep in mind that employment discrimination suits are a significant risk. So just looking at the books may not be enough to determine your financial risks. You may also need to take a look at the employment and personnel policies and procedures that are in place. If there are none, or they have not been reviewed of late, or they simply are not followed, this again is something you must take into consideration before sitting on that board.

In short, though it is admirable to give back through non-profit board participation, it is a serious commitment with serious potential financial considerations. It should not be taken lightly prior to or after the decision to sit on the board. Gone are the days where board membership is simply a symbol of status, or an exercise in networking or client development. If you are thinking of simply throwing your hat in the ring, you might consider that in this case your hat may contain all your worldly possessions.


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