April 14, 2024

Obligate Law

Professional Law Makers

The Risks of Managing a Non-Profit Organization and How to Protect Yourself and Others

3 min read
The Risks of Managing a Non-Profit Organization and How to Protect Yourself and Others

Managing or serving on the board of a nonprofit organization(NPO) remains both a noble and necessary activity. NPOs are often involved in protecting the vulnerable; providing services to those in need; and filling educational gaps for those subject to being mislead by charlatans and thieves to name just a few activities. However, despite these noble and necessary efforts, NPOs’ Directors and Officers(D&O) have liability risks and need to be clear as to what these risks are and what adequate protection consists of. In this litigious society NPOs who are sued are experiencing an average of $235,000 in legal fees even if the suit is unfounded.

Specifically, Directors and Officers (D&O) are exposed to such employment claims as wrongful termination, breach of employment contract, discriminatory hiring practices, failure to employ or promote, retaliation, negligent evaluation, sexual harassment, wrongful discipline, invasion of privacy, deprivation of career opportunity, employment related defamation, wrongful infliction of emotional distress, and mismanagement of employee benefit plans. Employment claims represent the area where more than 80% of the claims arise.

Therefore, before even the first employee is hired an Employee Handbook should be developed based on the models currently being used in similar type of service organizations and modified later if necessary. The employee should be given one and required to sign a statement that they have received it. A Workers Compensation policy which covers injury, illness, and death that result from workers performing their job or being on the job is also essential.

The other types of claims that arise are non-employment claims include misallocation of funds, breach of fiduciary responsibilities, self-dealing/conflict of interest, anti-trust or restraint of trade violations, defamation, invasion of privacy, negligent financial advice to third parties, failure to maintain insurance, interference with contract, breach of contract, failure to accredit or certify, and infringement of trademark, patent, or copyright.

Lawsuits can originate from such diverse sectors as beneficiaries who feel that they are entitled to more than they received; board members who disagree with a majority decision on the use of funds; donors who feel that their contributions have not been used to further the expressed aims of the organization; state attorney generals who institute legal proceedings against the board for issues such as mismanagement of funds and antitrust violations, and other government officials such as the IRS and the Dept of Labor alleging violation of federal or state laws.

It is important for NPOs to make the distinction between what a D&O liability policy covers and what a General Liability (GL)policy covers. A GL policy does not cover what a D&O liability policy is designed to cover. A GL policy is broad coverage and is designed to cover bodily injury, property damage, theft, criminal acts, deliberate fraudulent acts, pollution, nuclear reactor or radiation, and litigation pending prior to the original inception date of the policy. To narrow this down, a GL policy then essentially covers bodily injury and property damage, whereas the D&O policy covers wrongful acts which includes “wrongful management decisions” and never includes bodily injury and property damage. Therefore, it is essential that an NPO have both policies.

To summarize, the D&O liability policy must not only cover the claims made against the organization, but also full prior acts, and defense costs. Moreover, not only should the D&Os be covered, but also the employees, volunteers, and committee members. The best D&O liability policy does all of this.

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