Liability

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BOARD MEMBER LIABILITY is always a topic of high interest to board members. Lets begin by saying that you must consult your legal and insurance counsel for definitive answers to your specific questions. Being neither an attorney nor an expert in insurance, it will not be our goal to offer specific advice beyond this admonition.

The issue is usually raised with the question: “Can board members be sued?” And the answer is yes, they can. However, in order to sue a board successfully, one must usually demonstrate that board members have been negligent in the discharge of their responsibilities. So the first line of defense is for board members to do what they should be doing in the first place – being conscientious board members? That is to say: Attend and participate in your board’s meetings regularly. See to it that there are good financial controls present, that financial reports are regularly reviewed by the board and that there is a thorough annual audit. Avoid conflict of interest situations. Maintain adequate minutes of all of your board’s meetings documenting the board’s activities and decisions. And so forth. Living up to your several responsibilities as board members will certainly help to minimize the possibility of a successful lawsuit against your board and its members.

Unfortunately, being a conscientious board will not in and of itself offer complete protection against a law suit being brought; so there is also the cost of defense to consider. A board might be sued not with the expectation of a successful suit but, rather, with the expectation that the board might be willing to settle out of court in order to avoid a protracted and expensive defense. Because of such a possibility, many boards carry what is called directors and officers liability insurance. And it is important when purchasing such protection that your policy cover the cost of defense as well as protect your board against an adverse judgment.

Recently there has been a spate of legislation in several states (New York and Pennsylvania among them) designed to protect nonprofit boards and board members from suit when the board and its members have a history of acting prudently and responsibly. While this is certainly a trend to applaud, a board would be foolish to rely upon such legislation until it has been adequately tested in the courts. For this reason, you should not – except upon the advice of counsel – feel that you can comfortably cancel your directors and officers liability protection and rely solely upon such legislation.

The degree of exposure to the possibility of law suits varies considerably from organization to organization. As a simple rule of thumb, the more “hands on” the service your organization provides and the more your organization deals with the general public, the greater the exposure and, therefore, the greater your organization’s need for such protection is likely to be. Again, for a definitive assessment of your organization’s need for such protection, you must seek advice from your legal counsel and then, if appropriate, from your insurance agent.

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