Directors and Officers

Directors and Ofcers

(D&O)

Key Facts About Insurance

and Legal Liability

Directors and Oﬃcers (D&O)

Key Facts About Insurance and Legal Liability:

Chapter 1

Directors & Oﬃcers Insurance: Where Does it Fit into the Overall Insurance Picture?..1

Chapter 2

Commonly Asked Questions: What Every Director and Oﬃcer Should Know ..................2

Chapter 3

Claims Against Directors and Oﬃcers: Wrongful Termination, Harassment

and Discrimination...........................................................................................................................5

Chapter 4

D&O Coverage Forms: Understanding Key Policy Provisions ...............................................7

Chapter 5

Policies and Procedures: How Can You Minimize the Chances of Facing an

Employment-Related Lawsuit? ......................................................................................................9

Chapter 6

Board Practices: What Board Practices are Particularly Important? ................................ 12

Chapter 7

In Summary: Prevention and Protection are the Keys.......................................................... 13

Appendix

Member Resources ....................................................................................................................... 14

Please note: This booklet is designed to provide general information about

directors and oﬃcers based on our many years of experience in handling

claims and lawsuits against nonproﬁt organizations. This booklet is not

intended to oﬀer legal advice or counsel. The information contained in this

booklet does not alter the terms of any insurance contract or the law of the

jurisdiction which is the site of any potential claim or suit. It is the terms and

provisions of your insurance contract which provide the scope of the appli-

cable coverage. Because the areas of law constantly change, those using

this booklet should not rely on it as a substitute for independent research.

Introduction

Who should read this booklet?

Speciﬁcally, this booklet is designed to help ANI and NIAC nonproﬁt members understand

some of the most basic coverages provided by directors and oﬃcers insurance and to help ANI

and NIAC nonproﬁt members avoid lawsuits against their board members and organizations

when possible. It brieﬂy reviews the federal law that oﬀers minimal protection for volunteers

and explains why, for most nonproﬁts, directors and oﬃcers liability insurance is a valuable risk

ﬁnancing tool.

This booklet does not provide legal advice, nor does it provide detailed information on any particu-

lar directors and oﬃcers liability insurance policy. We urge you to consult with legal and insurance

professionals for assistance with this type of information. However, we hope this booklet will help

you gain a better understanding of some of the key issues surrounding the topics of board liability

and D&O insurance and enable you to take appropriate steps to protect the valuable assets of

your nonproﬁt.

Chapter 1

Directors & Oﬃcers Liability Insurance:

Where does it ﬁt into the overall insurance picture?

It was summer and Yourtown Community Center was at its peak. The organization’s new pro-

grams were in high demand, community donations were up, and the Center had just completed

construction of a new recreation facility. The Board of Directors had no warning of what was

coming next—a lawsuit.

Served in late June, the lawsuit alleged that the Executive Director was liable for sexual harass-

ment and discrimination. Damages in excess of $500,000 were sought. Shaken, the Board turned

the lawsuit over to its insurance broker expecting the Center’s general liability insurance car-

rier would defend the claim. At the next meeting of the Board, the broker read a letter from the

insurance company informing the organization that there was no coverage for employment-related

claims under the general liability policy and that the organization should look for coverage under

their directors and oﬃcers liability policy. The directors looked at each other with pained expres-

sions. They had previously decided not to purchase directors and oﬃcers liability insurance and to

devote all available resources to the expansion.

Although the details vary, that story happens all too frequently. What’s worse is that sometimes

boards with the foresight to purchase directors and oﬃcers (D&O) insurance fail to purchase a

policy containing the broad coverages they need.

Because we have seen too many situations like the one illustrated above, this booklet is not about

helping you to decide whether to purchase D&O insurance. It is intended to help you understand

the need for this type of coverage, help you evaluate your various coverage options and, if possi-

ble, help you avoid lawsuits of this nature. Whether you have D&O insurance or not, becoming

embroiled in a lawsuit will strain your organization and stress your employees. The best course is

avoidance whenever possible.

The following section explains the distinction between general liability and directors and oﬃcers

liability coverage. Remember that while general liability policies are substantially similar from one

policy form to the next, there are often signiﬁcant diﬀerences in the coverages that D&O policies

provide. These comments are therefore very general regarding these coverages and reﬂect what’s

typically found in policy forms.

General Liability Insurance...

General liability insurance provides coverage for “negligent” acts resulting in bodily injury and/

or property damage and a speciﬁed series of oﬀenses, such as defamation. “Negligence” is doing

something a reasonable person would not do under the circumstances or failing to do something

a reasonable person would do. If the organization, its employees, or volunteers (including board

members) negligently cause someone to sustain “bodily injury, or property damage, or commits

one of the speciﬁed oﬀences” general liability insurance will typically provide the applicable

coverage. If someone is physically injured or their reputation is hurt, or another person’s property

is damaged because of a mistake by someone at the organization, you can usually rely on general

liability insurance for coverage. For example, if/when a client trips and breaks a leg because of a

faulty stairway at the nonproﬁt.

Directors and Oﬃcers (D&O) Liability Insurance...

D&O provides coverage for an action taken by an organization’s board of directors or oﬃcers that

someone else thinks are wrong. Typically the D&O policy only requires some type of act, error, or

omission which causes a person or entity to sustain damage other than bodily injury. While the

most typical D&O claim involves an employment-related matter resulting from a personnel policy,

most D&O policies cover all types of alleged wrongful acts, including acts of discrimination, ﬁnan-

cial issues, and policies concerning the programs of the organization. As examples, if an employ-

ee is terminated and they allege age discrimination as a result of that termination, it is the D&O

policy that will typically provide the applicable coverage. If someone alleges that the board has

improperly utilized the funds of the organization in doing or failing to do something which that

person believes the organization is required to do under its bylaws and has caused ﬁnancial loss

to that individual, it is typically the D&O policy that provides the applicable coverage.

Chapter 2:

Commonly Asked Questions.

Things Every Director & Oﬃcer Should Know

Directors and oﬃcers owe three basic ﬁduciary duties to the nonproﬁt organizations they serve:

the duties of obedience, loyalty, and due care.

1. The duty of obedience forbids acts outside corporate powers. The governing board of the or-

ganization must comply with state and federal law and conform to the organization’s charter,

articles of incorporation, and bylaws.

2. The duty of loyalty dictates that oﬃcers and directors must act in good faith and must not

allow their personal interests to prevail over the interests of the organization.

3. The duty of care requires directors and oﬃcers to be diligent and prudent in managing the

organization’s aﬀairs. The individuals charged with governing must handle the organizational

duties with the care that an ordinarily prudent person would use under similar circumstances.

For many years, directors and oﬃcers of nonproﬁt organizations enjoyed a sense of invulnerability

because their services were associated with a nonproﬁt and subsequently were not an attractive

target for litigation. Nonproﬁt board members who continue to believe they are invulnerable today

may be in for an unpleasant surprise.

The duties of corporate governance—obedience, loyalty, and due care—may seem high-minded.

However, the importance of these responsibilities becomes crystal clear when a nonproﬁt board

member is faced with a lawsuit alleging improper ﬁduciary oversight or improper oversight of

employment practices resulting in allegations of sexual harassment or wrongful termination.

Employment-related suits may allege a wide range of wrongful acts or improper employment

practices. These cover a wide variety of subjects that include, but aren’t limited to, sexual harass-

ment, wrongful termination, discrimination on the basis of being a member of a protected class

that includes, among others, race, gender (including gender expression, gender identity, and

gender stereotyping), sex, religion, disability, marital status, age, ethnicity, national origin, violation

of the Americans with Disabilities Act (ADA), wage and hour violations, or retaliation for exercis-

ing a legal right. The risk of facing an employment-related lawsuit does not necessarily expand

proportionately by the number of paid employees in an organization.

Often, the parties at odds in a wrongful termination lawsuit are the executive director and the

board of directors. Many of these lawsuits can be avoided, or at least be dismissed in the early

stages of the lawsuit, if the nonproﬁt simply follows its own personnel policies. But more on

that later...

More than ninety percent of claims against boards of directors involve some type of employment

dispute. While every D&O claim can be costly to defend, the ten percent of claims not involving

employment disputes can be among the most expensive claims, and ironically, these often strike

the smallest organizations. Another allegation of concern is breach of ﬁduciary duty. A lawsuit

alleging breach of ﬁduciary duty could be brought by a donor, a concerned citizen, or the Attorney

General in your state. This type of lawsuit alleges that the board of directors is not appropriately

using and protecting the assets and resources of the nonproﬁt organization.

State Volunteer Protection Laws

There are no laws on the books anywhere in the United States that insulate nonproﬁts from

lawsuits. There are, however, various statutes that are often perceived as oﬀering immunity from

litigation. A review of these laws quickly demonstrates why they oﬀer only minimal protection.

Nearly every state in the country has in place a statute that aﬀords minimal protection to

volunteers serving nonproﬁt organizations. The intent of these statutes is to enable volunteers

to avoid personal liability for simple negligence when they are working under the direction of a

nonproﬁt. Many of these statutes were adopted with the express purpose of encouraging citizens to

volunteer their time and service to community-serving nonproﬁts.

While each state’s volunteer protection law diﬀers in some respects, most contain several

common features which include, but are not limited to:

• They do not extend protection for any willful acts by a volunteer;

• They do not extend protection for any claims involving the use of an automobile;

• They do not extend for any claims alleging violation of civil rights laws;

• They do not extend protection for any volunteer serving a nonproﬁt that does not have liability

insurance.

The exclusions provide the opportunity for individuals and entities to bring claims directly against

the organization, its board, and its oﬃcers. First, these exclusions represent a signiﬁcant percent-

age of the claims ﬁled against nonproﬁts and nonproﬁt board members. Claims alleging violation

of federal anti-discrimination and other civil rights laws represent a large portion of D&O claims

ﬁled against nonproﬁt volunteers and organizations.

Second, no state law oﬀers protection for allegations of breaches of federal laws, such as those

covering racial, sexual, and age discrimination and discrimination against those with disabilities

A D&O policy will typically provide a defense for such allegations but may not pay damages if it is

determined that the law was willfully broken.

Third, there are no protections under most state volunteer protection laws for directors and oﬃ-

cers of nonproﬁt organizations unless the nonproﬁt has an insurance policy in place that applies

to the claim. So, the catch is, if your nonproﬁt has D&O insurance, your state law may oﬀer some

protection for your volunteers. If your nonproﬁt doesn’t have insurance that covers the claim,

forget it. Your volunteers receive no protection under the law.

Fourth, with two exceptions (Virginia and New Jersey), there are no states that provide immu-

nity protection, no matter how minimal, for the nonproﬁt organization itself. The state volunteer

immunity laws discussed here apply only to individual directors and volunteers. A lawsuit against

a board of directors will typically name the individual directors and the nonproﬁt as defendants.

Some suits only name the nonproﬁt and its management.

Finally, while oﬀering limited protection from being found liable by a court, none of the state laws

speciﬁcally prohibit ﬁling suits against volunteers or nonproﬁt organizations. Typically, the most

expensive part of any lawsuit is the cost of legal defense: determining the facts, such as whether

the director or oﬃcer acted in good faith, and whether the act was simple or gross negligence.

Once the point is reached where the court determines that the board member should not be held

liable because they acted in good faith and that it was simple negligence, not gross negligence,

most expenses of the lawsuit will already have been incurred.

The Volunteer Protection Act of 1997

Federal legislation, known as the Volunteer Protection Act of 1997, was signed into law by Presi-

dent Clinton on June 19, 1997. This law is, in many respects, a mirror image of the state laws that

preceded it. In particular, to receive any protection, the volunteer must prove in a court of law that:

• the volunteer was acting within the scope of their responsibilities at the time of the act of

omission;

• if appropriate or required, the volunteer was properly licensed, certiﬁed, or authorized by the

appropriate authorities for the activities or practice in the State in which the harm occurred,

where the activities were or practice was undertaken within the scope of the volunteer’s

responsibilities in the nonproﬁt’s organization;

• the harm was not caused by willful or criminal misconduct, gross negligence, reckless mis-

conduct, or a conscious, ﬂagrant indiﬀerence to the rights or safety of the individual harmed

by the volunteer, and

• the harm was not caused by operating a motor vehicle, vessel, aircraft, etc.

The law also permits states to adopt more stringent requirements, such as the requirement in many

states that limit volunteer immunity to cases where the nonproﬁt organization engaging the volun-

teer has a liability policy in place to cover the claim.

This law does nothing to protect nonproﬁt organizations from suits alleging negligent acts by their

volunteers. The intent of the law’s sponsors was to make certain that if an injury results from the

simple negligence of a volunteer, the nonproﬁt sponsor, not the volunteer, is held accountable to the

victim.

“Wait a minute...my board indemniﬁes board members in its bylaws. Isn’t that adequate protection?”

The promise by an organization to indemnify its board members is only as good as the ﬁnancial

resources available to fulﬁll that promise. When a nonproﬁt agrees to indemnify board members,

it agrees that in situations where it may do so by law, it will pay to defend board members and will

possibly pay damages.

There are two potential risks here. First, nonproﬁts may not be permitted to indemnify board

members against certain types of actions, such as allegations of self-dealing. For these types of

allegations, the nonproﬁt may be prohibited from using charitable dollars in a board member’s

defense, whether or not the accusations are justiﬁed. Second, few nonproﬁts have suﬃcient unre-

stricted funds or unencumbered cash on-hand to mount an expensive and prolonged defense.

Some coverage for board service might be found under an individual’s homeowner’s policy, but

the extent of that coverage depends on the speciﬁc wording of that policy. It is not uncommon to

ﬁnd coverage under a homeowner’s policy for incidents that cause “bodily injury” resulting in the

course of volunteer activities. However, the coverage extended by a homeowner’s policy is typically

limited in scope and liability limits. The coverage extended by the D&O policy is typically broader

than the coverage extended by the homeowner’s policy, with less exclusions and a higher limit of

liability protection.

Even if every board member individually has a homeowner’s policy that provides coverage for

their decisions as a board member, these policies provide no protection for the nonproﬁt itself. In

these cases, if the nonproﬁt is named in a suit, the nonproﬁt must mount its own defense.

Chapter 3

Claims Against Directors & Oﬃcers:

Wrongful Termination, Harassment, and Discrimination

While far less common than claims resulting from slip and fall incidents and auto collisions,

claims against boards of directors are typically more complex and diﬃcult. A vast majority of

claims are lodged by disgruntled former employees and frequently involve a board member or a

senior employee, with an emotional stake in the outcome, who may be reluctant to be completely

candid. Often the facts are not clear-cut and are subject to interpretation by the various parties.

Getting to the bottom of the issue can be a long, painful, and expensive process. Indeed, no matter

what the outcome, all parties may feel like losers because of the ﬁnancial and emotional expense

of the process.

Employment claims against directors and oﬃcers of nonproﬁt corporations typically fall into three

major categories: wrongful termination (including retaliation), harassment, and discrimination. In

the following pages are sample scenarios to show the reader the types of lawsuits brought against

directors and oﬃcers and things to consider to prevent such claims from occurring.

Wrongful Termination

An employee of a nonproﬁt complains about illegal business practices and supervisory practices

at the organization. The employee is then terminated because of those complaints. The organi-

zation insists that the real reason for the termination was poor performance. However, the orga-

nization cannot furnish adequate documentation of the employee’s poor performance. The jury

sympathizes with the employee and concludes that the nonproﬁt intentionally terminated the

employee as retaliation for making waves in the organization.

Firing someone because they have pointed out wrong-doing is illegal. If an employee complains

about illegal business practices, supervisory practices, or any other portion of the business and

then is terminated because of those complaints, that employee may well have a valid case for

retaliation. Of all employment practice claims, retaliation produces the highest jury verdicts. In

most states, plaintiﬀ’s attorney fees can be recovered in addition to the jury award.

If an employee is terminated due to poor performance, even in an “at-will employment” state, the

organization should be able to prove in court that the employee was counseled and given ample

opportunity to improve their performance. Unfortunately, many organizations are lax in compiling

and maintaining adequate, appropriate, and accurate performance documentation. Documenta-

tion is essential to a successful defense to any employment claim.

Sexual Harassment

A supervisor of a nonproﬁt enters into a romantic relationship with their employee. One day, the

supervisor overhears other employees discussing the relationship between the supervisor and the

employee. Feeling that it is in the best interest of their position with the organization, the supervi-

sor breaks oﬀ the relationship. The employee is hurt and angered by the breakup and ﬁles a com-

plaint with Human Resources that the supervisor has made unwanted sexual advances at them.

This is a typical sexual harassment case—a romantic relationship gone wrong between a super-

visor and a person who works for them. The organization may be held responsible not only for

failing to do something about reported sexual harassment, but failing to investigate allegations of

sexual harassment. If an organization fails to investigate sexual harassment charges, the organi-

zation can be held as accountable and as responsible as if the harassment took place with their

knowledge and assent.

Discrimination

Save the Land, a nonproﬁt environmental agency, had applied for a large grant to continue an

innovative program for land acquisition and preservation. Unfortunately, they failed to get the

grant and were forced to eliminate one of the staﬀ positions serving this program. One of the two

positions was held by a 28-year-old man, Tom, who had been working for the nonproﬁt for six

years, and the other by a 47-year-old man, Bill, who had been working there for nine years. After

careful consideration, the Executive Director of Save the Land told Bill he would be terminated in

a month, when the funds were depleted from an earlier grant. The Executive Director’s reasons

for her decision were Tom’s recent college degree achieved during night school and because Tom

was bilingual, which was needed for program delivery. Bill sued for age discrimination.

The claim of age discrimination is not uncommon. Workers over 40, who are passed over for

promotions or who lose their jobs when other, younger workers in the same positions keep theirs,

frequently respond with a lawsuit. Here, the reasoning of the Executive Director was sound and

well-documented, and Bill failed with his lawsuit. Another type of discrimination case can be

based on sexual or gender orientation, expression, or identity. Any employment action taken be-

cause a person is gay, lesbian, bisexual, or transgender creates a serious risk of a discrimination

claim. As in all allegations of discrimination, a prompt, thorough investigation into the merits is

essential, and once completed and if appropriate, remedial action should be promptly undertaken.

Chapter 4

D&O Coverage Forms:

Understanding Key Policy Provisions

Unlike general liability insurance, where standardized policy language is amended by speciﬁc

endorsements, each insurance company writes its own specialized D&O policy. This can make

determining what coverage is provided a very diﬃcult process. That process is often more compli-

cated for nonproﬁts because many D&O policies sold to nonproﬁts contain provisions that initially

appeared in traditional for-proﬁt policies.

A wide variety of policies are available on the market today. Your insurance broker can help you

evaluate which policy form is best for your organization. There are far too many variables to

adequately evaluate the many diﬀerences in a booklet of this nature. However, some important

distinctions make the coverage provided by some far superior to others. In the next few pages are

examples of the most desirable provisions of coverage for nonproﬁts.

Broad Deﬁnition of Insured

A D&O policy containing a broad deﬁnition of “insured” extends coverage to any person who

was, is, or becomes a director, trustee, oﬃcer, employee, committee member, volunteer, intern, or

student-in-training of the nonproﬁt and the nonproﬁt organization itself. This is a major departure

from for-proﬁt policies, which typically cover only the directors and oﬃcers.

To determine whether a particular D&O policy contains this broader coverage, simply look at the

deﬁnition of “insured.”

If the organization and its employees are not named as insureds, the policy oﬀers narrow cover-

age and the organization and/or its managers are uninsured. Nonproﬁt managers should ask their

insurance professionals to advise them of any potential gaps in coverage of this nature. (NOTE:

The NIAC/ANI policies utilize the term “Member” as opposed to the term “insured.”)

Requirement to advance defense costs

Unfortunately, deciphering the language which states how the insurer will pay for defense costs

is often diﬃcult. It might be reasonable to assume policy language stating that “the company will

pay on behalf of the organization any loss...” is a commitment to pay the costs of legal defense as

they are incurred. However, later in this policy, “loss” is deﬁned as “amount paid by the Insured

or Organization.” This language, which makes the nonproﬁt eligible to get reimbursement for

defense costs, is easy to overlook, but it’s disastrous to the nonproﬁt, who is required to reach into

its own funds to pay costly legal bills.

Look for the language that requires the insurer to advance the costs of defense. Reimbursement

language requires the nonproﬁt to pay all costs and attorney fees out-of-pocket and wait for repay-

ment by the insurer. Since litigation covered under D&O policies can be expensive and lengthy,

reimbursement-style policies can severely stretch a nonproﬁt’s resources.

Broad coverage for employment practices liability

Although increasingly common, employment practices liability coverage is not universally pro-

vided in nonproﬁt D&O policies. In those policies granting coverage, the language is not in a

consistent policy section. (NOTE: The ANI/NIAC policies utilize Wrongful Act in extending the

coverage within the insuring agreement.) In some policies, it is found within the section titled

“Exclusions,” where employment contracts are exempt from the breach of contract exclusion.

While a policy may indicate previously that claims alleging breach of contract are not covered,

under Exclusions there may be a statement indicating this restriction on coverage does not apply

to claims alleging breach of an employment contract. In other policies, coverage for employment

practices may be found in the body of the policy or in the endorsements.

A broadly written policy covering employment practices should insure a defense for claims

alleging a wide range of wrongful employment actions. Some policies accomplish this by extend-

ing coverage to employment-related claims, while others list the speciﬁc causes of action (such

as wrongful termination or sexual harassment) that are covered. If the policy includes a speciﬁc

list, the reader must determine if all exposures are included. There should be coverage for cases

arising under both state and federal laws, those speciﬁc to employment and those, such as the

Americans with Disabilities Act (ADA), applicable in many contexts.

Of equal importance, and not so easily determined, is an insurer’s interpretation of certain deﬁni-

tions. If the insurer deﬁnes sexual harassment as sexual abuse, there may be no coverage under

that D&O policy if it contains a sexual abuse exclusion. If a question is on this matter, a nonproﬁt

manager should ask their insurance broker to contact the D&O carrier to determine the insurer’s

interpretation of this and similar terms and issues.

Most lawsuits ﬁled against nonproﬁt directors and oﬃcers involve some form of employment prac-

tices liability. Insurers are becoming more keenly aware of this exposure and some have made

subtle policy changes that restrict coverage in these areas. The nonproﬁt manager should request

that their insurance professional make sure that all coverages listed in this section are included in

a policy designed to cover the exposures which arise from governance activities, and should check

whether a separate deductible applies to employment-related allegations.

Chapter 5

Policies and Procedures:

How Can You Minimize the Chances of Facing an Employment-

Related Lawsuit?

Most employment-related complaints arise from the perception by prospective, current, or former

employees that an organization failed to treat them fairly or acted illegally. Many potential employ-

ment-related claims can be avoided by striving for clarity and consistency in the administration of

employment practices.

Every nonproﬁt’s personnel practices should be grounded in legal, defensible practices. In addi-

tion, a strong commitment to treat employees fairly and with respect should be the foundation

on which all employment actions are taken. The eﬀectiveness of this approach is only as strong

as the weakest link in the nonproﬁt. Therefore, it is crucial that all supervisors and managers be

trained and coached in implementing the organization’s employment practices. It is not enough to

distribute a list or handbook containing the organization’s policies. Potential problem scenarios

and concerns should be openly discussed. Those who administer employment policies must seek

additional assistance or clariﬁcation when they do not understand the reasons behind a particular

policy or how it should be implemented.

Other strategies a nonproﬁt should consider in managing the risk of employment-related claims

are discussed next.

Keep your employee handbook updated and in compliance with current law

In our review of hundreds of nonproﬁts’ employee handbooks, we have seen policies incorporated

into handbooks that are patently illegal. Policies requiring pregnant employees to take a leave of

absence, or those requiring employees to work as volunteers instead of receiving pay for overtime

work are simply illegal and will be indefensible in a lawsuit. Seek the assistance of an employment

attorney to make certain that your handbook is in compliance with your state and federal laws.

Clearly and promptly document each employment action

Each time you meet with an employee for performance counseling, document the discussion and

outcomes of the session and have the employee sign it to acknowledge that they have seen the

document. The employee may disagree with your assessment and may indicate so on the docu-

ment; however, attempt to have the employee acknowledge receipt and review of the document.

Keep one copy in the employee’s personnel ﬁle.

A decision to terminate employment for performance deﬁciencies should not surprise the employee.

Good documentation, accurate evaluation, and timely discipline will assist you in achieving this goal.

Make “at will” the standard of employment

Unless your nonproﬁt intends to have relationships with employees governed by contracts, take

steps to establish and preserve the “at will” status of your paid staﬀ. “At will” employment simply

means that either the employee or the employer may terminate the employment relationship and

for any reason, except an illegal reason. If your employee handbook or other document speciﬁes a

term of employment, or provides or suggests that employees will be terminated only “for cause,”

you have created an additional hurdle for yourself which is not required by law.

Many nonproﬁt managers resist adopting “at will” language because they believe that they must

then become less supportive of employees. The “at will” language does not require employers to

terminate without cause; it simply may make it easier to avoid a lawsuit once the organization de-

termines that an employee is not performing adequately and must be terminated. (If your nonprof-

it changes from a policy whereby employees may only be terminated for cause to one where true

employment “at will” exists, it may be necessary to compensate employees accordingly. Consult

an employment attorney for speciﬁc guidance on this tricky issue.)

Ban the word “permanent” from your employee handbook

Using the words “permanent employee” in a handbook can create an implied contract of employ-

ment. The word “permanent” should not appear in any description of employment or employee

status. If you need to distinguish your regular staﬀ from another group of staﬀ, you can label the

regular staﬀ “regular employees.”

Do not include termination as one of the actions covered by any grievance policy

Too many nonproﬁts, this recommendation sounds odd. Isn’t that often what the grievance policy

is for, as an appeals board in case of termination? If you allow a termination to be brought to the

grievance committee, you have destroyed your ability to terminate “at will.” With the ability to

grieve a termination, you may set up your organization to terminate only “for cause” and are

creating a procedure you would be required to follow whether the former employee has ﬁled a

claim or lawsuit.

Again, this does not mean that your organization should not give ample opportunity to help poorly

performing employees improve. It means only that you have reserved the right to determine when

termination is appropriate and have not waived that right for some third party’s determination of

what is proper “cause.” Best practice is to thoroughly review the appropriateness of a termination

decision before it is made, not after the fact.

Follow your employee handbook to the letter!

This guideline may be the most important of all. If your policies provide for written notice before

termination, if you promise to provide a second chance, if you have agreed to respond in 30 days,

etc., do just that. You may take a justiﬁed personnel action; however, if you do not follow your own

policies, this will be used against you in a court of law. If your policies do not represent your prac-

tice, then revise the handbook.

Conduct candid, thorough annual reviews

The key word in the above statement is “candid.” If your managers cannot be truthful and candid

with employees about poor performance and areas that need improvement, they should not be al-

lowed to continue as supervisors. If your nonproﬁt uses performance as a selection criteria for layoﬀ,

yet written performance reviews suggest a consistent record of acceptable performance, a discrimi-

nation claim looks much more substantial. Emphasize to supervisors the importance of conducting

candid reviews and teach supervisors how to accomplish this goal.

Make a prompt, thorough investigation of allegations of harassment or

discrimination

Nonproﬁt managers are being asked to do more with less, and there is never enough time to ac-

complish it all. However, if you do not take allegations of harassment and discrimination seriously

and conduct prompt, thorough investigations, you put your organization and your ability to fulﬁll

your mission at risk. Harassment and discrimination claims are taken seriously by the courts and

allegations of such should be taken seriously. It is also important to remember that any notice of

harassment that has occurred, however informal, should trigger an investigation. If an employee

approaches a manager and states, “I just overheard Bob making a sexually explicit comment to

Marie and she seemed very upset—but I don’t want you to actually do anything about it,” the man-

ager cannot ignore the comment and should follow the organization’s procedure for investigating

the matter. All employers must have a written harassment and discrimination complaint policy,

even if they have no employee handbook.

Seek legal advice before taking an adverse employment action

Even though your nonproﬁt may be an “at-will” employer and you can terminate an employee for

any reason (except an illegal reason), a court may be sympathetic to a plaintiﬀ terminated under

inexplicable circumstances. The very risky nature of terminations warrant consulting an employ-

ment specialist before you take adverse action against an employee. Make a commitment to do so

every time, with no exceptions.

We understand that with limited discretionary funds, obtaining legal consultation before taking

an employment action such as a layoﬀ, termination or demotion, may be a stretch for a nonproﬁt’s

budget. ANI and NIAC feel so strongly about the value of such consultation that free pre-termina-

tion consultations are available to members who have employees and purchase their D&O insur-

ance through ANI or NIAC. For more information about this service, call us at 800-359-6422,

ext. 6130.

Chapter 6

Board Practices: What Board Practices are Particularly

Important?

A board of directors should follow several practices to guard itself against the threat of lawsuits.

While even the best practices are no guarantee that the board will not be sued, good board practic-

es can be an eﬀective defense with unjustiﬁed allegations.

Informed and regular review of ﬁnancial statements

Board members should understand the sources of income for the nonproﬁt and know where

those resources are being expended. If a professional fundraiser is used, the board should deter-

mine that the fee charged by the fundraiser is comparable to that charged for similar services by

other companies.

Nonproﬁts receiving more than $500,000 of federal funds must do annual audits, like many

nonproﬁts under the laws of their state. At least once each year, the audit committee or the entire

board should meet with the organization’s independent auditor to discuss the audit ﬁndings. It is

appropriate during the meeting for the board or committee to ask management to leave the room

brieﬂy to allow the auditor to speak candidly.

Regular attendance at board meetings

As a board member, ignorance of a problem facing the nonproﬁt is not a good defense. To render

informed decisions about the governance of an organization, board members must thoroughly

review background information and attend and participate in board meetings regularly. Board

members should also feel comfortable expressing disagreement and voting against proposals for

which they are not in favor. Silence may well be interpreted as agreement by a court of law.

Clearly understand the board’s role in personnel situations

The chief executive oﬃcer of a nonproﬁt (typically the executive director) should have the authority

to hire and ﬁre staﬀ below the executive director level. If the division of labor between the board of

directors and the executive director is not clear, the board may ﬁnd itself embroiled in a situation

better resolved at the staﬀ level.

Avoid conﬂicts of interest

Board members who receive any compensation from the organization must fully disclose the

nature of services provided and the compensation received. The board of directors must make

a determination, independent of the compensated director, that the arrangement is in the best

interests of the nonproﬁt and that a more favorable arrangement for the nonproﬁt could not be

obtained elsewhere. There are speciﬁc guidelines about how these matters must be handled to

avoid the possibility of sanctions. A nonproﬁt uncertain about how this may aﬀect the organization

should consult its attorney for speciﬁc guidance.

While nonproﬁts should never make a loan to a director, it is also unwise for a director to make a

loan to a nonproﬁt. A board member with a loan to a nonproﬁt is in a situation of potential conﬂict;

are they acting in the best interests of the nonproﬁt or in a manner most likely to repay the loan?

Boards with a director who provides insurance or real estate broker services to a nonproﬁt must

be especially careful. While it may appear that that individual is providing the best possible service

because of special knowledge and commitment to the organization’s mission, the nonproﬁt should

periodically conﬁrm that the services it is receiving are satisfactory and that the cost of the prod-

ucts purchased from the “insider” competes with similar products purchased from other sources.

Enact and comply with the governance policies required by law

The federal Sarbanes-Oxley Act, passed in response to corporate accounting scandals, has two

provisions applicable to the nonproﬁt sector. Board members should look carefully at Sarbanes-

Oxley and applicable state laws, maintain all policies required by law, and determine whether

their organizations ought to voluntarily adopt governance accountability practices, even if not

legally mandated.

Under Sarbanes-Oxley, nonproﬁts must develop, adopt, and disclose a formal policy to respond

to employee complaints of illegal, improper, or fraudulent activity and to prevent retaliation. Civil

rights laws similarly require policies to address complaints of discrimination or harassment of

employees. Board members must ensure that the nonproﬁt thoroughly and promptly investigates

employee and volunteer complaints of wrongdoing and implements prompt corrective actions

when necessary. This should include a process whereby complaints regarding illegal conduct of

the executive director can be made to the board. Sarbanes-Oxley also requires nonproﬁts to have

a written document retention and periodic destruction policy that applies to paper records and

electronic ﬁles and voicemail.

Chapter 7

In Summary:

Prevention and Protection are the Keys

The majority of boards of directors of 501(c)(3) nonproﬁt organizations will never have to face a

lawsuit. However, no organization should claim that since it hasn’t happened in 75 years, it won’t

occur. The chances of being sued may be modest, but the consequences of an uninsured lawsuit,

no matter how unjustiﬁed the allegations, can be devastating.

Recent steep increases in the number of employment-related lawsuits are among the reasons non-

proﬁt board members are at risk. During economic downturns, the risk of employment litigation

substantially increases as it becomes more diﬃcult for laid oﬀ employees to ﬁnd employment.

Employees of nonproﬁts may be more long-suﬀering and willing to endure less job security and

accept fewer “perks” than their counterparts in the for-proﬁt world. Nonproﬁt employees are prob-

ably less likely to sue the nonproﬁt for whom they have worked hard and in whose mission they

believe. However, employees who feel they have been mistreated by a nonproﬁt or who disagree

with policy decisions made by management or the board may retaliate with emotion and convic-

tion. If these disputes result in lawsuits, the process can be expensive and diﬃcult for both sides.

Employee handbooks in compliance with law, with strict adherence to personnel policies, supervi-

sor training, and honest communication with employees can go far to mitigate potential problems.

Boards of directors must adopt and stand behind clear anti-discrimination and anti-harassment

policies and make sure that management promptly and honestly investigates, thoroughly

documents allegations of wrongdo-ing, and takes action. Not all lawsuits can be avoided, but

having proper procedures in place and following them can go far toward, providing a strong

defense.

Not all D&O insurance policies provide the same protection. A buyer should take care to make

sure that the policy includes a broad deﬁnition of who is an insured, provides for costs to be paid

by the insurer as they are incurred, and includes broad coverage for employment-related activities.

Managing a nonproﬁt organization is never an easy task, and it is getting more complicated each

day. Those who volunteer for board membership and those who serve in management positions

already give generously their time and their talents. They should not be asked to put their personal

assets at risk each time they make a governance decision.

Appendix B: Member Resources

BOARDnetWORK

This is a customized, web-based tool that streamlines governance activities and help boards of

directors stay informed and organized. This is a free resource for members. (NOTE: 501(c)(3)

organizations who are not insured with NIA can pay a nominal annual subscription fee for access

to this resource.)

Booklets

Written speciﬁcally for the nonproﬁt reader, our booklets explore liability issues most nonproﬁts

face.

• Arrive…Safe and Sound—Tips to Help with Your Nonproﬁt’s Vehicle Safety Program

• Collaboration Risks: Partnering with Conﬁdence and Success

• Directors and Oﬃcers (D&O)—Key Facts About Insurance and Legal Liability

• Managing Volunteers: Balancing Risk & Reward

• Sound Advice for Functions & Events

• Sexual Abuse Prevention for Children & Teens

• Surviving a Crisis—Practical Strategies for Nonproﬁt

Organizations

• What Nonproﬁt Managers Need to Know About Lawsuits

NOTE: Non-member organizations may request a single copy of our booklets or download a PDF

from our website.

Employment Issues Assistance

NIA members with a Directors and Oﬃcers (D&O) policy with employment practices liability, can

take advantage of free employment-related consultations – discipline or discharge (pre-termina-

tion); discrimination/harassment; leaves of absence; ADA; wage & hour; personnel policies; etc.

Loss Control Assistance

We oﬀer free assistance with issues such as background checks, the safe management of facilities

and ﬂeets, drafting and reviewing waivers, staﬀ training, volunteer management, and much more.

If we don’t have the answer, we ﬁnd it for our members through our various resources.

My Risk Management Plan

Members gain free access to a web-based interactive tool to help develop a customized risk man-

agement plan that reﬂects the organization’s needs, priorities, and culture. (NOTE: Non-members

can purchase a subscription to this resource from the Nonproﬁt Risk Management Center at

www.myriskmanagementplan.org)

Risk Management Forms and Templates

Members can take advantage of an extensive library of downloadable forms, templates, and infor-

mation available on our member portal.

Webinars

These 30-90 minute sessions are ideal for in-service training on risk-management skills, or for

polishing and orienting senior management and board members to individual aspects of manag-

ing risks in nonproﬁt organizations. The interactive format of the live sessions permits questions

from the participants and responses from the expert(s). All regular live sessions are free to our

members. Members can also access a library of on-demand sessions from our member portal.

We have many free and highly discounted resources for our members. Be sure to visit our

Member Portal for a current listing of all that is available.

The insurance policy, not this brochure, forms the contract between the insured and the insurer. The policy may contain limits,

exclusions, and limitations that are not disclosed in this brochure. Coverages may differ by state.

Nonprofits Insurance Alliance® is the tradename for a group of insurers — NIAC, ANI, and NANI — all of whom are public-

benefit 501(c)(3) nonprofits and rated A (Excellent) by AM Best. All NIA organizations are administrated by Alliance

Member Services® (AMS), also a 501(c)(3) nonprofit.