Do you currently sit on any boards, or are you thinking of doing so? Board membership can take many forms, from small nonprofits to major corporations. And while serving on a board can be very rewarding, it also exposes your personal wealth and assets to potential risk, since board members can be personally liable for the actions (or inactions) of the boards upon which they sit.
But maybe you knew that already, and you’re thinking to yourself, “Sure, but the organization whose board I sit on has insurance, so I’m fine.” Unfortunately, as with many things in life, the devil’s in the details, and it’s not uncommon for the insurance that’s in place to be inadequate for the risks that you face. This is particularly true for volunteer board membership in connection with nonprofits such as churches, school foundations, community programs, athletic organizations, etc.
For example, the insurance that organizationally protects board members is called Directors & Officers (D&O) insurance. However, some D&O policies have low limits, since such policies are cheaper to purchase (nonprofits are usually looking for ways to cut costs), which means that any claims that exceed the policy limits will come out of your pocket. Similarly, some policies will count defense costs against the policy limits, which means that a million-dollar policy with $300,000 in defense costs will only provide $700,000 of protection.
To compound matters, some D&O policies are set up such that their coverage limits are spread out among all board members. Using the example in the previous paragraph, if there are 10 board members, the $700,000 remaining after defense costs will be divided between them, which means that each board member only has $70,000 in protection.
Suddenly, the old expression “no good deed goes unpunished” starts to make more sense, doesn’t it?
1. Make sure the organization you are working with has adequate D&O coverage. Boards very often require their underlying organizations to maintain a D&O policy, but then take no role in the process of evaluating and placing such coverage. Instead, they often rely upon whoever is responsible for securing insurance for the organization. Unfortunately, that person is often an office manager, or someone similar, who has no insurance sophistication.
As a result, it is important that boards do the following:
2. Consider a PDL policy. In most cases, no individual board member can make the things described in the previous section happen, and those results typically require board action. Sometimes boards don’t sufficiently appreciate the risks they face, or may believe that the price of decent coverage isn’t worth it (after all, you’re giving back to the community, so no one would ever sue you for doing so, right?). However, regardless of the D&O policy that might be in place, you should consider obtaining a Personal Director’s Liability (PDL) policy, which is an individual insurance product that provides you with protection over and above the D&O policy. Such policies are usually reasonably priced, and the peace of mind they provide can be well worth the price of admission.
What sort of vultures sue unpaid volunteer board members of nonprofit organizations? The IRS can come after you, as can the nonprofit’s employees, funders, and beneficiaries. An executive director who cooks the books or engages in malfeasance ultimately answers to the board, which means you could be on the hook for someone else’s criminal actions. A thorough list of examples of the risks you could face can be found at NonProfitRisk.org.
In the end, it’s important to go into board membership with your eyes wide open. Join the conversation your organization has with its insurance consultants to make sure the policy in place provides you the protections you need. And, consider a PDL policy to ensure that your family assets aren’t jeopardized. Want more information about D&O liability or PDL policies, or would you like us to meet with your board to evaluate your insurance program or discuss your risk exposures? Contact us.
Teric provides both strategic internal and external support to staff and clients in multiple areas. In addition, Teric leads the Private Client Group insurance team and is responsible for client service technology solutions and the small business service unit. He applies his years of experience to d
With 15+ years in the industry, Teric previously lead the overall marketing and information technology departments, in addition to implementing strategic growth initiatives across the organization. Today, Teric continues to focus on strategic initiatives to support the growth of the business and the service deliverables to clients. He is also primarily responsible for the integration of technology with traditional insurance solutions and leading a team of credentialed insurance specialists who are passionate about helping others protect their assets. Teric holds a bachelor’s degree from Loras College.
Risk management and human resources are traditionally two different job functions, and the people in these areas have rarely crossed paths — but that is changing.
Why are these people starting to work together more frequently?
Many technology exposures originate in an organization’s information technology (IT) department. In addition, client data and intellectual property may be at risk through computer viruses or malware that can penetrate the system — even without fraudulent intent on the part of employees — through poor or nonexistent IT security policies.
Businesses are also exposed to a growing number of online security threats and vulnerabilities from the outside. Establishing policies and safeguards to protect your company from internal misuse, external fraud and malware is absolutely essential.
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