Just because your nonprofit has directors and officers liability insurance (D&O) does not mean that board members are immune from potential liability risk. To help manage the liability risk of nonprofit board members and reduce their exposure to legal claims, consider these five tips for reducing board liability:
Tip #1: Conduct an annual board orientation meeting.
Most nonprofits have term limits for board members, with old members rolling off and new members coming on every year. You should not assume that new members automatically understand what their legal and fiduciary duties entail, and it’s a good idea to provide old members with a refresher as well. Holding an annual orientation meeting to go over the organization’s structure, policies, governing documents, and specific oversight duties is a good way to help board members stay in compliance.
Tip #2: Maintain regular communications.
An uninformed board is of little use to a nonprofit and its mission. Nonprofit management needs to provide regular communications to the board on changes to policy, programs, and staffing as well as fundraising initiatives, contracts, stakeholder concerns, and any threat of litigation. If a crisis arises, an informed board is one of a nonprofit’s most valuable assets. An informed board will also be able to make better decisions in supporting the nonprofit’s mission and goals.
Tip #3: Explain how the nonprofit protects its directors and officers.
Be sure that board members understand the measures the nonprofit has taken to protect the organization and its governing members, including indemnification clauses found in the organization’s bylaws and details of the nonprofit’s D&O liability insurance policy as well as other liability coverage. The organization’s bylaws and D&O policy should be provided to board members annually as part of the orientation meeting.
Tip #4: Insist on accountability.
To be effective advocates, board members must live up to their promises. Nonprofits should hold board members accountable for doing what they have agreed to do. The board chair should be tasked with following up with board members who fall short of their commitments, such as missing too many meetings, failing to fulfill committee assignments, etc.
Tip #5: Educate the board about conflicts of interest.
Conflicts of interest that may arise in the course of organizational operations are quite normal, and are not, in and of themselves, illegal. But it is always important to deal with them properly when they occur. Board members must disclose any conflicts of interest and refrain from being involved in any decisions that may draw the conflict of interest into question.
In order to facilitate the process of making decisions in cases where conflicts of interest arise, many organizations choose to adopt a conflicts of interest policy. These conflicts of interest policies are not required by law for most nonprofit organizations. However, they are required in Arizona for nonprofits with assets exceeding $10 million, or whose revenues the previous year exceeded $2 million, among other qualifications, according to ARS section 10-3864. In these situations, a conflicts of interest policy is required.
Provident Law’s nonprofit attorneys can help churches and religious organizations with risk management. We stand ready to counsel and serve churches, charities, and foundations, as well as private schools, colleges, universities, and other types of nonprofit organizations—providing broad transactional and general counsel services in Arizona and surrounding areas. Contact us to learn more.