Over the last two decades, more and more nonprofit boardroom officials have welcomed attorneys on to their councils. While being invited to join a board is a professional honor, attorneys need to stop and consider the risks they are assuming and determine if the organization has their best interest in mind.
Take a recent case in Lancaster, Pennsylvania for example. Former Lancaster County Workforce Development Board Executive Director Cathy Rychalsky filed a lawsuit against the organization’s board for wrongful termination and pay discrimination based on gender. Rychalsky claims she was fired from her position after investigating complaints made by employees of a hostile work environment due to the employees’ race. While the board denies these claims, the implications could be financially disastrous for the organization, and individual board members.
When considering a seat on a board of directors, ensure D&O, or directors & officers insurance is included and offers adequate limits. At a high level, D&O liability insurance coverage protects an organization’s financial assets or required legal costs in the event of a claim, as well as individual board members personal assets. A typical D&O policy consists of:
- Side A protects the personal assets of individual board members if the organization is financially unable to protect the board or prohibited by law to do so in the event of a claim made against them.
- Side B reimburses the organization when they do financially protect members of the board.
- Side C covers both the organization and individuals when claims are made against the entire entity.
In addition to the Lancaster County Workforce Development Board example above, nonprofit organizations could be subject to claims related to inadequate financial records, misuse of funds, membership standards, cyber liability and more. It is important to note a D&O policy may exclude some defense costs and does not cover illegal activities knowingly undertaken by board members.
While the function of a board is to make decisions in the best interest of the organization, claims do happen. Board members need to know what their potential risk exposure might be while making those difficult decisions. A D&O liability insurance policy is a key line of defense in protecting the entire organization from financially damaging circumstances, not to mention the attorneys who give their time and effort to support those organizations as members of their boards of directors.