Our small performing arts organization has no directors and officers insurance and no indemnification clause in its bylaws. When I asked about this, I was told that the state law protects us so that it is unnecessary. Is that correct?
The Federal Volunteer Protection Law protects charity volunteers from liability except for willful or criminal misconduct, gross negligence, or flagrant indifference. (See Ready Reference Page - Federal Law Protects Nonprofit Volunteers.) Most states have some sort of similar volunteer protection. In addition, many states have some sort of protection for directors accused of breach of fiduciary duty, except in cases of self-dealing or recklessness. (See Ready Reference Page: “Directors Often Fear Risks of Personal Liability.”)
Those rules may prevent ultimate personal liability, but they don’t prevent suits from being filed, and those suits have to be defended. Without an indemnification clause in the bylaws, the corporation may or may not pay the costs of that defense.
An organization that wants to attract directors with personal means will want to assure them that it has insurance to protect against possible claims. Both general liability and D & O insurance are usually necessary to provide the means to assure that defense. Litigation is a very expensive proposition even where there is no liability.
This insurance will also protect the organization from liability, which is especially important because the organization can be liable for the negligent acts of its directors or volunteers, even where the volunteers are not personally liable because of the statutes mentioned above. Any organization that is serious about functioning for the foreseeable future ought to work with a competent broker who understands the particular business of the nonprofit to come up with a reasonable package of protection.
With pressure mounting on nonprofits to consider affiliations with other organizations, this workshop is designed to help you better navigate the world of mergers, acquisitions and affiliations. Unlike the corporate world, there are no financial "matchmakers" to help nonprofits identify successful partners for a merger. Learn more in our pre-recorded webinar.
Weekly question and answer
Notice of each full edition
and its free stories
Report on 501(c)(3) electioneering
What our readers say about Nonprofit Issues
Once again you've tackled a tricky question and explained it so we all can understand the issue.--M.V.
Thank you for your informative and keen advice on nonprofit matters. I believe it's a unique and concise place to get answers to this often wispy area called nonprofit. --R.T.
Have a question?
Other ways to
Talk to the Editor
Next Conference Call:
Wednesday, September 10, 2014
Participate in this bi-monthly telephone seminar conference call and ask your questions directly to Editor Don Kramer.
Access the entire site
($9.95/24 hours, $17.95/3 months).
Full Day Program
A well-received full-day program that covers the current hottest topics in nonprofit law. Qualifies in Pennsylvania for Continuing Education credits.
Don is available for programs and speaking engagements ranging from a one-hour presentation to a full-day primer on nonprofit law. Contact us if you are interested in having him speak at your program.