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.