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If you serve on a nonprofit board, watch out. You can be sued.
That’s what Jason, a friend of mine in Louisville, Ky., recently found out when he agreed to join a nonprofit board.
The good deed landed him in a lawsuit that was filed by 50 employees who were seeking unpaid wages and damages totaling $5 million. The group’s managers and controller had not told the board members that the agency was hurting for money.
Many directors of the United States’ 1.35 million charities and other nonprofits are clueless that they have the same fiduciary responsibilities as corporate board members. Many times, board members do not recognize that if they collaboratively make a poor decision, someone can come after them personally. It could cost you hundreds of thousands of dollars defending the lawsuit.
My friend accumulated $120,000 in attorney fees. In his case, as a 35-year-old business owner, $120,000 depleted his savings, and he suddenly was in a financial predicament.
Jason spent nearly 300 hours away from work tied up in meetings with attorneys. This impacted his performance and management of his business, which caused it to take a huge hit in sales.
Because the nonprofit agency’s accounts were empty, the employees reasoned that the only ones left to pay were the directors themselves. The board ended up settling with the employees for $480,000, which the board members split evenly.
Unfortunately for the board of directors, they did not have the proper directors and officers insurance policy in place to help transfer the risk. This insurance provides protection for a broad range of claims against directors and officers of nonprofit agencies and private companies. The standard $1 million policy, in this case, would have protected the directors from paying anything out of their own pockets.
Lawsuits can come from unexpected corners. Wrongful termination, discrimination, changing suppliers or any basic decision that impacts the operations of the organization can present lawsuit opportunities.
One way to reduce the risk of lawsuits is fairly obvious: Make sure all the directors, officers and employees are competent and informed.
The next step would be to analyze the terms and parameters of your directors and officers insurance policy. If one does not exist, purchase coverage. Don’t make the mistake of believing that your good deeds will go unpunished. In this litigious age, your good intent may not help you out much.
Mayer is an account executive at Holmes Murphy & Associates
333-2438
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