Have you volunteered or served on the board of a non-profit organizations? It can be a real pleasure to volunteer and work with others who support a charitable mission that is important to you. While it is natural to want to dive into these challenges head first, it is a good idea to confirm that the organization has procedures in place to protect you, as a director or other volunteer, from associated risks.
Available Statutory Protection
In Pennsylvania, there are several statutes that provide protection to directors, officers and other volunteers of non profits. Those statutes include the Volunteer Protection Act, the Directors’ Liability Act, the Good Samaritan Immunity law and the Volunteers-in-Public-Service law. Each of these laws is generally intended to limit the exposure of volunteers to liability relating to their volunteer activities. Each law, however, has unique exceptions from the protection offered, so there are gaps in the statutory protection.
Probably the broadest level of protection is offer in the Directors’ Liability Act. If the provisions of this law are incorporated into the bylaws and, for a member non-profit approved by the members, a director shall not be personally liable, as such, for monetary damages unless 1) the director breached or failed to perform the duties of his office, and 2) such breach constitutes self-dealing, willful misconduct or recklessness. This statute, by its terms, protects only directors and not officers.
Insurance
The law is clear that a non-profit corporation has unlimited power to insure individuals such as directors, officers and certain others against potential claims. Such insurance is declared by statute to be consistent with public policy. The amount of insurance should be based on a risk assessment of the organization so that the amount and types of coverage is appropriate in light of the potential risk. The Non Profit Risk Management Center has a guide on insurance for non- profits available at http://www.nonprofitrisk.org.
The primary impediment to insurance, particularly for small non profits, is the price. But insurance can go a long way to providing protection. As a director you should annually request a certificate of insurance that will general describe the Directors and Officers (D&O) coverage. It is fair to ask how the amount of insurance coverage was determined, what exclusions exist, and whether the insurance will provide you a legal defense from the first dollar spent. You could review this with your insurance agent or attorney.
Indemnity
A non-profit organization can also protect its directors and officers from liability related to their volunteerism by providing an indemnity. An indemnity is generally a promise to protect and defend the directors and officers from claims brought by third parties. If it is worded broadly, an indemnity can also release claims on behalf of the non-profit organization itself. An indemnity may be included in the bylaws or in a separate agreement.
The Pennsylvania Non Profit Corporation Law also provides a mandatory indemnification (including attorney fees) by a non-profit corporation to its representatives after they are successful in defending a case on the merits. The statutory requirement of a non-profit corporation to provide an indemnity has some exceptions. As significant, the indemnity, but not the release, is only as good as the non-profit organization’s ability to pay.
Conclusion
Liability protection for directors and officers of a non-profit organization can be provided through insurance with suitable coverage. The insurance would wisely be coupled with an agreement of indemnity and release by the non-profit so that the organization and not the director is second in line to cover legal fees or pay a claim that exceeds, or is not otherwise covered by, insurance. A director should assure they are covered for legal fees from the first dollar spent.
The Directors’ Liability Act, if incorporated into the bylaws of a non-profit and approved by the members of a member non-profit, provides certain “free” protection. In addition, the Pennsylvania Non Profit Law provides a mandatory indemnity to a representative of a non-profit corporation who is successful on the merits.
For more information, please contact Ernest R. Closser, Esq. at erc@curtinheefner.com or 215-736-2521.
