A GUIDE FOR COLORADO NONPROFIT ORGANIZATIONS

Transcription

1 A GUIDE FOR COLORADO NONPROFIT ORGANIZATIONS FIRST EDITION VOLUME ONE KAREN E. LEAFFER Managing Editor CONTINUING LEGAL EDUCATION IN COLORADO, INC. COLORADO BAR ASSOCIATION DENVER BAR ASSOCIATION 2007

2 Chapter 3 LIABILITY AND RISK MANAGEMENT FOR NONPROFIT ORGANIZATIONS Peter H. Schwartz, Esq.* Davis Graham & Stubbs LLP Katelin R. Oakley, Esq. Davis Graham & Stubbs LLP 3.1 INTRODUCTION SYNOPSIS 3.2 TYPES OF RISK AND SOURCES OF POTENTIAL LIABILITY Liability Of The Corporation Liability Of Directors And Officers Liability Associated With Volunteers 3.3 STRATEGIES FOR REDUCING AND MITIGATING RISK EXHIBITS Indemnification Of Officers, Directors, And Agents Insurance Waivers And Other Contractual Limitations Of Liability Corporate Policies And Procedures Exhibit 3A Sample Indemnification Provision For Nonprofit Articles Of Incorporation Exhibit 3B Sample Long-Form Indemnification Provisions For Nonprofit Bylaws Exhibit 3C Sample Short-Form Indemnification Provisions For Nonprofit Bylaws 3.1 INTRODUCTION Nonprofit corporations are subject to many of the same risks as for-profit entities. While the corporate form offers, under most circumstances, limited liability to the members and directors of the nonprofit, the charitable or educational services that it provides could be devastated by one significant loss event, be that a lawsuit or the destruction of a physical asset. Because of the important services provided by nonprofit entities and the (often) limited resources with which (3/07) 3-1

3 3.1 A Guide for Colorado Nonprofit Organizations they provide those services, it is critical that nonprofit management recognize and develop effective methods of addressing the risks to those resources. In fact, ensuring that management has in place an appropriate risk management strategy could be viewed as a critical board function, subject to the duty of care described more fully in Chapter 2, Roles and Responsibilities of Directors and Officers, of the Guide. Each nonprofit is unique, but generally speaking, a comprehensive strategy for risk management should include each of the following steps: Risk Identification and Analysis: maintaining a list of potential risk exposures, including probability of occurrence estimates, materiality of damage estimates, and degree of involvement of third parties in the event of an occurrence; Risk Reduction: reducing risk by transferring appropriate risks to insurance companies, reallocating corporate and contractual risk, reorganization of functions, and other mitigation techniques; and Efficiently Bearing Remaining Inherent Risk: bearing any remaining inherent risk in the most cost-efficient manner possible. This Chapter discusses the first two of these steps, describing the types of risk generally faced by the nonprofit corporation, their most common sources, and strategies for limiting and managing those risks, as well as the corresponding liability of those who serve the nonprofit, including directors, officers, employees, and volunteers. See Chapter 1, Selecting, Forming, and Maintaining the Organization, for a discussion of some of the liability considerations for these other forms of entities. The methods by which remaining risk not otherwise addressed adequately by the first two steps can be most efficiently managed must be determined by reference to specific facts and is therefore beyond the scope of this Chapter. 3.2 TYPES OF RISK AND SOURCES OF POTENTIAL LIABILITY Liability Of The Corporation Under Colorado law, the properly formed nonprofit corporation is a separate legal being that is, under most circumstances, liable for the debts, liabilities, and obligations of the entity and may be sued in the corporation s name. 1 There are some instances, however, where the corporate form does not provide protection from liability. Persons purporting to act on behalf of a nonprofit without the authority to do so are jointly and severally liable for all liabilities incurred or arising as a result of such acts. 2 Additionally, the corporate form may be disregarded by a court if there is a compelling inequity that might be set right by allowing the corporation s creditors or tort victims to recover assets from the corporation s members (3/07)

4 Liability and Risk Management for Nonprofit Organizations Generally speaking, a nonprofit s exposure to liability can arise under any of six categories: 1) Contracts to which the nonprofit is a party; 2) Tortious acts, such as negligence; 3) Statute, such as the applicable tax codes; 4) Employee-related actions, such as claims alleging sexual harassment or discriminatory hiring and claims alleging vicarious liability of the nonprofit for the actions of its employees; 5) Derivative actions brought in the name and on behalf of the nonprofit corporation; and 6) Liability associated with volunteers. This final category is addressed in greater detail in of this Chapter. Employment-related claims pose one of the most substantial categories of risk for a nonprofit. Because they vary greatly in size, structure, and resources, it is difficult to generalize about the specific claims that may be asserted against them in the employment context. However, such claims may be divided into two basic subcategories: (1) federal claims and (2) state law claims. Federal claims may include, among many others beyond the scope of this Chapter, claims arising from discriminatory hiring and firing practices in contravention of, for example, the Americans with Disabilities Act or the Age Discrimination in Employment Act, or from unsafe workplace practices in contravention of the Occupational Health and Safety Act. State law liability could arise from, among many others, workers compensation claims, negligent hiring, or sexual harassment. See Chapter 25, Employment Law Considerations, for more discussion of the types of employment-related claims that may be asserted against nonprofit organizations Liability Of Directors And Officers As discussed in the previous section, the nonprofit corporation, as a separate legal entity, is generally liable for its own debts, liabilities, and obligations. Thus, under most circumstances, directors and officers are not personally liable for the debts, liabilities, and obligations of the nonprofit corporation. There are circumstances, however, in which directors or officers of a nonprofit may face individual liability in connection with their service to the nonprofit corporation. Directors and officers owe the fiduciary duties to the corporation described in Chapter 2, Roles and Responsibilities of Directors and Officers, and may be liable to the corporation if they are found to have breached one or more of those duties. In addition, directors may be liable to the corporation if they vote for or assent to an unlawful distribution 4 or they participate in or assent to loans to an officer or director. 5 It is noteworthy, however, that in each case, the liability is to the corporation, not to a third party. As previously discussed, the directors and other members of the corporation may assert these claims in the name of the corporation in a derivative action (and, in the case of directors, may have some responsibility under the duty of care to bring such an action). Directors generally will not be liable to third parties for actions of the corporation on this basis unless, arguably, those actions are the proximate result of the director s or officer s failure to perform a duty owed to the corporation. (3/07) 3-3

5 3.2.2 A Guide for Colorado Nonprofit Organizations The corporate form does not protect a director or officer from liability that arises by reason of his or her own professional errors or omissions or his or her own torts (such as personal negligence, assault, slander, or fraud). In this case, the liability does not arise by reason of one s service as a director or officer; it arises by reason of personal actions. Similarly, the corporate form does not protect a director or officer from liability that arises by reason of a violation of a special statutory obligation, such as obligations imposed under the Internal Revenue Code. 6 Finally, the corporate form does not protect directors and officers if the veil is successfully pierced. 7 Potential sources of trouble in the area of directors and officers liability include the following: General mismanagement; Bad business decision (generally protected by the business judgment rule); Fraud or misrepresentation; Imprudent delegation; Inadequate supervision; Insufficient inquiry; Imprudent investments; Improper allocations of assets; Wrongful termination; Civil rights violations, including racial, age, and sex discrimination; Violation of rules relating to tax-exempt status; Assent to unlawful distributions of loans; and Violation of environmental standards or employee health and safety standards. As discussed in 2.4 of the Guide, Limitations on Liability of Directors and Officers, Colorado law provides directors and officers of nonprofit corporations, particularly volunteers, with several statutory protections from liability. Therefore, assuming a third party can establish standing to sue a director or officer in a court, these protections make it far more difficult for the third party to actually succeed on the merits. In particular: The Colorado Revised Nonprofit Corporation Act (Act) permits nonprofit corporations to eliminate the liability of directors to the corporation or its members for breach of the duty of care, under certain circumstances, by so providing in the corporation s articles of incorporation (but not the bylaws); The Act limits the personal liability of directors and officers of nonprofit corporations for injury to persons or property arising out of the tortious acts of an employee of the nonprofit, unless the officer or director was personally involved in the situation or committed a criminal offense in connection with the situation; and Colorado and federal law provides immunity from liability to directors and officers of nonprofit corporations who are volunteers under certain circumstances. Quite apart from these statutory protections, Colorado law also affords nonprofit corporations wide latitude in indemnifying directors and officers, advancing their costs of defense, and purchasing insurance for them. Such indemnification is discussed below in of this Chapter. 3-4 (3/07)

6 Liability and Risk Management for Nonprofit Organizations Any comprehensive risk management strategy should not only identify and address the potential sources of risk for the directors and officers but should also review and evaluate whether the nonprofit corporation has properly structured its corporate documents and policies as well as its general operations to take full advantage of these statutory protections Liability Associated With Volunteers Because of the valuable public service provided by volunteers and in order to encourage the provision of such service, Congress in 1997 enacted the Volunteer Protection Act (VPA). 8 A number of states, including Colorado, have adopted additional good Samaritan statutes for volunteers, which are discussed in greater detail below. However, because neither the VPA nor the Colorado statute limiting the liability of volunteers accordingly limits the liability of the nonprofit entity itself for such acts, volunteers still pose a significant risk for the nonprofit itself. With certain exceptions, individuals who perform volunteer work for nonprofit organizations are shielded from liability by the VPA for acts of ordinary negligence so long as such acts take place in the course of the volunteer work. 9 Generally, a volunteer is protected from liability under the VPA if: 1) The volunteer was acting within the scope of his or her responsibilities in the organization at the time; 2) The volunteer was properly credentialed and authorized, if appropriate or required; and 3) The conduct in question was not willful or criminal, nor did it constitute gross negligence. 10 Additionally, the VPA may limit certain types of damages recoverable even where the volunteer s actions do not meet the criteria enumerated for exemption from liability. 11 The Colorado Volunteer Service Act also reduces or eliminates volunteer liability under certain circumstances. Individuals who perform volunteer services assisting organizations benefiting young persons without compensation or expectation of compensation are immune from liability if the action was within the scope of their volunteer duties except where the act in question was wanton or willful or harmed a third party. 12 However, neither the VPA nor Colorado law works to shield the nonprofit corporation itself from vicarious liability arising from the actions of its volunteers. In fact, the Colorado Supreme Court has held that this particular shield is limited to volunteers and does not extend to the nonprofit itself. 13 As in an employment context, a nonprofit organization may be held vicariously liable for the ordinary negligence of its volunteers, even if they are immune from individual liability. Therefore, any risk mitigation strategy undertaken with respect to employees should be approached with a view to its application in the context of the nonprofit s volunteer force. (3/07) 3-5

7 3.3 A Guide for Colorado Nonprofit Organizations 3.3 STRATEGIES FOR REDUCING AND MITIGATING RISK Having identified the likely types and sources of risk, the nonprofit organization should take the further step of implementing strategies to reduce the potential for a loss occurrence and, if a loss does occur, to mitigate its impact. This section discusses steps that can be taken with respect to directors and officers of the nonprofit corporation as well as the nonprofit entity itself Indemnification Of Officers, Directors, And Agents The liability of officers, directors, and other agents of the nonprofit may be limited by statute, by the formation documents of the nonprofit, or by contract. Statutory Indemnification A person is entitled to reimbursement for reasonable expenses if he or she is wholly successful on the merits in the defense of a proceeding arising out of that person s service as a director or officer of the nonprofit. 14 In addition, under certain circumstances, a person may seek courtordered indemnification. 15 A nonprofit may also indemnify a director, officer, employee, fiduciary, or agent for any civil liability incurred by that person arising out of his or her service on behalf of the nonprofit, other than proceedings brought by or in the name of the nonprofit (e.g., a derivative suit), if (1) the person conducted himself or herself in good faith, and (2) the person reasonably believed that (a) when acting in an official capacity, the conduct was in the best interests of the nonprofit, and (b) in all other cases, his or her conduct was at least not opposed to the nonprofit s best interests. 16 A nonprofit may indemnify a person for criminal liability, other than in a derivative suit, in addition to the criteria specified above, if the person had no reasonable cause to believe that his or her conduct was unlawful. 17 With respect to derivative suits, the scope of the permitted indemnification is limited to reasonable expenses incurred in connection with the proceeding. 18 A disinterested party must determine that indemnification is proper under the circumstances. 19 Parties eligible to make this determination include, depending on the facts and circumstances, (1) a majority of disinterested directors, (2) a committee of disinterested directors, or (3) if either a quorum of disinterested directors cannot be obtained or a committee cannot be established, or the quorum group or the committee so direct, then by either (a) independent legal counsel or (b) the disinterested voting members. 20 Colorado law prohibits a nonprofit from indemnifying a person if the person is adjudged liable in a derivative suit 21 or the person is adjudged liable on the basis of deriving an improper personal benefit. 22 Moreover, if a nonprofit with voting members provides indemnification or advance expenses in a derivative suit, the nonprofit must give written notice of the indemnification or the advance with or before the notice of the next voting members meeting. If the next voting members action is taken without meeting (e.g., by written consent) at the instigation of the board of directors, such notice shall be given to the voting members at or before the time the first voting member signs a writing consenting to such action (3/07)

8 Liability and Risk Management for Nonprofit Organizations Advancement of Expenses Although directors and officers generally take great comfort in their ability to obtain indemnification from the nonprofit corporation, most can ill afford to cover their costs of defense until final disposition of an adverse proceeding. Therefore, Colorado law permits nonprofit corporations to advance reasonable costs of defense in advance of final disposition of the proceeding if certain criteria are met, including, most importantly, an undertaking from the indemnified person to repay the advance if it is later determined that he or she did not meet the requisite standard of conduct for indemnification. 24 In addition, Colorado law requires: (1) a written affirmation from the indemnified person that, in his or her good faith belief, the standard of conduct was satisfied; and (2) a determination that the facts known to those making the decision to advance expenses would not preclude indemnification of that person. 25 The written undertaking to repay the advance must be an unlimited general obligation of the director or officer, but it need not be secured and may be accepted without regard to financial ability to make the payment. 26 Whether to advance expenses is determined in the same manner as indemnification. 27 Provisions in the Articles of Incorporation and Bylaws of the Nonprofit A nonprofit corporation may also, in conformity with the statutory requirements described above and in 2.4 of this book, eliminate or limit the personal liability of a director of the nonprofit from monetary damages for breaches of fiduciary duty, with certain express exceptions, including breach of the duty of loyalty, by providing for such limitation in its articles of incorporation. 28 Such provisions, an example of which is included as Exhibit 3A to this Chapter, often permit indemnification in these circumstances to the fullest extent permitted by the Act. 29 The nonprofit may place further limitations on indemnification, however, so long as such limits do not fall below the level mandated by statute, as described above in Additional detail with respect to indemnification may be included in the nonprofit s bylaws. Such provisions typically address the indemnification procedure and any specific limitations imposed on indemnification by the nonprofit. In particular, the bylaws should speak to advancement of expenses, which is permitted by Colorado law in advance of final disposition of the proceeding if certain criteria are met. Some bylaws provide lengthy indemnification provisions while others have shorter provisions. There are advantages and disadvantages to both. Sample indemnification provisions are included in Exhibits 3B and 3C to this Chapter. In developing an appropriate risk-management strategy for the nonprofit corporation, one important decision that a board needs to make is whether to make indemnification (and advancement of expenses) mandatory or discretionary. The authors have seen many instances where directors and officers have been under the belief that they are absolutely entitled to indemnification to the fullest extent permitted by law, but the articles of incorporation and bylaws merely provide that the corporation may (not shall) indemnify to the fullest extent permitted by law. Also, some articles of incorporation or bylaws limit the mandatory indemnification to directors and officers, (3/07) 3-7

9 3.3.1 A Guide for Colorado Nonprofit Organizations not volunteers, which may foreclose individuals who serve on important advisory communities of the board from the protection they deserve. Indemnification by Contract Finally, if the combination of the statutory indemnification and the corporate documents do not provide indemnification to the maximum extent possible under Colorado law, directors, officers, or other persons may enter into direct contracts with the nonprofit to broaden the scope of indemnification for such person to the point where it is coextensive with the maximum available indemnification under Colorado law. Director and Officer Insurance Under Colorado law, a nonprofit corporation may purchase and maintain insurance on behalf of a person who is or was a director, officer, employee, fiduciary, or agent of the nonprofit, or a person serving in a similar capacity with another nonprofit at the request of the nonprofit. 30 This insurance may cover liability asserted against or incurred by the person in that capacity or arising from the person s status with the nonprofit, regardless of whether the liability is otherwise subject to indemnification under Colorado law. The insurance may be procured from any insurance company designated by the board of directors, including any insurance company in which the nonprofit has an equity or any other interest, through stock ownership or otherwise Insurance Adequate and appropriate insurance coverage is, in many cases, the most effective way for a nonprofit to mitigate risk. Insurance needs of nonprofits vary dramatically. This subsection discusses the basic types of coverage available to and advisable for a nonprofit, as well as common exclusions and exceptions from such coverage and a few practical pointers regarding the procurement of an insurance policy. It bears noting, however, that the needs of nonprofits are as diverse as those of for-profit entities: while some nonprofits only require conventional and easily procurable policies (such as general liability), others require special coverage (such as business interruption insurance, key man policies, and earthquake and tornado damage). Many nonprofits employ professionals, such as insurance brokers or attorneys, to negotiate and review insurance policies. Even if these services are used, the board and the appropriate officers should remain actively involved in the insurance selection process. Areas that typically require special attention include: Scope of covered persons; Scope of covered claims; Timing of coverage; Policy premiums and retention amounts; Advancement of expenses; Settlement; Exclusions; and Insurer s ability to pay. 3-8 (3/07)

10 Liability and Risk Management for Nonprofit Organizations A vital part of an insurance program or insurance policy is the insured s application and any other communications by the insured to the insurance company. Applications must be completed accurately and truthfully, or else the entire policy may be void. Furthermore, the particular questions on the application may indicate the presence of certain low-cost, risk management changes to existing practice that could significantly reduce policy premiums. Types of Coverage An insurance broker will generally be the best source of information for the nonprofit with respect to the scope of insurance coverage appropriate for the entity. This subsection describes the basic types of coverage that the typical nonprofit should consider as part of an overall insurance package. A general liability policy will, under most circumstances, cover a large majority of a nonprofit s risk exposure. Such a policy generally will cover claims for injury and property damage, and such policies routinely include, at no or a low additional charge, endorsements that are specifically designed to meet the needs of the nonprofit s particular business, such as coverage for premises and operations. In most cases, vehicles owned by an organization must be insured separately, as they will not be covered under the organization s general property policy. The Workers Compensation Act of Colorado 32 requires that all employers secure compensation in compliance with the standards of the Act either by procuring insurance coverage or executing a self-insurance certificate. Employees of charitable organizations who are elected or appointed to serve in an advisory capacity and paid a salary of less than $750 per year are excluded from the Act s definition of employee, 33 but nonprofits as a group are not excluded and, therefore, must comply with the terms of the Act to the extent they have one or more paid employees. 34 An umbrella policy can be used to supplement coverage provided under other polices, including liability, workers compensation, and automobile policies, with the premium dependent on the coverage limit. This type of policy can help fill gaps in coverage and provide a significant level of comfort to the nonprofit. Director and officer policies are designed to insure the organization purchasing the policy against costs incurred in the indemnification of its officers and directors. As discussed above, there are certain circumstances under which a nonprofit is required to indemnify an officer or director against costs associated with defending a claim. Obtaining Coverage at Reduced Rates One goal of the nonprofit in obtaining insurance coverage is to maximize that coverage while minimizing the premium paid. It is important to note in this regard that the application completed by the insured, as well as any other communication between the insured and the broker, are important parts of the insurance policy, the details of which may influence the premium paid. (3/07) 3-9

11 3.3.2 A Guide for Colorado Nonprofit Organizations The current market for insurance products is not particularly favorable to any consumer, least of all the nonprofit seeking reduced or below-market rates. Some insurers have faced substantial losses in the wake of the terrorist attacks of September 11, 2001, and subsequent international events, which they have compensated largely by increasing rates and premiums. Therefore, retention of a knowledgeable and motivated broker will be critical to the minimization of the nonprofit s insurance costs Waivers And Other Contractual Limitations Of Liability Under certain circumstances, a nonprofit may reduce its risk exposure by requiring volunteers and, to the extent applicable, the recipients of or participants in its services, to sign a waiver or release of claims. Such contracts are enforceable in Colorado to insulate a party from liability for injuries resulting from its own negligence if the release of liability is clear and unambiguous. 35 However, any court reviewing such a contract will scrutinize the language, and any ambiguity will be construed against the drafter. 36 Furthermore, enforceability is determined on a totality of the circumstances basis, which means that, because of the wide variety of scenarios under which a nonprofit might require such a waiver, it is difficult to predict with any generality whether such a contract would be an appropriate strategy for risk reduction Corporate Policies And Procedures An essential step in risk management (in addition to risk mitigation via insurance) is the development of risk avoidance strategies. The observation of corporate formalities and the development and consistent application of appropriate written policies can be significant elements of successful risk management. Corporate Formalities As described in above, nonprofit corporations are not immune from veil piercing actions, where the corporate form is disregarded to reach the assets of its members when equity demands such a result. Avoidance of a veil piercing action generally requires only that the members and directors of the nonprofit observe traditional corporate formalities that are indicative of the separate existence of the nonprofit. For example, the nonprofit s funds must not be commingled with the funds of any member, director, or related entity. Additionally, documents should be executed by directors or officers on behalf of the nonprofit using an appropriate signature block, and formal minutes of the meetings of members and directors should be maintained. Written Policies The types of written policies appropriate for any particular nonprofit will vary based on its activities, but they should be designed to address specifically the liabilities to which the nonprofit is exposed, as discussed in 3.2 above. Policies addressing conduct of directors, employees, and volunteers; conflicts and apparent conflicts; and fundraising activities would probably be appropriate for nearly all nonprofits and, if consistently applied, will contribute to the nonprofit s overall strategy for risk management. In addition, employment-related risks can be mitigated through the creation and use of an effective employee handbook (and separate volunteer handbook, if appropriate) and effective reporting mechanisms and procedural systems for handling any such incidents, if they arise. Items that could be included in such a handbook are rules for design (3/07)

12 Liability and Risk Management for Nonprofit Organizations Notes ing lawful and effective employment applications; interviewing job applicants; addressing wage and hour issues; performing performance evaluations; responding to sexual harassment; and handling discipline and discharge situations. *The authors gratefully acknowledge the assistance of Lansing A. Wallace in the preparation of this Chapter. NOTES 1. C.R.S (2005). 2. C.R.S In the for-profit context, see, e.g., Leonard v. McMom s, 63 P.3d 323 (Colo. 2003). See also Connolly v. Englewood Post No. 322 Veterans of Foreign Wars of the United States, Inc. (In re Phillips), 139 P.3d 639 (Colo. 2006) (adopting, in a split decision, the doctrine of reverse veil piercing, whereby a corporation can be held liable for the debts of a controlling shareholder or other corporate insider in the context of a for-profit corporation). 4. C.R.S See also 2.2.2, Director Liability for Approving Improper Use of Corporate Assets. 5. See C.R.S (b). See also 2.2.2, Director Liability for Approving Improper Use of Corporate Assets. 6. See Chapter 11, Public Charities, Private Foundations, and Private Foundation Alternatives, Chapter 12, Private Inurement, Private Benefit, and Intermediate Sanctions, Chapter 25, Employment Law Considerations, and Chapter 26, Employee Benefits, for a discussion of the potential penalties that may be imposed on directors and officers. 7. See supra n U.S.C through (2000) U.S.C U.S.C (a) U.S.C (e), C.R.S Concerned Parents of Pueblo v. Gilmore, 47 P.3d 311 (Colo. 2002). 14. C.R.S , -107(1)(a). The corporation may limit this right in its articles of incorporation. 15. C.R.S (1) and -107(1)(a). 16. Id. 17. C.R.S (1)(c) and -107(1)(a). 18. C.R.S (5). 19. C.R.S Id. 21. C.R.S (4). 22. Id. 23. C.R.S C.R.S (1) and -107(1)(b). 25. Id. 26. C.R.S (2). 27. C.R.S (3). 28. C.R.S It should be emphasized, however, that discretionary indemnification and advancement of expenses is still available to directors and officers, even if the articles of incorporation or bylaws are silent on (3/07) 3-11

13 Notes A Guide for Colorado Nonprofit Organizations the subject. What should be addressed in the articles or bylaws, as a minimum, is whether indemnification and advancement of expenses will be mandatory or discretionary to the fullest extent permitted by the Act. 30. C.R.S Id. 32. C.R.S , et seq. 33. C.R.S Id. 35. See, e.g., Anderson v. Eby, 998 F.2d 858 (10th Cir. 1993). 36. Id. 37. See Cooper v. U.S. Ski Association, 32 P.3d 502 (Colo. App. 2000) (3/07)

14 Liability and Risk Management for Nonprofit Organizations Exhibit 3A EXHIBIT 3A SAMPLE INDEMNIFICATION PROVISION FOR NONPROFIT ARTICLES OF INCORPORATION Liability and Indemnification Limitation of Personal Liability. The personal liability of each director of the Corporation for breach of fiduciary duty as a director is eliminated to the fullest extent permissible under the Act, including, without limitation, pursuant to C.R.S Scope of Indemnification. The Corporation shall provide indemnification of, and advance expenses to, directors, officers, employees, fiduciaries, and other agents to the fullest extent permissible under the Act. Amendment, Modification, or Repeal. Any amendment, modification, or repeal of all or part of this Article shall not adversely affect any right or protection of a director, officer, employee, fiduciary, or other agent under this Article in respect of any action or omission occurring prior to the time of such amendment, modification, or repeal. (3/07) 3-13

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16 Liability and Risk Management for Nonprofit Organizations Exhibit 3B EXHIBIT 3B SAMPLE LONG-FORM INDEMNIFICATION PROVISIONS FOR NONPROFIT BYLAWS INDEMNIFICATION OF DIRECTORS, OFFICERS, AND EMPLOYEES 1.1 Directors and Officers. Subject to the Articles of Incorporation and the other sections of this Article, the Corporation will indemnify, to the fullest extent permitted by, and in the manner permissible under, the laws of the State of Colorado in effect on the date hereof and as amended from time to time, any person who was or is threatened to be made a party to any threatened, pending, or completed action, suit, or proceeding, whether criminal, civil, administrative, or investigative, by reason of the fact that he or she is or was a director or officer of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, association, or other enterprise, against expenses (including attorney fees), judgments, fines, ERISA excise taxes or penalties, and amounts paid in settlement actually and reasonably incurred by him or her in connection with such action, suit, or proceeding, including any action, suit, or proceeding by or in the right of the Corporation (a Proceeding ). The Corporation will advance all reasonable expenses incurred by or on behalf of any such person in connection with any Proceeding within 10 days after the receipt by the Corporation of a statement or statements from such person requesting such advance or advances from time to time, whether prior to or after final disposition of such Proceeding. Such statement or statements will reasonably evidence the expenses incurred by such person and, if such person is an officer or director of the Corporation, will include or be preceded or accompanied by an undertaking by or on behalf of such person to repay any expenses advanced if it will ultimately be determined that such person is not entitled to be indemnified against such expenses. Costs, charges, or expenses of investigating or defending Proceedings for which indemnity will be sought hereunder may be incurred without the Corporation s consent provided that no settlement of any such Proceeding may be made without the Corporation s consent, which consent will not be unreasonably withheld. 1.2 Determination of Right to Indemnification Any indemnification requested by any person under Section 1.1 will be made no later than forty-five (45) days after receipt of the written request of such person unless a determination is made within said forty-five (45) day period: (i) by a majority vote of directors who are not parties to such Proceedings, or (ii) in the event a quorum of non-involved directors is not obtainable, at the election of the Corporation, by independent legal counsel in a written opinion, that such person is not entitled to indemnification hereunder Notwithstanding a determination under Section above that any person is not entitled to indemnification with respect to a Proceeding, such person will have the right to apply to any court of competent jurisdiction for the purpose of enforcing such person s (3/07) 3-15

17 Exhibit 3B A Guide for Colorado Nonprofit Organizations right to indemnification pursuant to these bylaws. Neither the failure of the Corporation (including its board of directors or independent legal counsel) to have made a determination prior to the commencement of such action that such person is entitled to indemnification hereunder, nor an actual determination by the Corporation (including its board of directors or independent legal counsel) that such person is not entitled to indemnification hereunder, will be a defense to the action or create any presumption that such person is not entitled to indemnification hereunder The Corporation will indemnify any person against all expenses incurred in connection with any hearing or Proceeding under this Section 1.2 if such person prevails on the merits or otherwise in such Proceeding. 1.3 Subrogation. In the event of payment under these bylaws, the indemnifying party or parties will be subrogated to the extent of such payment to all of the rights of recovery of the indemnified person therefor and such indemnified person will execute all papers required and will do everything that may be necessary to secure such rights, including the execution of such documents necessary to enable the indemnifying party or parties to effectively bring suit to enforce such rights. 1.4 Presumptions and Effect of Certain Proceedings In making a determination with respect to entitlement to indemnification hereunder, the person or persons or entity making such determination will presume that such person is entitled to indemnification under this Article I, and the Corporation will have the burden of proof to overcome that presumption in connection with the making by any person, persons, or entity of any determination contrary to that presumption The termination of any Proceeding or of any claim, issue or matter therein, by judgment, order, settlement, or conviction, or upon a plea of nolo contendere or its equivalent, will not (except as otherwise expressly provided in these Bylaws) of itself adversely affect the right of any person to indemnification or create a presumption that such person did not act in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Corporation or, with respect to any criminal Proceeding, that such person had reasonable cause to believe that his or her conduct was unlawful. 1.5 Exception to Right of Indemnification or Advancement of Expenses. Notwithstanding any other provision of these Bylaws, no person will be entitled to indemnification or advancement of expenses under these Bylaws with respect to any Proceeding brought by such person, unless the bringing of such Proceeding or making of such claim will have been approved by the board of directors (3/07)

18 Liability and Risk Management for Nonprofit Organizations Exhibit 3B 1.6 Contract. The foregoing provisions of this Article will be deemed to be a contract between the Corporation and each director and officer who serves in such capacity at any time while this Bylaw is in effect, and any repeal or modification thereof will not affect any rights or obligations then existing with respect to any state of facts then or theretofore existing or any Proceeding theretofore or thereafter brought based in whole or in part upon any such state of facts. The foregoing rights of indemnification will not be deemed exclusive of any other rights to which any director or officer may be entitled apart from the provisions of this Article. 1.7 Surviving Corporation. The board of directors may provide by resolution that references to the Corporation in this Article will include, in addition to this Corporation, all constituent corporations absorbed in a merger with this Corporation so that any person who was a director or officer of such a constituent corporation or is or was serving at the request of such constituent corporation as a director, employee, or agent of another corporation, partnership, joint venture, trust, association, or other entity will stand in the same position under the provisions of this Article with respect to this Corporation as he or she would if he or she had served this Corporation in the same capacity or is or was so serving such other entity at the request of this Corporation, as the case may be. 1.8 Inurement. The indemnification and advancement of expenses provided by, or granted pursuant to, this Article will continue as to a person who has ceased to be a director or officer and will inure to the benefit of the heirs, executors, and administrators of such person. 1.9 Employees and Agents. To the same extent as it may do for a director or officer, the Corporation may indemnify and advance expenses to a person who is not and was not a director or officer of the Corporation but who is or was an employee or agent of the Corporation. (3/07) 3-17

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20 Liability and Risk Management for Nonprofit Organizations Exhibit 3C EXHIBIT 3C SAMPLE SHORT-FORM INDEMNIFICATION PROVISIONS FOR NONPROFIT BYLAWS INDEMNIFICATION (a) Scope of Indemnification. The Corporation shall indemnify each person who is or was a director or officer of the Corporation, and shall pay or reimburse in advance his or her expenses, to the fullest extent permissible under the Colorado Revised Nonprofit Corporation Act (the Act ). The Corporation shall also indemnify each person who is or was an employee or volunteer of the Corporation, and shall pay or reimburse in advance his or her expenses, to the same extent as trustees and officers of the Corporation. The Corporation in its discretion may also purchase insurance insuring its obligations hereunder or otherwise protecting the persons intended to be protected by this Section. Any obligation that the Corporation has to advance expenses under this Section shall not adversely affect any right or indemnification of any person who is or was a director, officer, employee or volunteer of the Corporation existing at the time of such repeal or modification. The Corporation shall have the right, but shall not be obligated, to indemnify any agent of the Corporation not otherwise covered by this Section to the fullest extent permissible under the Act. (b) Savings Clause: Limitation. If any provision of the Act or these Bylaws dealing with indemnification is invalidated by any court on any ground, then the Corporation shall nevertheless indemnify each party otherwise entitled to indemnification hereunder to the fullest extent permitted by law or any applicable provision of the Act or these Bylaws that has not been invalidated. [For 501(c)(3) organizations: Notwithstanding any other provision of these Bylaws, the Corporation shall neither indemnify any person nor advance expenses or purchase any insurance in any manner or to any extent that would jeopardize or be inconsistent with the qualification of the Corporation as an organization described in 501(c)(3) of the Internal Revenue Code, or that would result in the imposition of any liability under either 4941 or 4958 of the Internal Revenue Code.] (3/07) 3-19

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