HFP Hartford Financial Products Nonprofit Directors and Officers Loss Prevention Manual
Nonprofit Directors and Officers Loss Prevention Manual Suzanne is a doctor who has been asked to be a board member for a nonprofit mental health association that provides free and/or low-cost services for impoverished families. The organization employs more than two thousand employees. Given the large number of employees, Suzanne worries that she and her fellow board members could be sued by any those employees for employment practices claims, including discrimination and wrongful termination. Victor is a college professor who wants to form a nonprofit foundation that provides scholarships to students in several universities under separate grant programs. Donors sometimes earmark their gifts to a specific university program, but do not always do so. Victor is concerned that a state regulator may not agree with the manner in which Victor s nonprofit foundation allocates the scholarship funds, and may take the position that the separate grant program funds have been improperly commingled. Bernadette is a director and officer of a nonprofit professional association of realtors, which is the only such association for 500 miles. Her realtors association has negotiated a deal with several major developers pursuant to which realtors who are members of the association are given preference to sell the houses that these developers are constructing. A family friend has cautioned Bernadette that this arrangement has the potential to be characterized as a violation of antitrust laws. Henry is a director and officer of a nonprofit entity that runs a local museum. Although the nonprofit entity s charter only discusses the operation of a museum, the nonprofit entity wants to expand its school to expand its operations to include a living history operation. What should he do? There are many considerations Suzanne, Victor, Bernadette and Henry need to take into account on behalf of themselves as directors and/or officers, and on behalf of the nonprofit entity with respect to the liabilities of its directors and officers and its own liabilities as an employer. The purpose of this manual is to review the issues nonprofit entities and their directors and officers need to consider in managing and running the nonprofit entity. I. Introduction Although directors and officers of nonprofit entities are generally not subject to the same scrutiny, pressures and legal requirements as their for-profit counterparts, nonprofit directors and officers still have meaningful exposure to personal liability. In fact, several surveys have reported that the frequency of claims against nonprofit directors and officers has doubled during the past several years. Also, individuals generally become directors and officers of nonprofit entities because they are interested in being a part of a service organization, and not an organization focused on
creating profits. These individuals generally are very surprised to learn than their actions -- or inactions -- may be the basis for a lawsuit against them, and that a wide and growing range of litigation risks is now a given for nonprofit directors and officers. As discussed more fully in this manual, nonprofit directors and officers can be protected through indemnification, state liability limitation statutes, a thorough loss prevention program and a comprehensive nonprofit directors and officers insurance policy. II. General Principles Governing D&O Liability Nonprofit directors and officers have three commonly recognized duties to the entities they service: the duties of care, loyalty and obedience. A. Duty of Care The duty of care calls upon a director to act in a reasonable and informed manner when participating in the board s decisions and its oversight of the nonprofit entity s management. The duty of care requires directors and officers to be competent in performing their functions, and requires directors and officers to use the care that an ordinarily prudent person would exercise in a like position and under similar circumstances. The satisfaction of the duty of care may be accomplished in part by the following activities: (1) attending meetings; (2) exercising independent judgment in the entity s best interests; and (3) having adequate information. Nonprofit entities can adopt the following features to enable the board and its individual members to use their time efficiently: (1) providing an orientation session for new directors and officers that includes one of several formal training sessions on their duties, responsibilities and obligations; (2) scheduling meetings on a regular basis; (3) having a standard form of meeting agenda that includes reports from all committees regarding significant actions taken since the last board meeting; (4) acting by written consent without a meeting for routine business or for the approval of specific actions that have already been fully discussed at prior board meeting as long as it is permitted by specific state statutes; (5) providing as much information as practical on a regular schedule; (6) adopting rules of procedure appropriate to a board s size, the constituencies represented on the board and the diversity of its members; and (7) preparing minutes of board meetings regularly, noting the names of the persons attending the meeting, all votes taken and how each director voted. 1. Examples of Claims What kinds of claims allege breach of the duty of care? In one case, the trustees of a charitable organization were sued for wasting assets of a trust by selling an old building used to house the poor and investing in a newer building. In another situation, the directors of an organization were sued because they authorized the organization s officers to become involved in attempts to influence legislation to benefit the organization, which resulted in the loss of the organization s tax-exempt status. 2
B. Duty of Loyalty The duty of loyalty requires directors and officers to exercise their powers in good faith and in the best interests of the nonprofit entity, rather than their own interests or the interests of another entity or person. The basic legal principle underlying the duty of loyalty is that directors and officers shall not use a corporate position for individual personal advantage. The duty of loyalty primarily relates to how directors handle conflicts of interest, corporate opportunity and confidentiality issues when they arise. 1. Conflicts of Interest The duty of loyalty requires that director and officers be conscious of the potential for conflicts of interest and act with candor and care in dealing with such situations. A conflict is present whenever a director or officer has a material personal interest in a proposed transaction to which the nonprofit entity may be a party. The law recognizes that conflicts of interest will occur and prescribes the methods by which directors and officers should disclose conflicts and how a board of directors should proceed in the face of such situations. Under the Revised Model Nonprofit Corporation Act (the Model Act ), which serves as a guide for state bar associations and legislatures in drafting the various state statutes, as well as many state nonprofit corporation laws, a director s or officer s conflict will not result in a deemed breach of the director s or officer s duty of loyalty, or render void the transactions under which the conflict arose, if the nonprofit entity can show that certain requirements were met, such as: 1. The transaction was approved by a disinterested majority of the board or a board committee after full disclosure by the affected director or officer of the material facts regarding the transaction and the director s or officer s interest therein; and 2. The transaction was fair to the nonprofit entity at the time it was entered into. Whenever a conflict of interest situations arises, the corporate minutes or other records should document the nature of the disclosure given regarding the conflict, as well as the board s proceeding the evaluate the relevant transaction in light of the conflict. The Model Act and many statute nonprofit corporation statutes uphold the validity of a transaction authorized when a director or officer had a undisclosed interest as long as the transaction was fair to the nonprofit entity. Directors and officers should be aware, however, that lack of disclosure of a conflict exposes both the affected director and officer and the rest of the board to a greater risk. If the board discovers that it has acted upon a proposal without disclosure of a conflict of interest, it should promptly reexamine the issues with an appropriate record of such scrutiny. In light of the various laws that relate to how a board should handle the identification and evaluation of conflicts of interest, it is good corporate practice for nonprofit entities to adopt and adhere to written conflict of interest policies and procedures for their directors and officers that 3
include regular dissemination of the conflict of interest policy, the collection of relevant information, and careful and periodic assessment of this information by the board or a committee of the board. 2. Corporate Opportunity Before a director or officer engages in a transaction that the director or officer reasonably knows may be of interest to the nonprofit entity, the director or officer should disclose the transaction to the board in sufficient detail and in adequate time to enable the board to act or decline to act with regard to such transaction. The duty to treat a potential transaction as a corporate opportunity arises when a director or officer learns of a prospective transaction or business opportunity that would be attractive to the director or officer or the director s or officer s business apart from his role as a director or officer, but which is also a transaction that would plausibly fall within the nonprofit entity s present or future activities. It is good corporate practice for a director or officer in such circumstances to make a clear record of such disclosure and request that the board s abstention, if any, from exercise of the opportunity be explicit and of record. 3. Confidentiality In the normal course of business, a director or officer should treat as confidential all matters involving the nonprofit entity until there has been general public disclosure or unless the information is a matter of public record or common knowledge. This presumption of confidential treatment should apply to all current information about legitimate board or corporate activities. 4. Examples of Claims What are the kinds of situations that result in an alleged breach of the duty of loyalty? Such claims can be made anytime directors are required to make a choice between an outcome in which they have no interest, and another outcome in which the directors do have an interest. The following are some examples of actual breach of duty of loyalty claims that have been brought in the past. Trustees of a museum established by a charitable trust were sued for closing the museum due to lack of public interest, and the court enjoined the closing as a violation of the trustees duty to the beneficiary public. In another case, a trustee was sued for using the assets of a charitable trust as security for a loan to his personal for-profit corporation even though the profits of the for-profit corporation were earned for the trust. C. Duty of Obedience The duty of obedience requires that a director or officer act with fidelity, within the bounds of the law generally, to the entity s mission, as expressed in its charter and bylaws. Thus, the directors and officers must make sure that their decisions are in the best interests of the nonprofit entity, and, in deciding the best means and overall strategy to fulfill the entity s 4
purposes, the directors and officers ultimately are held responsible to insure that the entity substantially adheres to its particular purposes. 1. Examples of Claims The following are some examples of cases in which claims were made for breaches of the duty of obedience. In one case, the board of managers of a nonprofit corporation was sued to prevent the board from selling artwork that was allegedly bequeathed to the nonprofit corporation in trust. In another case, the board of directors of a charitable corporation was sued for violating its duty to ensure that the mission of the corporation was carried out. D. Business Judgment Rule The Business Judgment Rule provides that a court, in an action brought by the nonprofit entity or its internal constituency, will not re-examine the actions of a director in authorizing or permitting a corporate action if such director s action was undertaken in good faith, in a manner reasonably believed to be in the nonprofit entity s best interests, and based on the director s independent and informed judgment. The Business Judgment Rule is not as well established in the nonprofit context as it is for business corporations. Thus, courts may be less willing to afford nonprofit directors the protection of the Business Judgment Rule when individuals are harmed, or other bad facts are present. In addition, the Business Judgment Rule defense will not be applied in situations where basic breaches of duty by the director, such as criminal activity, fraud, bad faith and willful and wanton misconduct, are present. E. Indemnification Most, if not all, states provides for indemnification rights of nonprofit officers and directors by statute. Generally, each state law sets forth a standard of conduct that the director or officer must meet in order to be eligible for indemnification. In the case of civil actions against a director or officer, the Model Act establishes two varying standards of conduct depending on the scope and purpose of the actions under review. When the director or officer has undertaken such actions in an official capacity, the director or officer must have acted in good faith and for a purpose that he or she reasonably believed to be in the best interest of the entity. In all other cases, the director or officer must have acted in good faith and for a purpose that he or she reasonable believed was not opposed to the best interests of the entity. With respect to criminal actions, in addition to the standard of conduct required for civil actions, the director or officer is required to have had no reasonable cause to believe that the conduct at issue was unlawful. Where a director or officer is acting in an official capacity, the standard of conduct for criminal actions is identical to that required for civil actions. Before any indemnification is accorded in either a civil or criminal case, the board of directors must determine whether a director or officer is entitled to indemnification by having met the applicable standard of conduct. The Model Act provides that termination of a 5
proceeding by judgment, order, settlement, conviction or by plea of nolo contendere will not, by itself, determine whether the director or officer has met the required standard of conduct. In addition, the Model Act prohibits indemnification unless ordered by a court in derivative suits in which the director or officer is found by a court to be liable to the entity, or any instance in which the director is determined to have received an improper personal benefit. In non-derivative actions, a nonprofit entity may generally indemnify its directors and officers against judgments, fines, settlement amounts and expenses provided that the requisite standard of conduct is satisfied and indemnification is not otherwise statutorily prohibited. The Model Act limits indemnification against expenses to those reasonably and actually incurred in the action or proceeding. On the other hand, indemnification in derivative actions is generally limited to expenses reasonably and actually incurred in connection with the action or proceeding, as long as the requisite standard of conduct is satisfied and indemnification is not otherwise statutorily prohibited. Under the Model Act, as well as most state laws, directors have the right to indemnification from the nonprofit entity under certain circumstances. The Model Act requires a nonprofit entity to indemnify directors and officers for reasonable expenses if the director or officer is wholly successful in his or her defense of any proceeding of which the director of officer is a party as a result of being a director or officer of the nonprofit entity. F. Limitation of Liability Statutes Congress enacted the Volunteer Protection Act of 1997 (the VPA ) to stem the flow of volunteers from nonprofit boards and service activities, to decrease the scope of liability of directors and officers, and to minimize the costs of D&O insurance. In general, the VPA protects nonprofit volunteers against liability for harm caused by ordinary negligence, although there are some exceptions, i.e., acts of gross negligence or recklessness. Damages may also be restricted by the VPA so that volunteers not otherwise covered by full protection may still be protected from liability against punitive damages arising, for example, out of the volunteer s gross negligence, provided that the volunteer s conduct does not constitute willful or criminal misconduct. Most states have enacted 'volunteer protection laws, ' limiting the liability of a nonprofit entity s directors and trustees, and sometimes other volunteers, in actions alleging violations of fiduciary responsibility. These laws modify the standards for imposing legal liability upon covered persons for their activities in nonprofit capacities. In order to receive protection under these state statutes, it is important for the person asserting the immunity or limited liability to establish that the act for which they are being alleged to be liable was performed within their nonprofit capacity or duties. The immunity afforded by volunteer protection statutes, however, is not absolute nor does it apply to all of a volunteer s activities. In addition, most laws limit their coverage to uncompensated volunteers, apply only to tax exempt or charitable organizations, and none can limit liability imposed by federal laws. Some states have enacted shield laws to protect nonprofit director and officers by limiting their liability to actions which constitute gross negligence or willful misconduct. Unlike 6
statutory provisions that permit some limitations on the liability of directors and officers as long as such limitations are set forth in the entity s articles of incorporation and/or bylaws, shield laws do not usually require such specific provisions. In addition to state shield provisions, some states have provisions that permit the nonprofit entity s articles of incorporation to eliminate or limit the personal liability of the director or officer for monetary damages arising from a breach of fiduciary duty. These provisions, however, usually do not permit the elimination or limitation of liability related to, among other things, breaches of the duty of loyalty, acts or omissions involving intentional misconduct or knowing violations of law, and transactions resulting in an improper personal benefit to the director or officer. III. Loss Prevention Suggestions A. Employment Practices Policies and Procedures Nonprofit entities that are employers will be subject to several federal statutes that prohibit employers from discriminating against individuals with respect to hiring, compensation, working conditions, promotion, discipline, termination and other employment practices. Some examples of such federal statutes include, but are not limited to: (1) Title VII of the Civil Rights Act of 1964, which prohibits discrimination based on an individual s race, color, religion, sex or national origin; (2) the Americans with Disabilities Act, which prohibits discrimination based on disability or perceived disability; (3) the Age Discrimination in Employment Act, which prohibits discrimination based upon age; and (4) the Equal Pay Act, which prohibits discrimination with respect to compensation based on gender. In addition to federal law, nonprofit entities usually are subject to state or local equal employment opportunity laws that impose the same or additional requirements. State and local statutes and ordinances may also prohibit discrimination based on a status not covered by federal law, i.e., sexual orientation. It is good practice for nonprofit entities to adopt a formal equal employment opportunity policy in order to comply with relevant laws and formalize their commitment to equal employment opportunity. The equal employment opportunity policy should: (1) be approved by the board of directors; (2) be reviewed annually by the board to confirm that the policy conforms to current legal requirements; (3) comply with all relevant laws; (4) state the nonprofit entity s commitment to equal employment opportunity; (5) provide a procedure for reporting any alleged discrimination; (6) prohibit retaliation against anyone who makes a report or complaint; and (7) be posted publicly and distributed to staff. In addition to an equal employment opportunity policy, the board of directors of nonprofit entities should adopt an anti-harassment policy. The anti-harassment policy should be applicable to both employees and volunteers and should include: (1) a statement that harassment will not be permitted; (2) a complaint procedure for victims or others to report harassment; and (3) a prohibition against retaliation. Under certain circumstances, employers who have such a 7
policy may be able to assert an affirmative defense to liability based upon the existence of a written policy and a victim s failure to make a complaint under it. It is also good practice for nonprofit entities to adopt an anti-violence policy that prohibits violence and weapons in the premises or any place where activities of the corporation may be conducted. With respect to nonprofit entities that have employee handbooks, it is good practice for nonprofit entities to include introductory language that states the purpose of the handbook and a conspicuous disclaimer that states that the handbook does not alter the at-will nature of employment. In addition, the board of directors should have legal counsel familiar with employment law issues review the handbook or policies before they are approved and distributed. Finally, with respect to nonprofit entities that have grievance procedures in which officials in the entity or the board may hear and rule upon employee grievances with management, boards should be aware that such policies may also be deemed to alter the at-will status of employees. If nonprofit entities decide to have such procedures, it is good practice for directors to make sure they understand their role in the grievance process and know whether the board s decision is binding or merely advisory. B. Antitrust Liability for Nonprofit Trade Associations and Professional Societies Nonprofit directors also may be subjected to suits against them for violations of federal or state antitrust laws. Although most courts will not allow nonprofit entities or their directors to be held liable for antitrust violations relating to their noncommercial activities, courts will allow antitrust cases to proceed where the activity at issue related to a nonprofit entity s commercial activities. For example, physicians whose staff privileges are suspended have frequently asserted Sherman Antitrust Act claims against hospitals and their trustees. In addition, trade associations or other associations that promulgate standards have been taken to court by manufacturers contending that the standards violated antitrust laws by excluding their products from a market, even where it appeared that state governments and the federal government had widely adopted the standards into law. C. Derivative Action Liability, Including State Attorneys General Suing On Behalf of Charitable Donors Derivative actions are actions brought on behalf of an entity, and allege breaches of fiduciary duties owed by directors to that entity. Such actions recognize that where a wrongdoer controls the entity, the wrongdoer is unlikely to bring an action against himself or herself for any breaches of fiduciary duty. For this reason, other parties whose interests are impacted by the entity sue the wrongdoing directors on the entity s behalf. 8
Derivative actions may be maintained by members of nonprofit entities for equitable relief and damages. Some state statutes expressly allow derivative actions against nonprofit corporate directors, and such a provision is contained in the Model Act. In addition, derivative actions have been permitted -- even in the absence of an authorizing statute -- on the theory that members are likened to shareholders, who are expressly permitted to bring such actions. Although charitable donors may not bring individual or class actions against nonprofit entities, state attorney generals typically have standing to maintain derivative actions on behalf of the nonprofit entity itself, addressing the concerns of such charitable donors. D. Federal Tax Liability Since 1996, the Internal Revenue Service (the IRS ) has been empowered to fine and otherwise penalize executives of nonprofit entities who receive excessive compensation for services and benefits, as well as officers, directors or trustees who approve such arrangements. The IRS was previously relegated to revoking the tax-exempt status of the nonprofit entity in such instances. The IRS has sought increased scrutiny and oversight over nonprofit entities. Under new laws, the IRS may investigate areas of perquisites for individuals, and compensation and perquisites must be authorized by impartial boards and must be comparable to those provided by other entities. IV. Emerging Legal Issues A. Sarbanes-Oxley Act The widely-publicized corporate scandals of recent years have led to increased oversight and scrutiny of corporate boards and their decision-making processes. In 2002, the U.S. Congress enacted new legislation aimed at holding directors and officers of publicly-traded companies responsible for the accuracy of corporate and public disclosures. The Sarbanes-Oxley Act requires that publicly-traded companies adhere to significant new governance standards that broaden board members roles in overseeing financial transactions and auditing procedures. While nearly all of the provisions of the Sarbanes-Oxley Act apply only to publicly-traded corporations, over time, it is expected that many of the heightened duties imposed on public company directors and officers will be applied to directors and officers of nonprofit entities, and that nonprofit entities should consider it in ensuring effective governance of their entities. This manual discusses the major provision of the Sarbanes-Oxley Act and their potential relevance to nonprofit entities. 1. Independent and Competent Audit Committee The Sarbanes-Oxley Act requires that each member of a company s audit committee be a member of the board of directors and be independent. In addition, companies must disclose whether they have at least one financial expert, or their rationale for not having such an expert. 9
It is good practice for nonprofit entities to take steps to ensure the independence of any audit committees and to ensure that audit committee members have the financial competency to understand financial statements, evaluate accounting company bids to undertake auditing, and make sound financial decisions as part of their fiduciary responsibilities. 2. Responsibility of Auditors The Sarbanes-Oxley Act requires that the lead and reviewing partner of the auditing firm rotate off the audit every five years, prohibits the auditing form from providing any non-audit services to the company at the same time it is providing auditing services (with certain exceptions), and requires that the auditing firm report to the audit committee all critical accounting policies and practices that are used by the entity, discussed with management, and represent the preferred way management wants these policies and practices treated. It may be prudent for nonprofit entities to change auditors every five years and to adopt the Sarbanes-Oxley rule of preventing auditing firms from providing non-auditing services in order to preclude any conflicts of interest between the auditing firm and the client. In addition, adopting the provisions about disclosure to the audit committee of critical accounting policies and discussion with management will foster more informed judgments by the audit committee, enhanced oversight by the board and greater transparency. 3. Certified Financial Statements The Sarbanes-Oxley Act requires the chief executive and chief financial officers to certify the appropriateness of financial statements and that they fairly present the financial condition and operations of the company. In addition, the CEO, CFO, controller and chief accounting officer cannot have worked for the auditing firm for one year preceding the audit. It is always a good practice for CEOs, CFOs and the boards of nonprofit entities to fully understand financial documents and reports and make sure that they are accurate and complete. 4. Insider Transactions and Conflicts of Interest The Sarbanes-Oxley Act generally prohibits loans to any directors or executives of the company. It is also good practice for nonprofits entities to refuse to provide personal loans to directors or officers, which is expressly prohibited in some states. As stated above, it is also good practice for nonprofit entities to have written conflict of interest policies that are consistently and uniformly applied throughout the organization. 5. Disclosure The Sarbanes-Oxley Act requires a number of disclosures, including information on internal control mechanisms, corrections to past financial statements, material off-balance sheet transactions, and material changes in the operations and financial situation of the company on a rapid and current basis. 10
Nonprofit entities should provide their donors, clients, public officials, the media and others with an accurate picture of their financial condition at all times. 6. Whistle-Blower Protection The Sarbanes-Oxley Act provides new protections for whistle-blowers and criminal penalties for actions taken in retaliation against whistle-blowers. Well-managed nonprofit entities develop and implement written procedures for handling employee complaints, and should develop a confidential and anonymous mechanism to encourage employees to report any inappropriate activities within the entity s management. 7. Document Destruction The Sarbanes-Oxley Act makes it a crime to alter, cover up, falsify or destroy any documents to prevent its use in an official proceeding. It is critical that nonprofit entities maintain appropriate written records about their operations. V. Dispelling the Myths About Available Insurance Coverage Directors and officers of non-profit organizations often believe that insurance coverage for any lawsuits arising out of their service for such organizations particularly where the nonprofit is a charitable entity are covered under insurance policies already in place, and therefore don t see the need to purchase D&O insurance. A quick review of other kinds of insurance coverages shows, however, that other kinds of policies do not provide the kind of needed and meaningful coverage for director and officer liability, and can be a poor substitute for a D&O policy. The following are some of the kinds of insurance coverage a director or officer might hope to use: A. CGL, Umbrella and Excess Insurance Policies CGL, or comprehensive general liability, policies provide coverage for bodily injury or personal injury and property damage which occurs through an accident or occurrence. When employees sue the employers in a non-profit organization for emotional injuries, defamation or invasion of privacy resulting from an alleged employment termination or discrimination, an issue is raised as to whether the entity s CGL policy will cover that employment action. However, since the 1980s, CGL insurers have been steadily and purposefully narrowing the scope of coverage under CGL policies to exclude coverage for employment-related disputes precisely because CGL insurers do not want such disputes to be covered under CGL policies. For this reason, there is often a clear exclusion in CGL policies making it clear that the CGL insurer has no intention of covering employment-related disputes. Most umbrella policies are tailored to address unique risks. Chances are, if an insured entity hasn t specifically negotiated with its umbrella insurer for some type of employment- 11
related or management liability coverage, such coverage won t be available under an umbrella policy. Similarly, excess policies typically do not provide coverage that is broader than any coverage underlying the excess policy. So if the underlying policy doesn t provide management or employment practices liability, it s not likely that such coverage would be found under an excess policy. B. Workers Compensation Insurance In years past, coverage for certain types of employment practices claims may have been available under the employers liability insurance coverage part of standard workers compensation policies. As has been the case with CGL insurers, however, workers compensation insurers have made a concerted effort over the past decade to specifically exclude coverage for employment-related disputes from workers compensation policies. So it s highly doubtful that a workers compensation policy can be expected to respond to a management or employment practices liability lawsuit. C. Homeowners and Personal Umbrella Insurance Policies Particularly in sexual harassment cases, an employee suing for sexual harassment will often sue both the employer and the employee alleged to have engaged in the harassment, as well as any employees who arguably failed to prevent or correct the hostile environment. The defendant employees will often seek coverage under their personal homeowners policy. However, most homeowners policies contain clear exclusions for business pursuits and intentional acts, which are often used by homeowners insurers to deny coverage for sexual harassment claims. Personal umbrella policies, like commercial umbrella policies, typically will not provide broader coverage than is provided by the underlying policy. For this reason, if the underlying policies available to the homeowner do not provide coverage for a certain kind of liability, it s likely that the personal umbrella policy won t cover that liability either. D. Employment Practices Liability Insurance Over the past ten years, employment practices liability policies have become an increasingly popular risk management tool for large and small organizations alike. These policies, often referred to as EPL policies, provide coverage for employment-related claims, and can be a substantial source of protection for a nonprofit organization which employs workers. The downside to EPL coverage for non-profit directors and officers, however, is that EPL policies address only one of the two major categories of claims a non-profit can expect to receive with no coverage for claims that might be brought against directors and officers of a non-profit that do not result from an employment dispute. So, while EPL policies are useful to a non-profit, they are like a blanket designed for a smaller bed; they won t cover you in all the places you need to be covered. 12
VI. D&O Insurance D&O policies for non-profit organizations sometimes called association liability policies are the insurance policies most specifically tailored to address the unique liabilities of non-profit directors and officers. These policies generally insure not only the directors and officers, but also trustees, employees, committee members and volunteers. In light of the fact that employment practices claims constitute a substantial percentage of the types of claims asserted against non-profit entities and their managers, these policies typically include EPL coverage as part of their overall coverage. Non-profit directors and officers can talk to an insurance broker about the specific features of a D&O insurance program that can be tailored to their specific needs. The scenarios summarized above are offered only as examples. Coverage depends on the actual facts of each case and the terms, conditions and exclusion of each individual policy. Please refer to your insurance policy to determine all terms, conditions, exclusions, and limitations of coverage. This publication was prepared with the assistance of John F. McCarrick and Helen Han Mountain, both members of the Insurance & Financial Products Practice Group at Duane Morris LLP. Duane Morris is a full-service firm of approximately 550 lawyers, representing clients across the nation and around the world through a combination of 20 offices and a relationship with an international network of independent law firms. 13