HomeHAHN AGENCY, INC.

Why Protect Directors and Officers?

Why protect Directors and Officers at all? Between Immunity Statutes, personal insurance and waivers of liability, these board members should be adequately covered. Good point, let's look at the protection afforded by these devices along with what is NOT provided.

Also, let's look at the benefits of providing this important insurance protection to the directors and officers. toplist

Protection for Directors and Officers through their personal insurance or through volunteer Protection Statutes.

Protection for Directors and Officers through Transfer or Waiver of Liability.

Benefits to the Non-Profit Organization in protecting its Directors and Officers.

 

Protection for Directors and Officers through personal insurance or through volunteer protection statutes top

Q. Since actions of the directors and officers are personal, why do we, as a non-profit organization have to obtain coverage? After all, aren’t the directors and officers immune from liability due to volunteer protection statutes? Even if they do not have immunity from legal action, their personal homeowner’s liability coverage should protect them.

A. Personal Acts of directors and officers are not adequately covered by volunteer protection statutes and personal liability insurance:

Volunteer protection statutes are inadequate

To limit the liability of volunteer board members, many states have enacted volunteer protection statutes. Generally these State and Federal Statutes are inadequate since:

Does not apply to allegations of gross negligence or willful misconduct, a common allegation.

Does not apply to violations of federal statutes.

Coverage provided by personal homeowner’s policies is inadequate.

Industry Standard HO-3 personal homeowner’s policy.

Policy does not provide any coverage.

Expanded homeowner’s policies, such as those written with Fireman’s Fund and Chubb Insurance Group

Personal Injury coverage provided for "business acts" with respect to serving on a non-profit board for no remuneration. No Wrongful Acts coverage.

Expanded homeowner’s policy written with Royal Insurance.

Provides up to $20,000.00 in Wrongful Acts coverage for being a volunteer in a non-profit organization. Employee benefits liability is NOT covered

 

Protection for Directors and Officers through Transfer or Waiver of Liability. top

Q Our by-laws have a provision which reads as follows:

SECTION 16.INDEMNIFICATION BY CORPORATION OF DIRECTORS AND OFFICERS

The directors and officers of the corporation shall be indemnified by the corporation to the fullest extent permissible under the laws of this state.

Doesn’t this provide complete protection to the directors and officers?

A Yes and no.

  • Some liability exposures cannot be transferred by law, (exculpatory agreement).

  • This provision in the by-laws does not protect other members of the non-profit .

  • If liability is transferred to the organization, how will organization pay?

As a non-profit organization you have funds earmarked for a charitable purpose along with funds for administrative expenses. There has never been an instance in Illinois were funds for charitable purposes have been allowed to be used for the defense of legal action taken against the organization. Are the costs going to come out of the administrative expenses?

 

Q. Can’t we just eliminate our liability by having parties that do business with us sign waivers holding us harmless from all liability arising out of our actions?

A. A contractual provision purporting to relieve or "excuse" a party of liability for negligence is an exculpatory contract. Court rarely favor these disclaimers of liability. Courts will interpret them narrowly against the party attempting to limit its liability and often declare them illegal since they can go against public policy.

In other words, waivers are meaningless.

 

Benefits to the Non-Profit Organization in protecting its Directors and Officers. top

Brain Drain:

You want to attract the "best and the brightest" for their talents. Potential volunteers may be reluctant to join if not adequately protected for their actions as Directors and Officers

Social Responsibility:

A moral obligation to protect those that help and serve your organization.

Perpetuation and reputation of non-profit entity:

You do not want it to get around town that serving as a board member in your organization can result in a personal financial hit.

You want to make sure that you have the resources for competent legal representation to ensure that your non-profit organization can survive a lawsuit for alleged wrongful acts with its reputation intact.

 

Remember, these acts by the directors and officers have an effect on the non- profit organization. The organization, including its employees, trustees and volunteers should be a named insured on a directors and officer policy. Acts leading to a claim covered by a directors and officers policy can result from actions of all of the individuals of the organization, not just the directors and officers. 

 

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