By Jenifer M. Pinkham, Esquire
Recently, one of our clients was served with a lawsuit because he had served on the Board of Directors for a Non-Profit Corporation more than ten years ago. The lawsuit named all of the Board members, and was suing each of them personally, as well as the Board. Our client had only attended a handful of meetings, served officially on the Board for less than a year and was not highly involved. He became a member of the Board because his friend, a business associate, asked him to volunteer for a good cause. He is now being dragged into a legal battle. Unfortunately, our society can sometimes punish the do-gooder. Within this article, there are practical tips for directors and/or officers of any corporation, non-profit or for profit.
As many of you know, we always recommend that you form a corporate entity (or limited liability company) to protect yourself from personal liability. That corporate entity, however, is sometimes not enough. There are certain claims which can be made for which an individual can be sued personally. Some examples include employment related issues, such as discrimination, harassment and wrongful termination. You may also be sued personally for mismanagement of corporate assets if you have breached your fiduciary duty to the Company. Lawsuits against corporate directors and officers by shareholders are commonplace. You may have income tax liability as well.
If you are serving as a director or officer for a non-profit entity, you are volunteering to give guidance and direction to the entity, however, you are doing so in your individual capacity. Therefore, you may be sued personally for decisions that you make while serving on the Board. Also, non-profit entities have a more vulnerable corporate structure because unlike other companies, non-profit entities do not have easy access to capital which could be used to protect the board or officers if a claim is made against them.
A way in which directors and officers can protect themselves, in addition to the corporate structure, is to have a directors and officers insurance policy, commonly referred to as D&O. D&O pays for actual or alleged wrong decisions, what the policy calls "wrongful acts." Although each insurer defines coverage in its own way, D&O generally includes any actual or alleged act or omission, error, misstatement, misleading statement, neglect or breach of duty by an Insured Person in the discharge of his/her duties.
Directors and officers should request that D&O insurance be procured to protect themselves from personal liability. In addition, not all policies are created equally, and as a result; directors and officers should take the time to research the coverage. Before you begin serving on any Board of Directors, you should ask the entity if they have ever been sued, and for what. If you are serving or are asked to serve on the Board of Directors for a non-profit corporation, the first question you should ask is, does the non-profit maintain a D&O insurance policy, and request a copy of the policy before you agree to serve on the Board. If the non-profit does not wish to obtain a policy, you need to think twice before serving. It may not be feasible for the non-profit financially, however, you should consider the risk before agreeing to serve.
Within the policy, you want the most protection possible, and here are a few provisions that you should be on the lookout for during your review of the policy. First, most policies provide that an entity will indemnify directors and officers for claims against them and that the entity will be indemnified by the insurance proceeds. Yet, there are certain situations when the entity may be prohibited from indemnifying the officer or director, and as a result, you should ensure that there is liability coverage that provides direct coverage to the directors and officers if the entity is unable to indemnify them. Second, make sure that the definition of "claim" is as broad as possible. Be sure that it includes all lawsuits and other criminal, civil, administrative and regulatory proceedings and investigations. Third, look carefully at what acts or events the policy excludes, and attempt to limit the exclusions. Also, you can request if there is a crime/fraud exclusion that the exclusion be predicated on a final judgment and not simply a claim. Fourth, the policy should make it clear that you have the right to choose your own lawyer and that defense costs will be promptly reimbursed as long as they are reasonable. Lastly, be sure to find out the amount of coverage provided by the policy.
If you have questions about liability of directors and officers, please call us for guidance.