The Responsibility of Serving on a Board of Directors
Serving on the Board of an organization can be a very fruitful activity, both for the organization and the individual. There is no better feeling than being part of a team that leads the organization to the next level.
However, if the endeavors of the organization do not work out as planned, there is the potential for legal liability that lies with the members of their Board of Directors and the organization’s Officers. Regardless of whether the organization is publicly traded, private, or nonprofit, the individual Board members can be held legally and financially responsible for the conduct of the organization, the Board and its Officers.
The 2013 Directors and Officers Liability Survey by JLT Park Ltd. states that the largest proportion of claims overall, 61% of Directors & Officers liability claims, came from the nonprofit sector.
According to the Bureau of Labor and Statistics, from 2004-2013, 39% of Director and Officers liability claims were derivative lawsuits – lawsuits brought forth by the shareholders (or members) of the organization. The average settlement value of this type of lawsuit was $7.2 Million.
Yes, someone who chooses to file a lawsuit can file against the organization, but the liability does not stop there. The individual Board members and the Officers of the organization are also personally liable and so are usually named in the lawsuit as well. This appears to be a big misconception by nonprofit entities. They feel they have nothing to lose because they have little in assets. But defending a lawsuit is quite costly. So it would be logical for the next target to be the people running the organization.
Thankfully, this type of liability is something businesses and organizations can insure against, freeing their Directors and Officers to make important decisions without the threat of personal liability hanging over their heads. It is Directors & Officers Insurance, otherwise known as D&O Insurance. This policy should be part of any business or organization’s insurance portfolio.
To find out more about D&O Insurance, how it works and how to obtain it, contact one of our professionals at Pronoeo Insurance Agency. 800-495-2886