Serving on a non-profit or paid board of directors can be a fulfilling and rewarding experience. It allows you to make a difference in the community or industry you care about, network with other professionals, and develop leadership skills. However, being a board member also comes with personal liability and fiduciary risks that you should be aware of.
Personal Liability Risks
As a board member, you have a legal duty to act in the organization’s and its stakeholders’ best interests. This includes making informed decisions, exercising due diligence, and avoiding conflicts of interest. If you breach your duty and the organization suffers harm as a result, you could be held personally liable for damages.
For example, if you approve a risky investment that causes the organization to lose money, you could be sued for breach of fiduciary duty. Similarly, if you ignore warning signs of financial mismanagement or fraud, you could be liable for negligence or gross negligence.
In addition to personal liability, board members face fiduciary risks that come with managing an organization’s finances and operations. This includes ensuring that the organization complies with legal and regulatory requirements, managing its assets responsibly, and protecting its reputation.
If the organization fails to fulfill its obligations or faces legal or financial difficulties, board members could be sued by stakeholders or regulators for breach of fiduciary duty. This could result in personal liability, fines, or even criminal charges in extreme cases.
Directors and Officers Coverage
Before you join an organization’s board, you should review its bylaws and see what policies and processes are in place. To protect against personal liability and fiduciary risks, many organizations purchase Directors and Officers (D&O) insurance coverage. D&O coverage is designed to provide financial protection for board members in case they are sued for alleged wrongful acts committed in their capacity as directors or officers of the organization.
D&O coverage typically covers legal expenses, settlements, and judgments arising from claims of negligence, breach of fiduciary duty, or other wrongful acts. It may also cover defense costs for criminal investigations or regulatory actions.
Should Board Members Have Personal D&O or Umbrella Coverage?
While organizations may provide D&O coverage for their board members, it’s important to note that this coverage is limited and may not provide complete protection. In some cases, the organization’s policy may not cover certain types of claims, such as claims related to fraud or intentional wrongdoing.
For this reason, some board members may choose to purchase personal D&O and/or umbrella coverage to supplement the organization’s policy. Personal D&O coverage provides additional protection for board members in case their actions result in personal liability, while umbrella coverage provides excess liability coverage beyond the limits of the organization’s policy.
Not all insurance carriers offer personal D&O coverage, so work with your insurance broker to determine the best course for your personal risk portfolio.
Serving on a non-profit or paid board of directors can be a rewarding experience, but it also comes with personal liability and fiduciary risks. To ensure you are adequately protected, it’s important you review the organization’s D&O policy and work with your insurance broker to explore additional coverages if needed. At Power Risk Management, we offer a free no obligation risk review with one of our licensed brokers.
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