by Samantha Pahlow, CTFA, AWMA®
Wealth Management Chair Executive Vice President
For many people, serving on a nonprofit board is a rewarding experience. It’s a chance to lend expertise, guide strategy and contribute meaningfully to a cause they believe in. More than ever, nonprofits need board members who can help them navigate sudden changes to their planning and income streams, as seen in the past five years.
Board service is also a significant responsibility and it's important to understand the potential personal liability that can accompany it. While nonprofits are tax-exempt, board members are not immune from legal responsibility. Understanding the risks and implementing safeguards is crucial to protecting your financial well-being while serving your community.
Understanding Your Responsibilities: Fiduciary Duties
A board member's liability primarily stems from their fiduciary duties—legal obligations to act in the organization's best interests.
Duty of Care: You must act with the diligence and prudence of a reasonably careful person in similar circumstances. This means actively attending meetings, reviewing materials, asking questions and making informed decisions.
Duty of Loyalty: You must act in the best interest of the organization, prioritizing the organization's well-being above any personal gain or conflicts of interest.
Duty of Obedience: You must ensure the organization operates strictly within all applicable laws, regulations and its own governing documents.
Beyond these duties, board members can face liability from operational and legal circumstances such as negligence, regulatory non-compliance, fraud and/or criminal acts. Understanding these potential scenarios empowers you to navigate them effectively.
Organizational Safeguards
While board members should be aware of the liabilities they may face, the nonprofits they serve will help protect them through internal policies and insurance.
Indemnification: The organization's promise to cover a board member's expenses, settlements and judgments incurred while serving. This is typically outlined in bylaws, but its effectiveness depends on the organization's financial health and legal limitations (e.g., gross negligence, willful misconduct or criminal acts often excluded).
Directors and Officers (D&O) Liability Insurance: A must-have policy that directly protects the personal assets of board members from lawsuits related to wrongful acts. It covers legal defense costs, settlements and judgments—often stepping in when indemnification is insufficient. D&O policies generally exclude dishonest acts, fines and personal gain. They do not cover bodily injury, property damage or cyber threats.
Other Essential Organizational Insurance Policies: D&O doesn't cover all risks. Organizations should also have general liability, employment practices liability, cyber liability, professional liability and fiduciary liability insurance policies.
Personal Protection Strategies: What You Can Do
Your strongest defense is often your own personal due diligence.
Ask Questions Before Joining: Before agreeing to serve, ask questions about the organization’s finances, risk profile, governance practices, indemnification policies and insurance coverage. Evaluate whether you have sufficient time to devote to meetings and material review and any potential conflicts of interest.
For a list of suggested questions to ask when considering a board position see: Questions to Ask Before Joining a Board - BoardSource
Personal Umbrella Insurance: It's a common misconception that your personal umbrella policy provides coverage for board liability. They generally do not, or coverage is extremely limited and conditional.
Individual D&O Coverage—Outside Directorship Liability (ODL): While less common, some individuals, especially those on multiple boards, may consider purchasing their own ODL policy. It provides an additional layer of protection if the organization's D&O is insufficient, its insurer becomes insolvent or indemnification is legally restricted.
Best Practices for Daily Board Service:
Your ongoing conduct is your most significant personal safeguard and path to effective governance.
Active Participation: Attend all meetings, thoroughly review materials beforehand and actively engage in discussions.
Ask Probing Questions: Don't hesitate to question management, auditors and legal counsel. Seek independent advice if needed. The only "bad question" is the one you don’t ask.
Uphold Fiduciary Duties: Always prioritize the organization's best interests, disclose conflicts and recuse yourself when necessary.
Maintain Good Records: Ensure meeting minutes accurately reflect discussions, decisions and dissenting votes.
Continuous Learning: Stay informed about the organization's operations, finances, risks and the broader industry and regulatory environment.
Serving on a board is a privilege with significant responsibilities. By understanding the risks, assessing organizational safeguards and committing to best practices, you can navigate these complexities with confidence, ensuring you are well-protected while effectively contributing to the organizations you serve.
Should you have any questions as you consider joining a nonprofit board, please reach out. Not only do Ferguson Wellman and West Bearing manage investments for more than 50 nonprofits, our team also serves on many boards with a myriad of focus areas that provide a broad perspective.
Ferguson Wellman, Octavia Group and West Bearing do not provide tax, legal, insurance or medical advice. This material has been prepared for general educational and informational purposes only and not as a substitute for qualified counsel. You should consult qualified professionals to understand how this information may, or may not, apply specifically to you.