There is a growing belief by nonprofit organizations that directors’ and
officers’ liability insurance is no longer an essential risk management
tool for protecting an organization for a wrongful act or omission. This belief
exists because of a growing awareness by nonprofit organizations of liability
protection afforded to them due to the federally mandated "Volunteer Protection
Act of 1997." This protection provided by federal and state statutes was
created to encourage volunteerism among communities. At its core, the "Volunteer
Protection Act" was a giant leap forward for the nonprofit community. However,
the new protections afforded to the nonprofit community is deficient and does
not address significant exposures faced by most nonprofit organizations.
What is the Volunteer Protection Act and what does it cover?
"No volunteer of a nonprofit organization or governmental entity shall
be liable for harm caused by an act or omission of the volunteer acting on behalf
of the organization or entity."
Under this definition of coverage, protection is afforded to the volunteers
unless one of the following occurs:
- The volunteer does something which is OUTSIDE their job description,
- The volunteer does not have the required licenses or certificate for the
job being performed
- The volunteer’s act that caused the injury was as a consequence of
the operation of a motor vehicle
- The volunteer caused the injury with willful, criminal or reckless misconduct
or gross negligence.
While the new laws allow nonprofit organizations to feel secure that their
liability against wrongful acts are reduced, the laws are also creating a false
sense of security since they have significant limitations.
Why do I need Directors’ and Officers’ Liability Insurance?
While extremely valuable, the intent of volunteer protection laws are to limit
liability if a claim falls within the scope of the protection. However, the
law does not prevent the volunteer from being sued. Furthermore, compensated
individuals (the most obvious being compensated employees and directors or officers)
are not provided protection under the law.
According to the laws, protection is also not provided if the misconduct is
a crime of violence, hate, sexual in nature, committed while under the influence
of alcohol, or if its a violation of civil rights, labor, or tax provisions.
For example, according to a Watson Wyatt Worldwide Survey Report, 22% of all
claims are based on discrimination. As this is a civil rights violation, coverage
would not be afforded to the volunteer being sued.
More importantly, should a volunteer be protected under volunteer protection
laws, nothing in the law acts as a protection against a claimant seeking a remedy
against the entity itself. Currently, most claimants automatically name the
entity itself into its suit.
Directors’ and Officers’ Liability Insurance serves to protect an
individual and entity against significant exposures which may not be covered
under volunteer protection laws, such as those highlighted above. Generally,
a volunteer may not learn whether or not their situation is applicable until
a court determines the law to be applicable. Until this determination is reached,
directors’ and officers’ insurance indemnifies the association and
volunteer against legal defense costs. Most directors’ and officers’
policies are duty to defend policies. This means the insurance carrier has an
obligation to provide a defense on behalf of the named insured.
The Volunteer Protection Act is a valuable piece of legislation. However, the
act was never intended to replace existing risk management techniques, such
as directors’ and officers’ insurance. Appropriate risk management
requires a nonprofit organization to take all appropriate steps necessary to
insure a secure financial future, even if some precautions overlap.
This article is of a general nature and is not intended to address all issues
or problems that might arise. Nor is it intended to be legal advice, which can
only be rendered by a duly licensed attorney-at-law. Readers should consult
with a lawyer if they have specific concerns that they feel are legal in nature. Aon Affinity Nonprofits, including its parent and affiliates, does not assume any liability for how this information is applied in practice
nor for the accuracy of this information.