No Good Deed Goes Unpunished

One of Ted Pappas’s, The McLaughlin Company’s President, favorite quotes rings very true to people who elect to serve on not-for-profit boards of directors.

According to a survey by consultants Tillinghast, 96% of the claims brought against non­profit groups are from employ­ees, compared with 23% against public companies. Nonprofit boards are now being held more accountable, just like cor­porate directors. The Internal Revenue Service has stepped up scrutiny of private founda­tions, auditing 400 of them this federal fiscal year (ending Sept. 30), more than double that of recent years. The Department of Labor has beefed up their investigative and audit staffs targeting Labor Unions. The Senate Finance Committee held hearings in April about the oversight of tax-exempt organizations.

Many directors of the nation’s over 1 million charities, labor unions, and other nonprofits are clueless that they have the same fiduciary duties as corporate board members. “If they make a bad decision, someone can come after them,” warns Jeffrey Klenk, senior vice president at St. Paul Travelers, which sells directors and officers (D&O) liability insurance to nonprofits. “It might cost you up to $200,000 from out of your own pocket defending a lawsuit”

One management consultant and investment banker who joined the board of a non-profit agency giving job training to the disadvantaged and the disabled found his charitable impulse landed him in a lawsuit filed by 100 employees seeking unpaid wages. He was aghast to learn that his board had been fed false reports of glowing financial health—and startled to find that he was personally liable. The agency’s coffers were bare, so the only ones left to pay were the directors. The board ended up settling with the workers for $355,000 in back pay and $88,000 in attorneys’ fees.

Luckily for the board, its insurer covered both. Most non-profits are uninsured for such claims. The direc­tors also had to do much of the closing-down work. The consultant spent 600 hours of his time over two years on such chores as filing back payroll and sales tax forms.

Prior to joining a charitable board make sure that fellow directors and the staff are diligent and competent. Then investigate the extent of your group’s D&O policy, should there be one. If one doesn’t exist, contact an independent insurance agent to buy some coverage. Aside from Travelers, nonprofit D&O policies are available from Chubb, Hartford and American International Group. For Unions, both AIG and Ullico offer a Union Liability Policy specifically designed by The McLaughlin Company that covers those unique exposures arising from the Landrum-Griffin and Taft- Hartley Act. Many not-for-profit entities try to save money by telling their Boards that such coverage is not needed. This statement should be a “red flag” and an indication that someone is being “pennywise and pound foolish.”

If all else fails, you may be covered under your stan­dard homeowners and umbrella policy. Talk to your independent agent like The McLaughlin Company about more than your car and homeowners insurance. Let him/her help you identify exposures that you haven’t even thought about, especially those good deeds that “never go unpunished.”