Without question, an invitation to join the board of a corporation comprised of friends and colleagues, or a not-for-profit organization with a mission you support is hard to resist. But before you accept, we caution you to think of being on a board not as a benign hobby-like activity, but as a business deal. In your business, you and your advisors make certain you are protected from exposure to judgments that could result in personal liability. You need to do the same before joining a board.

NOW THE BAD NEWS
If you are a director of a for-profit company, no personal lines underwriting insurance company offers coverage that will protect you from exposure if the firm suffers a devastating judgment and cannot cover the cost. The news is a bit better if you become a director of a not-for-profit board. For starters, several major carriers offer personal policy coverage for board members of nonprofit entities, condominium associations and cooperative corporations. But this personal policy to supplement the nonprofit’s protection has limitations.

First, given the fact that many nonprofits operate with limited budgets, the coverage they secure is often minimal, as little as $1 million for an entire board. And know that the personal policy you rely on to supplement this coverage is limited to bodily injury, property damage and personal injury. Adding to the limitations of the personal policy are some qualifications, specific to the underwriter, regarding any director’s compensation. That means each underwriter’s policy contract must be reviewed.
The second caution is that personal policy nonprofit director coverages do not provide for fiduciary claims such as wrongful employment acts or monetary loss from errors or omissions, except in extremely limited situations. Because nonprofit organizations typically can afford only the minimum amount of liability insurance, the limits may be exhausted. If a court ordered amount exceeds that limit, board members—that is, you—may be personally liable for the judgment amount in excess of the exhausted coverage; that puts your personal assets at risk.

While our firm is working with our underwriters in an effort to address this fiduciary claim void, the developments so far are severely limited and available only in some states. So, what can you, a well-intentioned individual willing to serve as a board member do? For starters, read the sidebar on this page, and proceed with caution.