Many high-net-worth individuals choose to give back to their community by serving as a volunteer board member of a non-profit organization or a local charity. While their actions are admirable, volunteers may not realize that serving on a charitable board exposes them to the risk of being sued.
Board members, even when they’re acting as volunteers, can be held personally liable for the actions or inactions of the charitable organization. Yet many people who serve in this capacity aren’t insuring themselves against legal action.
An ACE Private Risk Services survey of households with at least $5 million in investable assets revealed that 39% of those who serve or previously served as a volunteer board member did not have proper insurance coverage.
This area of liability presents an excellent opportunity for wealth advisors, who can strengthen client relationships by discussing this liability risk with clients and, as a next step, having clients’ insurance coverage reviewed by an insurance specialist.
The first question likely to be raised in this type of review is, what can I be sued for? Most often, lawsuits arise out of wrongful employment practices, such as sexual harassment, discrimination or wrongful termination. But even seemingly innocuous or unimportant situations, such as a verbal exchange or a heated disagreement during a board meeting, can lead to litigation.
Consider these scenarios:
• A non-profit organization plans to stage an unannounced drill to simulate an emergency situation, testing its employees on their emergency response and evacuation readiness. One employee is so surprised by this activity that he sues the organization, claiming emotional distress. A board member, even an individual without any direct responsibility or involvement in this event, can be named in the lawsuit and potentially be held liable.
• A misbehaving student is expelled from a private school or a teacher is fired. Regardless of the cause or whether school board members were aware of the dismissal, a student’s parents could sue the school and individual members of the school board for alleged defamation of character. The teacher could sue for wrongful termination or discrimination. This risk is heightened by the fact that charitable organizations may not be as diligent in their hiring practices as for-profit companies.
• A discussion during a co-op board meeting escalates into an argument. In the heat of the moment, a board member says something to another that could be considered defamatory in nature and now faces a liability risk entirely unrelated to the topic of the original disagreement. Board members, even in a volunteer capacity for a non-profit organization, must understand that every comment and conversation may be recorded.
Throughout each of these scenarios, one theme is consistent: Volunteer board members either mistakenly assume they will be covered by the organization’s liability insurance policies or they fail to fully understand that they may face liability exposure just by serving on the board. Although a board member may not have actually carried out the acts listed in the suit, he or she can still be held accountable for not establishing preventative training programs or ensuring a streamlined complaint process is in place to address problems in the earliest stages.
Social media has only intensified the threat, as lawsuits claiming libel, slander, invasion of privacy, plagiarism and copyright or trademark infringement are increasingly born out of online discussions. Successful charities often thrive on networking and spreading the word about their good efforts. Social media has greatly increased the ease, reach and speed of distributing news. But the pressure to constantly produce content can compromise internal review procedures, as the temptation to copy and paste or offer a hastily conceived opinion grows. In one case, $11.3 million was awarded to a consultant as a result of an individual posting defamatory comments on an Internet bulletin board. Had that individual been working for a charity and offered the comments in connection with his or her employment, the board members could have been named in the lawsuit as well.
More than 40% of volunteer board members remain exposed to these types of risks because they falsely believe they’re covered under an organization’s insurance policy, according to the ACE survey. Most organizations’ policies provide coverage to a certain extent. But charities, especially smaller, locally focused groups, typically operate on tight budgets and may not purchase sufficient insurance to guard against worst-case scenarios. They may have only $1 million in directors and officers liability insurance to cover the entire board. With some lawsuits far exceeding that amount, plaintiff lawyers will then try to recover damages from additional sources, including the personal assets of the board members.
Another 20% of volunteer board members recognize they may have some liability exposure, according to the ACE survey, but do nothing about it because they aren’t aware that a solution exists in the form of charitable directors and officers, or D&O, liability coverage. Insurance companies that specialize in serving high-net-worth families typically offer this coverage as an optional component of an umbrella liability policy. The coverage can be surprisingly affordable—perhaps $500 for $1 million in coverage. It provides an additional layer of protection for claims made during the policy period. Even if a client stops serving as a volunteer board member, he or she may want to continue the coverage for a few years in case a claim is brought against the organization for something that happened during his or her term.
Volunteer board members should also make sure their basic umbrella liability coverage is adequate. Charitable D&O coverage protects against employment practices lawsuits, but bodily injury lawsuits would typically be covered under a homeowners policy and then, if damages exceed $300,000 to $500,000, the umbrella policy.
How costly could a bodily injury lawsuit be? Imagine that an organization runs a day-care facility and a child with a peanut allergy eats food that causes a serious reaction. The child stops breathing and suffers permanent brain damage. A settlement could be in the tens of millions of dollars.
Charities often turn to their board members to host parties, fund-raisers, networking events and other social gatherings at their homes. Hosts of these types of events—which pose significant liability risks—must have sufficient umbrella liability coverage. A mishap, such as a deck collapse or a slip and fall on an icy driveway, places the homeowner at serious risk for litigation.
Perhaps the most dangerous liability exposure for party hosts comes from serving alcohol. If an underage guest is served and then has an accident on the drive home, the host in charge of providing the alcohol can be perceived as responsible. Accidents caused by intoxicated adults driving away from a party can also come back to haunt the host. In addition to insurance coverage, there are other steps policyholders should take to reduce risk. For example, they should hire professional, licensed bartenders who are experienced serving alcohol to large numbers of people. The party host should sign a contract that clearly outlines the protocol for responsible alcohol service to indemnify the host for any type of loss.
With these risks in mind, our agents often recommend purchasing enough umbrella liability coverage to match personal net worth, as well as the present value of a future income stream. Such coverage usually costs a few hundred dollars per million dollars in coverage, and the cost-per-million declines as the amount of coverage increases. Many high-net-worth families choose to offset the cost of additional umbrella liability coverage by increasing the deductible on their home and auto policies. For instance, increasing the deductible amount on one home from $500 to $2,500 might save $900 in annual premium. That savings could secure a $5 million umbrella liability coverage limit.
Not all umbrella policies are alike. Those from carriers that specialize in serving high-net-worth clients often have added benefits, such as offering coverage limits up to $100 million, paying for legal defense without using up the liability limit and covering the cost of hiring a public relations firm that can protect the client’s reputation.
While there are many risks to consider when volunteering as a board member, the insurance solution need not be complicated or costly. Once an advisor is aware that a client serves on the board of a charity, the most practical step is to encourage a discussion with an expert agent or broker to review the insurance plans of both the client and the organization he or she is serving. As more wealthy families appreciate the liability exposures associated with serving as a volunteer board member for a non-profit organization or charity, they will understand the importance of working with a qualified insurance advisor to build a comprehensive program for liability protection.
Clyde Douglas is senior vice president of claims at ACE Private Risk Services.
