Board Liability

According to Volunteer Canada’s National Survey on Giving, Volunteering and Participating, about 41 percent of Canadian volunteers serve on boards and committees. (2000). Despite their commitment to countless causes and organizations many board members may be unaware of the legal ramifications of their volunteer work and the possibility of being held personally liable. This liability applies to all nonprofit organizations including clubs, associations, societies, leagues, committees and charities.

BOARD RESPONSIBILITIES

The basic responsibility of directors is to represent the interest of the organization, their members and their constituencies in directing the affairs of the organization, and to do so within the law. In their role as ‘trustee’, directors have three basic duties:

• Diligence: to act reasonably, prudently, in good faith and with a view to the best interests of the organizations and its members;
• Loyalty: to place the interests of the organization first, and to not use one’s position as a director to further private interests;
• Obedience: to act within the scope of the governing policies of the organization and within the scope of other laws, rules and regulations that apply to the organization.

A volunteer director who fails to fulfill his or her duties as outlined above may be liable. The term ‘liability’ refers to the responsibility of directors and organizations for the consequences of conduct that fails to meet a pre-determined legal standard. Usually, the term ‘consequences’ refers to damage or loss experienced by someone, and being responsible for such consequences can mean having to pay financial compensation.

INCORPORATED OR UNINCORPORATED

An incorporated organization offers directors the protection what is termed the ‘corporate veil.” As a separate legal entity, the organization is one step removed from the directors and members. Lawsuits must be brought against the corporation.

An unincorporated organization is not a separate legal entity and has no legal status apart from that of its members. While carrying out their duties on behalf of the members, directors can be held personally and jointly liable for the activities of the organization.

The basic responsibility of directors is to represent the interest of the organization, their members and their constituencies in directing the affairs of the organization, and to do so within the law.

BOARD OF DIRECTORS’ LIABILITY INSURANCE

A common risk management measure, and one that is particularly important in minimizing director’s personal liability, is that the organization carry Directors’ and Officers’ Liability Insurance (DOLI). Directors; and officers’ liability insurance covers costs that the directors and officers of an organization might become legally obligated to pay as a result of damages to another party. Unlike a general liability insurance policy that covers losses arising from physical injury or property damage, directors’ and officers’ liability insurance covers only those losses arising from a director’s own ‘wrongful acts’, such as an error; a misstatement; a misleading statement, act, omission; or other break of duty by an insured person in his or her insured capacity.

The risk is not so much that a director will be found guilty of a wrongful act, but simply that there will be an allegation of a wrongful act. The cost of defending any claim can be significant.

Insurance policies vary and there is no standard level of coverage. Make sure you are aware of the coverage you have. According to Volunteer Canada, many polices DO NOT include:

• Directors acting outside the scope of their duties, including any actions that are dishonest, fraudulent or criminal;
• Breach of contract, including wrongful dismissal of employees;
• Fines and penalties under statue or regulation; and
• Complaints under a human rights code, including a complaint of discrimination, harassment or sexual harassment.

COMMON SENSE PREVAILS

There is risk inherent in everything we do. Volunteers, employees and directors of organizations must always be mindful of risks – this means examining situations cautiously and thinking ahead to the potential consequences of decisions and actions.

An effective board will complete a Risk Management Assessment of their organization and ensure practical measures to eliminate undue risk are in place.

Information for this segment was excerpted from:
“Directors’ Liability: A Discussion Paper on Legal Liability, Risk Management and the Role of Directors in Non-Profit Organizations, Volunteer Canada, 2002.