Friday, February 12, 2016

The Last Bylaws Pitfalls is...

Our staff attorneys have spent more than a year reviewing hundreds of nonprofit bylaws.Here is what they learned about the most common legal pitfalls!

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The Next (and Last) Bylaw Pitfall (#5) Is: Having Overly Generalized Indemnification & Insurance Policies
The Problem
When it comes to potential exposure to personal liability faced by board and staff members affiliated with nonprofits, many organizations fail to clearly and sufficiently stipulate what guarantees and protections they offer. In some cases, unfortunately, organizations don't even secure appropriate insurance necessary to truly honor their promises.  Virtually all nonprofits should, and do, endeavor to indemnify their stakeholders from legal claims arising as a result of their service to the organization. Such decisions, however, merit requisite due diligence.  

Indemnification obligations are generally two-fold:  
  • Coverage of expenses that might be incurred in defending a legal action;
  • Payment of any judgments or necessary settlement fees
How do nonprofit meet these obligations?
For most nonprofits, only with appropriate insurance coverage can they truly honor their indemnification commitments.  In our experience, many nonprofits needlessly expose themselves, and their stakeholders, to liability and potentially disastrous financial obligations by simply adopting brief, catch-all indemnification and insurance clauses in their by-laws. 

Carefully consider the following questions:
  • Does the indemnification and insurance clause expressly require the nonprofit to procure insurance coverage appropriate for its organizational needs and does it provide for procedures to assure that such coverage is maintained and can be adjusted as needed as the organization evolves? 
  • Assuming a nonprofit's by-laws obligate the organization to maintain insurance coverage for purposes of indemnification, are the by-laws clear as to those who are actually indemnified?  Are staff expressly indemnified?  What about volunteers?  If so, are the terms of the underlying insurance policies in sync with the by-laws?
  • Should the nonprofit also guarantee corporate funds in order to indemnify a stakeholder if its insurance carrier were to refuse to pay or if actual damages exceeded coverage limits? Remember, insurance coverage has its limitations. 
  • What discretion should a board of directors have, if any, in authorizing the indemnification of a stakeholder who acted in bad-faith or engaged illegal conduct while loosely acting on behalf of the nonprofit?  (An unfortunate example can be found here.) 
Actions to Consider
Read More about the limitations of insurance, please read the following recent Q&A  from the Nonprofit Risk Management Center. Scroll to the last question for the important question regarding what D&O insurance covers.

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