Who Sues not-for-profits and not-for-profit Boards and Why?

A Frequent Technical Assistance Question

One of the myths associated with not-for-profit D&O exposures is that there are few sources of claims since not-for-profits don't have shareholders. not-for-profits serve large and varied constituencies to which their boards owe specific fiduciary duties similar to duties owed by corporate boards. These constituencies are potential plaintiffs in legal actions brought against not-for-profit boards. Potential claimants in a suit against not-for-profit directors include:

  1. Insiders

    The current and former staff of a not-for-profit may bring actions alleging a host of wrongful acts, including wrongful termination, discrimination, sexual harassment, and Americans with Disabilities Act violations.

  2. Outsiders

    Third parties that have a relationship with the not-for-profit may allege harm caused by the not-for-profit and/or its directors, officers or employees. Outside sources can be vendors, funders, or another not-for-profit.

  3. The Entity

    The not-for-profit may bring an action against its directors and officers. Examples include claims by current management against a former trustee. In some states, derivative suits are permitted. In a derivative suit, members of a not-for-profit may bring a claim on the not-for-profit's behalf against a director and officer. (Note: Claims by the entity against its directors and officers will likely be excluded under most not-for-profit D&O policies).

  4. Directors

    A not-for-profit director may sue another board member alleging violation of a duty owed to the not-for-profit. Under certain circumstances such an action may be compelled.

  5. Beneficiaries

    The people you are in business to help- your service recipients- may bring claims against directors and officers alleging wrongdoing.

  6. Members

    Directors and officers of membership associations are vulnerable to claims brought by members alleging harm to the interests of the member.

  7. Donors

    A not-for-profit's contributors may sue directors and officers alleging misuse of a restricted gift.

  8. State Attorney General

    In most states, the state attorney general represents the interests of the general public in assuring the proper management of public benefit corporations. As such, the Attorney General may bring a claim against not-for-profit directors and officers alleging wrongdoing.

  9. Other Government Officials

    Other government officials, including representatives of the U.S. Internal Revenue Service and the U.S. Department of Labor, may bring actions against not-for-profit directors alleging violation of state or federal laws.

  10. Directors' & Officers' (D&O) Liability Insurance

    D&O Liability Insurance provides coverage against "wrongful acts" which might include actual or alleged errors, omissions, misleading statements, and neglect or breach of duty on the part of the board of directors.

Source: Coverage, Claims & Consequences: An Insurance Handbook for Nonprofits, 2002, Nonprofit Risk Management Center, Washington, DC

Reprinted with permission from the April 12, 2005 e-News, published by Nonprofit Risk Management Center (www.nonprofitrisk.org) a not-for-profit serving other not-for-profits through articles, books, online training, workshops, conferences and consulting with a not-for-profit's slant on managing risk.