The impact of being on a board is bigger than people realize.
Many people feel honored when asked to join a board, be it a local school, shul or charity organization, and they should be. It is a testament not only to their perceived value in the community but also to the insight they can bring to ongoing challenges. Of course, there is the financial component where donations are expected, and often fundraising “for the cause” is a significant factor. Sounds great—giving your time, energy and resources to such worthy causes, and it is, but is that all you are giving?
What many people don’t realize is that one small decision, or even an oversight, can have a devastating impact not only to the organization but to the board members—personally. That’s right, a board member’s assets—home, financial holdings etc.—can be at risk if the board does not carry the right insurance coverage. It’s not enough to have a chosen limit ($1M, $5M or more) but the coverage has to be customized to offer the right protection. Directors’ and officers’ policies can and should be tailored to fit specific needs since no two situations are exactly the same.
Few board members ask to see the policy, let alone know the limit they are covered for, which is astounding. Of all the schools, shuls and nonprofit entities I insure, I only had one request to know what limits are afforded in the policy. Unfortunately, there is an inherent conflict when joining a nonprofit—they are usually not well funded and therefore the insurance is inadequate to begin with. While knowing the limits are a start, it can be meaningless if the policy has exclusions that leave the board members completely bare. Tucked at back of the hundred or so pages of legal jargon, if you haven’t already fallen asleep, are endorsements and exclusions that become the minefield of protection.
What if the board approves a security company and something happens? Parents or members sue the board for lack of due diligence. What was once a simple decision now becomes a procedural nightmare. What happens if one board member decides to sue another? The “insured vs. insured” exclusion is typical of these policies and offers no protection when one board member is fed up and sues. Disagreements about the way finances are managed, contracts signed, school and shul funds are allocated are all examples of real-world cases that have led to hundreds of thousands of dollars in claims. Not all of the claims’ expenses are for awarded damages, but the legal fees from sorting through countless emails and documentation at high rates cause the defense cost to skyrocket. Even if no damages are paid, legal fees alone can easily exceed $100,000 depending on the discovery length.
A nonprofit, performing routine duties, can be sued by an outraged member or ex-member who brings the board into the law suit while looking for deeper pockets. Suddenly, the board member who only meant well for the institution can now be facing a real legal battle that can impact personal finances should the nonprofit have inadequate coverage. The same applies to for-profits and any entity with a board.
The complexity of these policies cannot be overstated. Insurance companies don’t just write a check because the broker files a claim. The fine print of these policies contain exclusions that can also terminate coverage if the application itself contains any misrepresentation. This is a key factor since it is usually the overworked CEO or business administrator filling it out without the final approval of the board. Information innocently misstated can lead to the total denial of a claim.
People will often regale me with stories in which an insurance company denied a claim that “should have been paid.” We get what we pay for and more often than not, the insurance policy couldn’t be more clear. Insurance is a contract, a legally binding one, and if it is not read carefully or customized, there is not much that can be done. Shopping for price instead of coverage has its limitations.
With all this being said, I hope I didn’t scare you away from joining a worthy board. On the contrary, I hope you join and add the value uniquely requested of you. Just make sure you are aware of the potential hazards so you may avoid them. If nothing else, your homeowner and umbrella policy, if written correctly, may afford you missing coverage. Request the full policy and have an attorney or broker you trust look it over so that you can give the cause the full attention it deserves.
By David Feuerstein
David Feuerstein is a senior vice president with Brown & Brown (NYSE:BRO), the largest insurance broker in NJ. David’s consultative approach toward employee benefits, property, casualty and personal insurance has fostered strong ties with his clients. David can be reached at [email protected] or 973-549-1947.