It is a common myth that volunteer directors can never be sued. While state and federal laws provide general protections for volunteer board members, these protections are highly conditional.
Why Incorporation is Not Enough
Incorporation creates a legal barrier that prevents creditors from coming after directors' personal assets for the organization's general debts. However, this "corporate shield" instantly pierces under several circumstances:
- Gross Negligence: Making major decisions without any reasonable inquiry or diligence (e.g., approving a massive building loan without looking at financial statements).
- Willful Wrongdoing: Committing or allowing fraudulent activities, self-dealing, or illegal behaviors.
- Unpaid Payroll Taxes: The IRS holds individual board members personally liable for willfully failing to withhold and pay payroll taxes. This is a non-dischargeable personal liability.
The Role of D&O Insurance
Because lawsuits can be brought against boards by disgruntled employees, former directors, donors, or the Attorney General, your organization must maintain high-quality Directors and Officers (D&O) Insurance.
D&O insurance does two critical things:
- It pays for the legal defense fees, which can accumulate to tens of thousands of dollars even if the lawsuit is completely meritless.
- It covers settlements or judgments rendered against individual directors, provided the conduct was not fraudulent or criminal.
When reviewing your policy, look out for "Employment Practices Liability (EPLI)." Employment disputes (wrongful termination, discrimination, hostile work environment) are the single biggest cause of legal claims against governing boards. If your organization has paid staff, EPLI is absolutely essential.