High Net Worth

Nonprofit Boards Pose Personal Risk

High net worth board members are ready targets for lawsuits.
By: | September 14, 2016 • 5 min read

Successful people who serve their communities with their knowledge and executive experience are worthy of praise. But  while serving on the board of a nonprofit can be a great way to give back, it can also open the door to lawsuits and personal liability risks, especially for high net worth individuals.

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Insurance and risk experts say that while many organizations have commercial and directors and officers policies, board members may not be fully covered for a myriad of personal liability risks.

They recommend those interested in serving on boards be cognizant of the risks, perform due diligence when evaluating an opportunity, and ensure they have sufficient insurance coverage.

Big Exposure for High Net Worth Board Members

When most high net worth individuals take on duties as board members, it’s usually out of passion, not to make a profit. Parker Beauchamp, CEO of INGUARD, an insurance and risk management firm in Wabash, Ind., said most individuals are “trying to do good,” but they can open themselves up to significant personal risks when serving on boards.

Parker Beauchamp, CEO, INGUARD

Parker Beauchamp, CEO, INGUARD

In many cases, these individuals jump into fields they don’t fully understand. While an oil company executive might have a high level of experience in petrochemical engineering and market economics, he or she might know little about the liability risks related to directing a children’s cancer foundation.

“Suddenly they’re dealing with an entirely new venture that they know little about. When you combine the profile and the wealth, and something negative happens, they’re a big target,” said Beauchamp.

Jim Fiske, senior vice president of marketing at Chubb Personal Risk Services in Whitehouse Station, N.J., said some of the biggest risks come from employment practices and liabilities related to operation of the organization. Fiske said anything from wrongful termination and accusations of harassment to fiduciary exposure liabilities and misallocated funds could personally come back to a board member.

A white paper by Gulfshore Insurance in Naples, Fla., said that directors of nonprofits can be held liable for invasion of privacy, discrimination, bankruptcies, and misuse of financing claims made by the IRS. Fiske said while personal injuries, property damage, and general liability are typically covered, “it can get ambiguous quickly if there are allegations against the board.”

Although all states perform the indemnification of directors to an extent, those laws do not always absolutely eliminate the risk of personal liability, said Donna Ferrara, senior vice president and managing director at Arthur J. Gallagher & Co. in Itasca, Ill. No matter how broad the indemnification agreement may be, there are limits, she said.

“Insurance can reduce the risk, but it’s not a cure-all. There are always going to be some limitations on how protected a director can be,” said Ferrara.

Insufficient Liability Coverage

A survey by ACE Private Risk Services, a global carrier that caters to affluent customers with at least $5 million in investable assets, found that 44 percent of those serving on boards did not have adequate personal liability coverage in place.

Donna Ferrara, senior vice president and managing director, Arthur J. Gallagher & Co.

Donna Ferrara, senior vice president and managing director, Arthur J. Gallagher & Co.

Ferrara said most assume they’re covered by their personal umbrella policies, but these policies typically won’t respond to business liabilities. Commercial umbrella policies may cover liabilities if there’s an underlying D&O policy and the umbrella is specifically “excess” of the D&O, but that’s not always the case.

“D&O insurance is not uniform. Policies can be negotiated, tailoring coverage to meet the needs and finances of the insured. Their terms and conditions differ widely,” said Ferrara.

Paul King, SVP, national MPS director and cyber practice leader at USI Insurance Services in Valhalla, N.Y., said many small nonprofits “aren’t very sophisticated” when it comes to compliance and having the right coverage.

He said these organizations can often run into rules and regulation issues that lead to D&O claims. And while these policies should often be at the forefront of board discussions, King said they are “often shoved to the back of the line.”

Fiske said another problem is that D&O policies typically don’t cover defense costs for the individual. So even if there is a claim, the board member may still have to cover his or her legal fees related to defending themselves.

Beauchamp said while these personal liabilities aren’t always tremendous, they are a “real risk.” In one example, he said, a small nonprofit forgot to pay its payroll taxes and sparked a federal claim against the organization. The individual director of the organization was deemed personally liable to reimburse the U.S. government.

Beauchamp said it was a relatively small amount but a clear example of claims that can come back on board members.

King said claims related to cyber attacks and data breaches are another growing liability risk for directors.

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Because many organizations don’t have large IT departments and usually use third-party companies, organizations need to do due diligence with their contractors, he said.

Many policies don’t cover such exposures and may require that the organization have a separate cyber liability insurance policy.

“They might feel emotionally attached to the group and they’re not thinking about things like malware attacks and the IT infrastructure,” said King.

Due Diligence Required

Lisa Lindsay, executive director of the Private Risk Management Association, said individuals need to work with their attorneys and brokers to ensure the organization has the level of sophistication required to cover their bases and reduce risk. Individuals should drill down with a full examination of the processes and procedures of the organization to ensure compliance with rules and regulations.

Lisa Lindsay, executive director, Private Risk Management Association

Lisa Lindsay, executive director, Private Risk Management Association

Lindsay recommended that high net worth individuals not sit on boards if there isn’t sufficient coverage in place. She also said many are often misled into believing that their personal umbrella policy offers coverage if they sit on a board in a non-leadership position. High net worth individuals need to be “very persistent” in asking questions, she said.

“We really want to see the individual do an awful lot of due diligence around understanding the organization, how the board operates, because even while [policies] are available, high net worth individuals still have significant risk exposure,” said Lindsay.

The Gulfshore Insurance white paper said that individuals should first engage in best practices to avoid future claims. This includes ensuring the organization has an adequate conflict of interest policy as well as policies that ensure restricted funds are used and invested as required by law.  &

Craig Guillot is a writer and photographer, based in New Orleans. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Risk Management

The Profession

As a professor of business, Jack Hampton knows firsthand the positive impact education has on risk managers as they tackle growing risks.
By: | April 9, 2018 • 4 min read

R&I: Who is your mentor and why?

Ellen Thrower, president (retired), The College of Insurance, introduced me to the importance of insurance as a component of risk management. Further, she encouraged me to explore strategic and operational risk as foundation topics shaping the role of the modern risk manager.

Chris Mandel, former president of RIMS and Risk Manager of the Year, introduced me to the emerging area of enterprise risk management. He helped me recognize the need to align hazard, strategic, operational and financial risk into a single framework. He gave me the perspective of ERM in a high-tech environment, using USAA as a model program that later won an excellence award for innovation.

Bob Morrell, founder and former CEO of Riskonnect, showed me how technology could be applied to solving serious risk management and governance problems. He created a platform that made some of my ideas practical and extended them into a highly-successful enterprise that served risk and governance management needs of major corporations.

R&I: How did you come to work in this industry?

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From a background in corporate finance and commercial banking, I accepted the position of provost of The College of Insurance. Recognizing my limited prior knowledge in the field, I became a student of insurance and risk management leading to authorship of books on hazard and financial risk. This led to industry consulting, as well as to the development of graduate-level courses and concentrations in MBA programs.

R&I: What was your first job?

The provost position was the first job I had in the industry, after serving as dean of the Seton Hall University School of Business and founding The Princeton Consulting Group. Earlier positions were in business development with Marine Transport Lines, consulting in commercial banking and college professorships.

R&I: What have you accomplished that you are proudest of?

Creating a risk management concentration in the MBA program at Saint Peter’s, co-founding the Russian Risk Management Society (RUSRISK), and writing “Fundamentals of Enterprise Risk Management” and the “AMA Handbook of Financial Risk Management.”

A few years ago, I expanded into risk management in higher education. From 2017 into 2018, Rowman and Littlefield published my four books that address risks facing colleges and universities, professors, students and parents.

Jack Hampton, Professor of Business, St. Peter’s University

R&I: What is your favorite book or movie?

The Godfather. I see it as a story of managing risk, even as the behavior of its leading characters create risk for others.

R&I: What is your favorite drink?

Jameson’s Irish whiskey. Mixed with a little ice, it is a serious rival for Johnny Walker Gold scotch and Jack Daniel’s Tennessee whiskey.

R&I: What is the most unusual/interesting place you have ever visited?

Mount Etna, Taormina, and Agrigento, Sicily. I actually supervised an MBA program in Siracusa and learned about risk from a new perspective.

R&I: What is the riskiest activity you ever engaged in?

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Army Airborne training and jumping out of an airplane. Fortunately, I never had to do it in combat even though I served in Vietnam.

R&I: If the world has a modern hero, who is it and why?

George C. Marshall, one of the most decorated military leaders in American history, architect of the economic recovery program for Europe after World War II, and recipient of the 1953 Nobel Peace Prize. For Marshall, it was not just about winning the war. It was also about winning the peace.

R&I: What about this work do you find the most fulfilling or rewarding?

Sharing lessons with colleagues and students by writing, publishing and teaching. A professor with a knowledge of risk management does not only share lessons. The professor is also a student when MBA candidates talk about the risks they manage every day.

R&I: What is the risk management community doing right?

Sensitizing for-profit, nonprofit and governmental agencies to the exposures and complexities facing their organizations. Sometimes we focus too much on strategies that sound good but do not withstand closer examination. Risk managers help organizations make better decisions.

R&I: What could the risk management community be doing a better job of?

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Developing executive training programs to help risk managers assume C-suite positions in organizations. Insurance may be a good place to start but so is an MBA degree. The Risk and Insurance Management Society recognizes the importance of a wide range of risk knowledge. Colleges and universities need to catch up with RIMS.

R&I: What emerging commercial risk most concerns you?

Cyber risk and its impact on hazard, operational and financial strategies. A terrorist can take down a building. A cyber-criminal can take down much more.

R&I: What does your family think you do?

My family members think I’m a professor. They do not seem to be too interested in my views on risk management.




Katie Dwyer is an associate editor at Risk & Insurance®. She can be reached at [email protected]