18 Jun 2020

How to Protect Your Board

Allyssa Klingberg

Volunteering to serve on the board of a nonprofit can be a rewarding experience for both the board members and the communities they serve. Unfortunately, serving on a board can also open up directors to a degree of personal liability. What some may overlook or be unaware of when they choose to serve on a board is that they are exposing themselves to liability in connection with their service. This exposure occurs during their tenure and continues for some time thereafter.

Boards can be proactive about this risk, however, and one of the steps they can take is making sure that the nonprofit provides board members with an indemnification policy.

Knowing this, let’s take a look at what indemnification means:

What is Indemnification?

Indemnification means that the nonprofit will secure (protect) an individual against future loss or damages arising from events that occur while the individual serves in his/her capacity as a board member, staff (employee), officer, or volunteer.

The provisions of an indemnification policy usually derive from the state law under which a nonprofit is incorporated, which grants the nonprofit the power to indemnify members of the board against claims they face while they maintain such roles. Of course, indemnification is subject to certain limits on intentional misconduct.

Many states, such as Delaware, have provisional statutes for incorporated entities that they may indemnify any director or officer if he or she:

  • acted in good faith,
  • acted in a manner reasonably believed to be in or not opposed to the best interests of the corporation, and
  • had no reasonable cause to believe that his or her conduct was unlawful, in the case of a criminal action or proceeding.

Resource: 

How Exculpation, Indemnification and Advancement of Expenses Works

This is why it is so important for every nonprofit board to consider having an indemnification policy in place once incorporated. 

For nonprofits, the topic of incorporation can sometimes be fraught with confusion and myths. Amid that confusion, the importance of laying a solid legal foundation on which to build a nonprofit can fall to the wayside. 

So let’s take a moment to shed some light on incorporation by looking at a few facts and myths around it.

Three facts about incorporation

Fact 1: Incorporation provides liability protection.

Who puts the most on the line: those with founding vision.

With a vision of winning souls into the Kingdom, many men and women of God risk everything they have. But it does not have to be that way.

By incorporating the ministry, state law separates the founder from the dangers of liability lawsuits and misfortunes that could fall on a ministry.

The laws of all fifty states provide that a corporation is a separate legal entity from its founders and members. This separation creates a legal concept known as indemnification. Under the indemnification rules, a board member, officer, or founder could not be held personally liable for the debt, liabilities, or judgments against the corporation. It prevents the consequence of one member's acts from falling personally upon all the members.

Fact 2: The Articles of Incorporation are the church's supreme legal document.

Under state law, the articles of incorporation are the church's supreme legal document. It has greater authority than the bylaws and any other legal document.

Therefore, it is important that you carefully draft the following to best protect your vision and calling:

  1. The purpose statement must clearly create a religious (ecclesiastical) corporation that allows the ministry to expand into a wide array of activities. 
  2. A clause that does not allow the articles of incorporation to be amended without the vote and approval of the board, including the founder/president.
  3. A clause that creates membership, but orders the bylaws to provide for the manner of admission and removal. This allows you to carefully draft and amend your church's membership without having to pay money to the state to amend the articles of incorporation.
  4. A clause that establishes the duration of the corporation to be perpetual. I once read that if you want to do something great in this lifetime, then build something that will outlive you for at least 100 years. One thing that incorporation will do is create the perpetual existence of the corporation. The ministries of many of our greatest American heroes of the faith still exist today because they incorporated to ensure the continuity of the vision the Lord gave them when they first started.

Fact 3: Incorporation allows the ministry to enter into contracts in its own name.

One of the most wonderful benefits of incorporation is that the ministry can enter into contracts, such as owning property in its own name without putting the founder on the hook for any negative results that may occur. Let me explain how this works.

Let's say that Church XYZ signs a three-year lease on a building it rents from Landlord ABC. After the third year, the church decides to move to another location, so it gives the landlord due notice and vacates according to the terms of the contract. However, the landlord is upset that the church is leaving and tries to sue the church. He cannot name the pastor or board members as defendants because the contract is with the corporation. In the unfortunate event that the church has to close its doors and dissolve, the founder and board can do so responsibly without being on the hook for any claims the landlord could make.

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Liability Insurance

Indemnification is only as valuable as the financial resources that underpin it. While a nonprofit may grant its directors a right to indemnification, if the nonprofit has no resources—or, is otherwise illiquid—the grant will merely be an empty promise that ultimately is of no value to the director. Because of this, nonprofits may consider purchasing directors and officers liability insurance, commonly referred to as a “D&O policy.” D&O policies are intended to provide coverage in the event a director or officer is sued for alleged wrongful acts in managing the affairs of the nonprofit. Depending on the terms of the specific D&O policy, coverage can range in amount and scope. When considering whether to acquire a D&O policy, the nonprofit should consult with legal counsel and their insurance professionals to ensure they receive adequate and appropriate coverage.

Resources: 

JDSupra - A Proactive Approach For Nonprofit Boards

InsuranceForNonprofits.org

7 steps to implement a policy

Knowing how to implement an indemnification policy can be just as crucial as understanding what it is. Below are a few steps to show you how to implement an indemnification policy in your own nonprofit.

1. Adopt an indemnification policy. If you would like to get a copy of an indemnification policy, please call us at 877-494-4655, and we will send you one by email absolutely free!

2. Save all demand letters and your responses to those demand letters.

3. Save all police reports, if any.

4. Save all correspondence with the insurance company, including whether they pay or deny any claims.

5. Fill out an advanced reimbursement request. 

6. Pay the demand to the individual.

7. Make sure the individual pays the demand. 

Ministering to your community can be incredibly rewarding. A great ministry ensures that its legal foundation is solid. That way the ministry—that dream—can live on in the community for generations to come. Please take the time right now to think about your nonprofit's foundation. Is it strong? Are there some things that keep you up at night? Do you dream about your ministry becoming a vital force in the community—filled with people, outreach, for-profit entities, salvations, and healings? It begins with taking care of the little things first. With the StartRIGHT Service, you can establish a strong legal foundation for your church or ministry. Call us today at 877-494-4655 or schedule a call below to set up a time to share your vision for your ministry.

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Please feel free to comment. We always appreciate good dialogue. However, we do moderate each comment to ensure that it is on topic and not derogatory to other participants. We ask that you keep your comments brief and pertinent to the topic so that others may benefit.

Blessings,
Raul Rivera


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