Indemnification; How to Protect Your Board Members

By Raul Rivera

The weather could not get any better for a church outing at a state park.  Pastor Steele, with his congregation of 85 people, had planned a church family party where they would play games, grill burgers, and have fellowship.  Early that morning, Albert, one of the church's board members, went to the grocery store to pick up 40 pounds of beef for the hamburgers.  When he entered the parking lot, he proceeded to park his car and in the process, he misjudged the distance between his car and the one parked beside him. His car sideswiped the other car, causing some damage.  He immediately wrote down the car's tag number and reported the incident to the grocery store manager, who paged the customer.  After exchanging information and giving his insurance company's phone policy number, he continued his day. 

Two weeks later

What was Albert going to do?  His usual morning trip to the mailbox would surprise him in a way he had never before experienced.  In his mailbox sat a letter from the lady whose car he had sideswiped.  It was a demand letter asking for compensatory damages of $1,100.00 for her daughter's laptop and $350.00 for legal fees.  She claimed he damaged it when he hit her car. 

After considering the letter and sharing it with his pastor, they sought the advice of a local attorney.  He said to them that they had two choices.  One was to pay her demand and the other was to write her back and deny her request.  Albert and his pastor felt that it was in everyone's best interest to turn the other cheek and pay her demand.  However, Albert, who was retired, lived on social security and a small pension.  How would he pay the demand?

Indemnification was the answer

Very often, churches are not aware that the laws of the states allow a church to indemnify board members, employees, officers, and volunteers.  In order to best take advantage of it, the church/ministry must be incorporated.  Indemnification means that the church 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.

How the church protected Albert

Pastor Steele was aware that the church had a policy that provided indemnification to its board members.  He assured Albert that if the church's insurance company did not pay the claim, the church was authorized to pay it because of the indemnification policy.   The insurance company denied the claim. (I will explain why in a later article).

Two weeks later, the church provided an advanced reimbursement to Albert in the amount of $1,450.00 so that he could pay the demand.  Why was the church allowed to pay his claim without it constituting taxable income?  Why did it not break 501(c)(3) regulation or cause a section 4958 violation? 

The indemnification policy explained

In order for your church/ministry to properly indemnify its people, it must properly follow indemnification rules.  Pastor Steele's church did it the right way.  Below are the steps that will teach you how to do it.

1.     Adopt an indemnification policy. If you would like to get a copy of an indemnifiication policy, please call us at 770-638-3444 and we will send you one by email absolutely free!

2.     Save any and 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.  A copy is provided on page 100 of the conference manual. 

6.     Pay the demand to the individual.

7.     Make sure the individual pays the demand.

Thinking things through

Ministry is more than good teaching, preaching, and revival services.  A great church ensures that its legal foundation is solid.  I believe that when a pastor decides to work ON his/her ministry and not just IN his/her ministry, he/she will experience increased stewardship.  Please take the time right now to think about your church'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.  Let us share a vision that will empower you to get there.  Come to one of our conferences.  You will not be disappointed.

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