What Is A Not-For-Profit?
Generally defined, a charitable institution is an organization or other entity
engaged in the relief or aid to a certain class of persons, a corporate body
established for public use, or a private institution created and maintained
for the purpose of dispensing some public good or benevolence to those who require
it. , The range of not-for-profits is varied, from the entertainment giant NFL,
the medical monolith Blue Cross and Blue Shield, American Red Cross, the recently
discriminating Old Town Club, YMCA, Jim Baker’s church, the Forsyth Humane
Society, and the Ku Klux Klan. From the list, one may wonder if not-for–profits
are necessarily eleemosynary institutions. The benefit that they bestow may
be for private or public benefit. While not-for-profits may accumulate profits
, they have a non-distribution constraint -- they are not allowed to distribute
any assets to third parties (payments to shareholders).
Annual giving to not-for-profit organizations in 1997 increased 7.5% from 1996 to $1,498 billion , which represents approximately 15 percent of the gross national product . North Carolina has 5913 or approximately 2.5% private not-for-profit organizations officially registered with the IRS grossing in 2.5% of reported annual giving .
Why Is Nonprofit Liability Exposure Important?
The purpose of this paper is to value my liability exposure from working with
not-for-profit agencies. My interest peaked after the Metrolina HIV/AIDS Consortium
president sexually molested an employee. The acts were witnessed. She complained
to her managers, who then went to the board and recommended that she be cut
from full time to part time because of the traveling expenses between counties.
The managers made no mention to the board of the philanthropist’s sexual
escapades against the employee. The county where her assailant lived was taken
from her multi-county territory, although it was an adjacent county, no substitute
county was given to her, they cut her pay, and removed all benefits. She filed
a lawsuit for sexual harassment. The claim was settled out of court.
As an applicant to law school, I looked forward to having my degree so I could assist charities possibly by incorporating them under I.R.C. 501(c), drafting simple contracts, or connecting them to legal experts for free as a professional courtesy to me. Once I pass the bar, my ability to offer expertise along with my volunteer hours is four years closer than it was when I entered Wake Forest. One dream is to serve on the bio-ethics committee of a hospital. As I learned more about the law, I became aware that the price of giving is the possibility of exposure to liability. I could be personally liable under respondeat superior or other tort theory for a wide array of actions:
• the lecherous conduct of a fellow board member or manager (sexual harassment);
• breach of fiduciary duty for not paying employment taxes or not studying the monthly financials to catch embezzlement or misuse of assets;
• bodily harm possibly wrongful death to employee or visitor at the facility;
• wrongful discharge, breach of contract or other tortious claim ; and
• violation of bylaws or deviation from the charter. (The Attorney General often monitors these claims and a third party usually does not need to bring claim).
Even if not liable, I may still be responsible for litigation costs arising out of such claims.
Over the past decade, I have served on various not-for-profit boards. Presently, I am serving on the Sawtooth Center for Visual Arts Board, the North Carolina Medical Society Alliance Board, and the North Carolina Medical Society’s Prevention and Public Health HIV/STD committee and will be serving on the Alumni Council for Babcock Graduate School of Management shortly.
Is Liability as a Not-For-Profit Board Member real or is the law student’s equivalent to medical student’s disease?
Real! In general, potential liabilities for generally fall into three categories: (i) liability for breach of duty to the organization, (ii) third-party liability in which plaintiffs who suffer some injury from the corporation seek to hold directors and officers personally responsible, and (iii) government enforcement actions. The 1996/1997 Watson Wyatt Worldwide Survey reported 1,290 claims made against nonprofit directors and/or officers from 1987 through 1996 . Fifty-five percent were closed. Approximately 73% of these closed claims were resolved by settlement or trial and the claimants dropped the remaining 27% of cases. The average indemnity payment for all claimants was $376,168. The average indemnity payment for D&O claims made by employees (including physicians) was $275,170. Close to five percent of all nonprofit claims had an indemnity payment over $1 million. The average defense cost for those claims, which were closed by litigation, was $147,274 and by settlement was $118,204. If the claimant dropped the case, the average defense cost was $19,092. Sexual harassment cases more than doubled in 1991 from 6,883 to 15,889 in 1997 . Between 1991 and 1996, awards to victims under federal laws nearly quadrupled from $7.7 million to $27.8 million, not including punitive damages .
Is Charitable Immunity an Option in North Carolina?
Charitable immunity does not mean that plaintiffs could never recover for damages
for the act of a charity. Previously, it was established that if a charitable
institution has exercised due care in its selection and retention of its servants
or employees, it might not be held liable to a beneficiary of the charity for
the negligence of its servants or employees. , A non-beneficiary, for example
visitor to the not-for-profit could sue if s/he hurt her/himself due to negligent
maintenance of the premises by an employee.
Two theories supporting charitable immunity were the trust fund theory and the nonprofit theory . Under this theory, courts argued that charities should be immune from paying damages in tort because charitable donations were said to be held in trust for the beneficiaries of the charity, and paying tort judgments from those funds would frustrate the intent of the donor. The nonprofit theory supporting immunity was that charities were not bound by the doctrine of respondeat superior because charities did not profit from their employees' work.
Justice and sound public policy alike dictated that a not-for-profit should be exempt from liability because one is acting as the Good Samaritan. Another theory was implied waiver .
By 1940, four fifths of the states recognized charitable immunity , . Since then the states have abrogated this defense and limited its application. Reasons cited for the demise of the doctrine were (1) the development of an advanced insurance industry and (2) the growth of the not-for-profit sector . Courts reasoned that any burden placed on charities because of tort liability could be alleviated with insurance. Moreover, charities were no longer the historically poor organizations operating on shoestring budgets. They had evolved from asset-poor groups into substantial corporate powers with sufficient assets to self-insure.
North Carolina abolished the common law defense of charitable immunity as to actions arising after September 1, 1967 with G.S. 1- 539.9 . A Westlaw search looking for charitable immunity and nonprofit found 14 North Carolina cases. Eleven had to do with hospitals. Of these 11 cases, eight clarified the date that charitable immunity precluded suit by a beneficiary or disallowed recovery because the tort was asserted against the nonprofit before September 1967 ; two allowed recovery because the plaintiff was not a beneficiary ; and one case held that the hospital was not a nonprofit . The remaining three cases, all predating the abolition of charitable immunity, were against the YWCA, the Masonic Lodge, and a railroad .
What Is My Liability Exposure from Community Service?
I am involved in four not-for-profit agencies; Sawtooth Center for Visual Arts, the North Carolina Medical Society Alliance, the North Carolina Medical Society’s The NCMS Prevention and Public Health Committee, the alumni council for Wake Forest’s Babcock Graduate School of Management. To assess my liability exposure based on the four committees, I will discuss each committee separately. One underlying assumption is that due to my background in the law and general ethics, I would not be the tortfeasor, such as the president of the AIDS Consortium. Rather, I would be the object of liability because my position in the organization.
Sawtooth Center for Visual Arts, Winston-Salem, North Carolina
Sawtooth teaches the visual arts to approximately 14,000 students of all ages in roughly 10 counties around the Triad. The media include photography, glass blowing, metalworking, pottery, painting, woodworking, and weaving. Presently, I am beginning my third year on the board and am working with the Winston-Salem conductor Peter Perret and Sawtooth’s executive director, Jim Sanders, to design an arts-based curriculum for a new charter school in the area.
Subjectively, my concerns for liability are from the toxic chemicals, potential chemical and heat burns, and explosions. A slip-and-fall case would possibly pass through us because we are a tenant and the Arts Council is the landlord. The executive director, who has been there for over a decade has never had any complaints for mismanagement of employees or funds. I don’t necessarily have 100% confidence in each individual to understand financial statements and be a bloodhound when it comes to possible mismanagement of assets or breach of fiduciary duty. As a twenty-plus team, my confidence is more than 100% that we could catch any misdealing. Historically, there have never been any claims against the Sawtooth or the North Carolina Arts Council.
North Carolina Medical Society Alliance (NCMSA), Raleigh, North Carolina (www.ncmsalliance.org)
I am completing my fifth year on the board and am the awards chairperson for North Carolina. The group is comprised of physicians’ spouses and is a little sister organization to the North Carolina Medical Society, which represents about 50 percent of NC-licensed medical and osteopathic doctors. Subjectively speaking, I do not see any possible claims regarding employment because there are only one and one-half female full-time equivalents. The board is female dominated. To this day there have been no claims against the NCMSA, nor against any states’ medical society alliance. In addition, the national organization has never had a claim made against it.
North Carolina Medical Society’s Prevention and Public Health Committee
Third, I use my background in epidemiology and infectious diseases while working with the North Carolina Medical Society’s Prevention and Public Health Committee. The primary tasks over the past five years have been to author health policy statements for the medical society on issues surrounding communicable diseases. Subjectively speaking, there are tons of lawyers crawling around that office and actions regarding employment or financials are very carefully scrutinized. Only the impulsive tortious act or similar slip and fall case would be likely to pop up. For the North Carolina Medical Society board and all of its committees, no claim has ever been asserted against it. Like it’s spousal counterpart, there have been no assertions against any state medical societies or the American Medical Association. I was unable to find out whether there had been any claims against any county medical societies or the county medical alliances.
Babcock Graduate School of Management Alumni Council
Finally, beginning July, I will begin my three-year term on Babcock Graduate School of Management’s Alumni Council, a 36-person team that acts as a conduit for fundraising and a steering committee for the graduate program. (Only vehement Tarheel fans have made only non-legal claims against Wake alumni). I was unable to find out if the alumni council per se had insurance. I will assume that it does not and will also assume that it functions simply as a committee and do not impact Wake Forest employees, visitors, or policy . Rather, if any action implicated the alumni council, the plaintiff would sue Wake Forest, Babcock Graduate School of Management, and the board of directors and trustees of the respective schools.
Analysis and Conclusion
To calculate the liability, the following data was incorporated into the decision tree model of liability exposure . See Appendix C. Over the past nine years there have been 1290 claims or approximately an average of 145 cases annually . Because North Carolina represents 2.5% of registered not-for-profits, assuming an equal distribution of suits, North Carolina is faced with four cases per year . Assuming that liability suits are independent variables, the four suits will randomly impact the 5913 not-for-profits registered or each not-for-profit has a 0.068% of being plagued by a lawsuit, making my exposure to suit equal to 0.27% . I have rounded the model up to 1% for each board.
Continuing with a suit was assigned 73% and dropping a case was assigned 27% based on nine-year sample from the Watson Wyatt survey . Based on anecdotal evidence from trial lawyers who state about 5% cases go to trial and the rest settle, I used divided the likelihood of settlement and litigation accordingly. In addition, the defense costs for litigation, settlement, and dropping a case were $147,274, $118,204, and $19,092, respectively . While I felt that the average indemnification payment for directors and officers, $275,170 was high because of the skewing effect physicians and health settlements would have on the sample average, it was added to litigation and settlement outcomes . My expectation of liability exposure this year is $2,933 using the inflated 1% chance of suit per board and the skewed average D&O payment.
If one uses the actual 0.068% likelihood, the result is $793.85.
The fault of this logic is it does not touch on the horrific randomness of a lawsuit. Instead, the model averages the probability of an event happening throughout time. Anyone who has experienced even a minor sickness without health insurance knows that the magnitude of such an event limits the applicability of the decision-tree model. By continuing the analogy, the solution is foreshadowed for the philanthropist.
Is There A Way to Protect Oneself?
There are two ways to cover oneself as a board member. The first is to have directors and officer’s liability insurance and the second is to check to see if your personal umbrella policy has appropriate clauses covering your exposure. Often called D&O liability insurance for a not-for-profit, some technically refer to it as not-for-profit organization liability policy. Unlike its for-profit counterpart, which only covers directors and officers, this covers the board, directors and officers, committees, corporation, staff, and volunteers. (For a list of companies providing appropriate insurance, see Appendix B). The costs associated with my coverage are below in Table 1: Insurance Costs Associated With the Four Boards
Table 1: Insurance Costs Associated with the Four Boards
Sawtooth: $0 - No coverage (bids ranged from $2,000 - $5,000 for the 20 –
30 man board)
NCMSA: $1,500 to cover 20-person board. Brokered by Cameron M. Harris & Company of Charlotte for $1,000,000 through Reliance Insurance Company and Colonial Insurance Company.
NCMS: $1,500 same as above
Unlike individual umbrella policies, the D&O insurance is not a cost the individual incurs, rather it is provided by the not-for-profit.
There is a 0.068% that a North Carolina not-for-profit will be sued. North Carolina statute does not provide not-for-profits with charitable immunity, but board members and trustees are given limited protection, as long as they act within the scope of their duties, exercise reasonable care, and are not involved in business for individual or illegal profit. Based on the decision tree model, one has a $2,933.79 exposure annually.
Appendix B: Partial list of companies providing policies for not-for-profit organization liability insurance.
CAN Financial Insurance
Emergency Service Insurance Program (ESIP)
Great American Insurance Companies
Monitor Liability Managers, Inc.
Royal and Sunalliance
Appendix C: Other Valuable Resources:
ABA Model Nonprofit Corporation Law, Revised Model Nonprofit Corporation Act, Prentice Hall Law & Business (1988) (devoted exclusively to nonprofits).
American Association of Fund-Raising Counsel
The Chronicle of Philanthropy
National Center for Charitable Statistics
National Charities Information Bureau
National Society of Fund Raising Executives
The Nonprofit Times
Philanthropy Journal online
Watson Wyatt Consultants