‘Tis the season for thinking of charity, and to their credit, high-net-worth individuals should be applauded for contributing not just their money but a significant portion of their time. An independent study recently commissioned by ACE showed that nearly 60 percent of individuals in households with $5 million in investable assets or more, excluding the primary residence, serve or have served as unpaid board members or trustees of charitable organizations.
Unfortunately, no good deed goes unpunished.
Whether or not you receive compensation as a board member or trustee, you can be held personally liable for the actions or inactions of the organization.
How bad can it be for an organization that is trying to do good? Bad enough. Perhaps the organization funded the construction of a playground for disadvantaged kids. Then a child fell off a swing and suffered brain damage resulting in the need for multiple surgeries and lifelong care. The cost could run into the tens of millions of dollars.
While the organization may carry insurance to protect itself, the limited budget common with charities typically prevents the purchase of a gold-plated insurance program. Coverage limits may be inadequate. At that point, plaintiff lawyers look for parties with ‘deep pockets,’ including the board members.
Moreover, in a difficult economic period when charitable organizations may be forced to trim paid staff, the risk of wrongful termination and other wrongful-employment-act lawsuits rises. This type of legal action actually presents the greatest risk for board members, but many remain unprotected. Among the high-net-worth individuals who have been voluntary board members in ACE’s survey, 44% did not carry directors and officers insurance to protect themselves.
Why do so many well-meaning volunteers leave themselves exposed to such risk? Nearly half think the organization will fully protect them. But as previously stated, many charitable organizations can afford only a bare-bones insurance program that won’t cover the more costly cases. Another 20% simply haven’t heard about this type of coverage, and 11% don’t realize they can be held liable in such circumstances. Trust us. They can.
The good news: insurance coverage for lawsuits brought against volunteer board members or trustees of charitable organizations is very affordable. For suits related to employment practices, the most common threat, insurance companies that specialize in serving families and individuals with substantial assets may offer $1 million in directors and officers coverage for as little as $500. For suits related to bodily injury, the umbrella liability coverage offered by the same carriers will provide protection to the unpaid board member or trustee. This type of protection typically costs only a few hundred dollars per million dollars in coverage, and the cost-per-million declines as the amount of coverage increases.
Surprisingly, a significant portion of HNW individuals do not have umbrella coverage in place, even though it is critical for guarding against costly lawsuits arising out of auto accidents, slips and falls and a host of other risks, not just those from charitable board participation. When you consider how much time and money wealthy individuals contribute to charitable organizations, it is almost ironic that they are unaware of the small amount of money it would take to protect themselves.
Wealth managers are in a unique position to rectify this irony, because they often deepen their client relationships by understanding not just their clients’ financial assets and goals but their lifestyles and interests, as well. If any of their clients are volunteering as unpaid board members, there’s no better season to give them the gift of knowledge and explain how easy it is to address this unique liability risk.
“ Protection may be available via applicable state and/or federal immunity statutes.”