Litigation Protection: Be Safe, Not Sorry

The Presbytery of Chicago recently entered into a $10 million agreement to sell its beloved Michigan summer camps, which it has owned for nearly a century. Proceeds from the sale are expected to help pay off an $11 million loan that was used in 2008 to settle a 2002 lawsuit brought by four men who said they were molested as minors by one of the church’s ministers. Many church members consider the sale an enormous loss.

Lawsuits involving nonprofits aren’t unusual in today’s litigious society, and organizations sometimes take a huge financial and public relations hit as a result. But your nonprofit can employ safeguards to protect itself from litigation and potential financial devastation. Here’s a quick review of those safeguards.

Policies and procedures

Lawsuits can come from anyone, including those receiving services (such as the alleged victims in the example above), donors, grantors, volunteers and board members. But current and terminated employees remain the most common source of lawsuits against nonprofits, according to insurance specialists.

To guard your organization against legal actions, your organization should develop, with the assistance of an attorney, comprehensive policies in the areas of:

  • Sexual harassment
  • Age, race and gender discrimination
  • Wrongful termination

Also consider designing policies and procedures to guard against wrongdoing and potential litigation relating to noncompliance with the Americans with Disabilities Act, mismanagement of restricted funds and failure to provide services.

D&O insurance coverage

Directors and officers (D&O) liability insurance protects an organization’s directors and officers from liability in case a lawsuit is brought against them relating to the nonprofit’s operation. Qualified candidates usually are more comfortable accepting a board appointment if they know they’re guarded from potential lawsuits.

Although D&O insurance can be expensive, it generally takes over where your general liability policy coverage leaves off. For example, although the Volunteer Protection Act of 1997 provides some protection for board members while performing their fiduciary duties, D&O insurance can be used to cover attorneys’ fees when a lawsuit is first filed. So, it usually will cover these fees even if the lawsuit is eventually dismissed.

Employment practices liability (EPL) insurance also is available to provide further coverage in the event of an employee-generated suit and often is available as part of a D&O policy at a small additional cost. Pricing of D&O policies typically is based on the size of the organization’s workforce, its claims history and the coverage requested.

An ongoing process

To lessen the chances of your nonprofit being sued, be proactive in developing policies and procedures in any particularly litigious areas of your operation. Be sure to involve your attorney throughout the development process and periodically afterwards to ensure they remain up to date.

Your CPA also can help provide templates for common policies and can advise on financial and general business content. Once you’ve finalized the policies and have board approval, training your nonprofit’s employees to follow the procedures as designed is key to enforcing their compliance.