This article originally published on McKnight’s website on April 16, 2015.
By Rafael Haciski, Esq., and Bette McNee, RN, NHA
If you serve on a board of directors for a nonprofit health care organization and have ever asked yourself why you need Directors & Officers Insurance given the fact the organization has no shareholders, look no further than a recent federal appeals court ruling for Lemington Home for the Aged, which has sent ripples through the nonprofit sector.
A court ruled to hold directors of the nonprofit nursing home liable for failure to meet fiduciary duties. Although the ruling seems to be most focused on the board’s failure to exercise fiscal responsibility for the organization, the board’s failure to monitor the quality of care and services being delivered by the nursing home is at least a causal factor in the bankruptcy and closure of the home.
Lessons Learned
The Lemington Home for the Aged case demonstrates that nonprofit board members cannot disregard their responsibilities and are misled in thinking federal and state statutes provide individuals who serve as directors on nonprofit boards with adequate protection. A review of the case reveals several key lessons for board members to consider:
- Although nonprofit organizations do not have shareholders, the organizations’ directors and officers can still face claims;
- Even though an organization is a nonprofit entity, its directors and officers are still expected to perform their duties in compliance with standards of care and can be held accountable for not performing up to those standards;
- The most important job for the board is to make sure that the organization’s day-to-day management personnel are qualified to perform their duties and are meeting those expectations; and
- Board members of nonprofits may be held accountable for their actions after the organization has become bankrupt.
Prudent Steps to Avoid Liability
This court decision need not leave directors awake at night with a fear of looming lawsuits. Generally, actions of board members who are reasonable and prudent are protected from liability. This is not to say you should abandon all concern and not take steps to protect yourself. Directors and officers should ask themselves: what are the reasonable and prudent actions for a board member to help avoid liability?
Nonprofit board members, even though they are not stakeholders, are trustees and have a great responsibility and duty to ensure good stewardship of the nonprofit organization’s resources. Regardless of what role the members actually play in the budgeting process or in the ongoing management of the budget, the responsibility and ultimate authority lies with the board members. Furthermore, this responsibility cannot be delegated to a staff member, for example, the chief financial officer. In fulfilling their duty to oversee fiscal operations, the trustees or board members should be involved in the review and approval of the operation budget. The members should also receive financial reports with frequency adequate to ensure the organization’s good stewardship – quarterly or monthly. If the organization is not required to submit to an annual audit by a credentialed third party due to licensing provisions or conditions of participation from financing entities, the board may determine an annual audit to be a reasonable measure in performing their duty of fiscal management.
In addition to managing the organization’s resources, a board has the responsibility to oversee the quality of care and services provided by the nonprofit organization. While some board members embrace philanthropy and fiscal oversight charges, not all will have an interest in delving into the care or service aspect of the nonprofit organization’s operations. Larger boards may determine it is best to approach this requirement with a delegated subcommittee that is responsible to ensure the quality of care and services provided by the organization. This is not to say that the board should become involved in day-to-day operations. Rather, a board subcommittee focusing on quality of services or care should monitor indicators of performance such as annual licensing survey results, results of client satisfaction surveys and staff satisfaction surveys and publically reported ratings like Five Star ratings.
Board members should receive notification and updates for risk management activity, especially any serious incidents, claims, legal actions or other significant liability exposures. Serious exposures could threaten the organization’s financial position and the organization’s reputation for quality of care and services and therefore reflect adversely on the board’s fulfillment of its duties.
Federal and state immunity statutes, while good intentioned, should not be relied upon to protect nonprofit board members. Directors & Officers Insurance is used to transfer the financial burden from the organization to an insurance carrier to cover defense costs and any potential settlement-related indemnification of their directors and officers. This insurance policy is also used to provide direct protection for the directors and officers themselves in the event that the organization cannot or will not indemnify. A type of coverage under the policy reinforces the organization’s promise to indemnify. In the unfortunate event of bankruptcy of the organization, there simply may not be any money to indemnify the directors or officers. This is a very important coverage for nonprofit organizations, and no two policies are alike. These policies should be reviewed thoroughly by your insurance broker to ensure that the proper and broadest coverage is in place.
In conclusion, there are many lessons to learn from the Lemington Home for the Aged case. The most important takeaway, however, is directors and officers must be clear on their rules and responsibilities and cognizant of the potential areas for risk.
