Ensuring volunteer protection: steps for limiting liability for volunteer leaders.

One question inevitably asked by the elected leaders of nonprofit associations is whether their volunteerism exposes them to personal liability. While risk of exposure does exist, as a volunteer, you should have relatively little personal exposure if the association takes a few simple steps toward protection.

INCORPORATION

The first step is to incorporate. By organizing an association as a corporation under a state's nonprofit corporate laws, members generally are protected from personal liability. Incorporation creates a legal entity - the corporation - which can sue and be sued. As such, the members are not personally and individually responsible for the corporation's acts.

STATE LIMITED-LIABILITY LAWS

Incorporation provides other benefits. Many state nonprofit corporation laws provide additional limitations on liability not only for members but also for the officers and directors of nonprofit organizations. Those protections tend to vary from state to state. Some state laws provide little, if any, limitation on liability; others provide broad limitation against personal liability for officers and directors - except, for example, where there is willful and wanton conduct. That is a high standard of proof for a plaintiff to overcome to successfully sue an officer or director for personal liability. Because an association can choose the state in which it would like to incorporate, it's possible to get the protection of the best state limited-liability provision available. But many of the best state limited-liability provisions only apply when the officer or director is an unpaid volunteer or is not paid more than a minimum amount.

FEDERAL VOLUNTEER PROTECTION ACT

Volunteers also enjoy the protection of the federal Volunteer Protection Act of 1997. The law provides limitations against personal liability for officers, directors, and other volunteers who provide services to nonprofit associations. The federal law preempts any state law that provides lesser protection, but states may provide greater protection.

Generally, the federal law covers all volunteers except those paid or receiving items of value in excess of $500. Covered volunteers are protected if acting within the scope of responsibility and, where required or appropriate, are licensed or certified. Furthermore, covered volunteers are protected so long as any harm they may have caused was not the result of willful or criminal misconduct; gross negligence; reckless misconduct; conscious, flagrant indifference; or operation of a vehicle for which they did not have the state-required license or insurance.

INDEMNIFICATION 

Besides incorporation and state and federal limitations on liability laws, associations can further protect volunteers through indemnification. State laws generally provide that an association may indemnify any person - including officers, directors, and other volunteers - for certain actions taken on behalf of the association. Indemnification does not prevent lawsuits, but it does allow the association to reimburse or pay for the expenses associated with litigation. Indemnification also can allow the association to pay any damages that might be assessed.

The scope of permitted indemnification varies from state to state, so it's important to check the law of the state in which the association is incorporated. For example, some states only allow indemnification for actions taken in good faith and in the best interest of the association.

DIRECTORS AND OFFICERS INSURANCE

Associations must consider purchasing directors and officers liability insurance. Even with incorporation and limited liability protection, volunteer leaders may still have some risk of exposure. More important is the risk of lawsuits. Even if those lawsuits are without merit, the costs to defend them can be covered by insurance. Such insurance also can provide the financial support that makes an association's indemnification meaningful. Without insurance, the association would have to use its assets to pay the cost of indemnification. If the association had insufficient funds, the indemnification, as a practical matter, would be worthless.

The best insurance policies for associations not only protect officers and directors but also provide a broader measure of protection for the association itself against potential liability. Obviously, the benefits of insurance must be weighed against its cost, the scope of coverage, and the risk of exposure.

RISK MANAGEMENT

As a volunteer leader, you do have a great deal of protection against personal liability,: incorporation, limited-liability laws, indemnification, and insurance. Still, associations and their leaders can minimize exposure with a rigorous risk management program. Among other things, a good program includes:

* periodic review and modification as necessary of the association's procedures, programs, and activities for compliance with articles of incorporation, bylaws, and policies;

* careful review of all contractual obligations;

* strict compliance with state and federal tax and corporate filing requirements;

* adoption of appropriate policies on office procedures, personnel practices, authorization to sign contracts, use of letterhead, authorization to sign checks, and other such administrative concerns;

* maintenance of accurate financial and other records;

* adoption and implementation of a records retention policy;

* monitoring of relationships with other associations or coalitions; and

* use of waivers or releases, where appropriate, and reduction of the indemnification of others.

Jed R. Mandel is a partner at Neal, Gerber and Eisenberg, Chicago. E-mail: [e-mail].