'Shield Laws' and the Volunteer Protection Act.
Some states, however, have adopted "shield laws" to protect directors of not-for-profit organizations to varying degrees. In most, if not all, cases, to take advantage of these shield laws, the director must be an uncompensated volunteer. Shield laws typically protect covered directors from liability, except in cases of gross negligence or willful misconduct. These state statutes often require organizations to adopt provisions in their organizational documents or bylaws that limit director liability and/or provide indemnification.

Also, in 1997, in an effort to decrease the liability of directors, address director attrition, and lower the costs of directors and officers ("D&O") insurance, the United States Congress passed, and the President signed into law, the Volunteer Protection Act of 1997.

However, shield laws and the Volunteer Protection Act of 1997 are replete with exceptions, and most directors of not-for-profits should take care to confirm that the statutory indemnifications allowed by state law are adopted in organizational documents or bylaws and are reconfirmed from time to time by vote of the board in accordance with state law.

In all cases, directors are obliged to act in general good faith and in the best interests of the organization.

Some states treat the directors of such organizations similarly to fiduciaries of a trust. If a director is found to have mismanaged the funds of an organization, for example, he or she could be sued for the breach of fiduciary duty. However, this is the minority approach, and most courts have held that the "modern trend" is to treat such organizations as being more akin to corporations than trusts.

Directors and Officers Liability Insurance.
D&O insurance coverage for non-profit directors is available in the insurance market place. The cost will depend on analysis of the risks faced by the organization, events that are excepted from the coverage, the amount of coverage, the dollar amount of any deductible and, often, the policies and procedures in place to demonstrate oversight of operations. For example, an international aid organization with an active "risk committee" and polices to address travel risks will likely pay lower premiums. Premiums are a legitimate budget cost to a non-profit organization. It should be noted that D&O will not cover gross negligence or fraudulent acts by directors and officers.
The cost of insurance also often depends on organizational policies. For example, an organization doing international aid work should have a risk committee or equivalent to periodically analyze the risk of the organization, or have a third party vendor address risk to employees traveling abroad. Having one of these risk assessments on a regular basis can often reduce the cost of an organization's coverage. The risk to a not-for-profit and the types of coverage needed depend on the organization's mission. For example, a not-for-profit that provides scholarships for school children has significantly less exposure than an international aid organization providing food or medicines with employees in the Darfur region of Sudan.

D&O insurance must be coupled with proper management and director oversight. Larger organizations with an international presence should have D&O insurance, but should also provide for proper management oversight through the policies and procedures adopted by their board of directors. Typically, such organizations will have a risk committee to work with management to evaluate risk to the organization. Directors can no longer afford to be merely passive or honorary, but must be involved and informed to mitigate the risk to themselves and the organization.

Directors of nonprofit organizations should familiarize themselves with the laws of their particular jurisdiction and the federal Volunteer Protection Act of 1997.

Increased Scrutiny.
Today, not-for-profit organizations are under increased scrutiny from organizations such as the Better Business Bureau, the Charitable Navigator, and from donors who have become sensitized to the efficiency of these organizations and their delivery of "good works." In addition, increased oversight by the Internal Revenue Service and well-publicized Congressional oversight efforts have changed the landscape of nonprofit governance.

Directors must act in good faith and in the best interests of the organization, avoid conflicts of interest, and be diligent in carrying out their duties. Recent high-profile litigation should be a wake up call for boards to improve their oversight of management.

Samaritan's Purse.
Flavia Wagner was an employee of Samaritan's Purse, a nonprofit based in North Carolina and run by Franklin Graham, son of evangelist Billy Graham. In 2010, she spent three months in captivity in the Darfur region of Sudan. In May 2011 she brought a civil action against Samaritan's Purse alleging that the organization failed to train its security personnel adequately. Wagner, who had previously been abducted in the fall of 2009, alleged in the New York Southern District Court that Samaritan's Purse pursued a plan designed to protect its own financial and political interests by minimizing the amount of money it would pay for ransom. At present there is no indication that Graham will be named as an additional defendant but, given the severity of the claims against the organization, it is possible that he could be added in the future.

Kidnapping and Ransom Insurance.
International aid organizations, particularly those with personnel on the ground in dangerous regions, must consider purchasing Kidnapping and Ransom ("K&R") insurance in addition to D&O insurance.

The dilemma with K&R insurance is whether the organization should keep the existence of the insurance confidential and undisclosed to employees. It is not unusual for organizations to do so. Sophisticated abductors are cognizant of insurance of this nature and will typically question the abductees about their knowledge of its existence. It is thought that negotiations are better served if the employee is unaware of the coverage. Boards in executive session can authorize the purchase of K&R insurance within limits affordable to the organization.

International aid organizations should also strongly consider retaining a monitoring organization to monitor risks by country on a day-to-day basis, and also to negotiate for the organization in the event of a kidnapping situation. These organizations are known to have contacts in the most dangerous areas of the world.

Nonprofit organizations should adopt security policies for overseas travel to reduce exposure. Measures to minimize risk include equipping employees with satellite phones, requiring call-in times, and requiring specific and daily approval for travel in the most dangerous areas.

These policies also serve to reduce the risk of directors from allegations of failure to oversee management and the policies and procedures of the organization.

`Three Cups of Tea.'
In May 2011 a lawsuit was filed in the U.S. District Court in Montana seeking the return of millions of dollars in donations from Greg Mortensen and his charity, The Central Asia Institute.6 The suit alleged that the charity had fraudulently solicited donations. The lawsuit followed an episode of the CBS television show "60 Minutes" that cast doubts on the charity's activities and on the veracity of "Three Cups of Tea," a popular book written by Mr. Mortensen. It is alleged that Mr. Mortensen fabricated much of what is contained in his publication, thereby fraudulently eliciting donations.

Events such as the Mortensen and Wagner cases highlight the need for boards of directors to conduct proper oversight in their role and to ensure that policies and procedures are in place that limit exposure both to the organization, and to the directors personally.

A sampling of cases from various jurisdictions is informative.

Director of Nonprofit Operating as a Trust
In Blue Cross and Blue Shield Mut. of Ohio v. Blue Cross and Blue Shield Ass'n, the Sixth Circuit held that, under Ohio law, the director of a nonprofit organization operating as a trust is a fiduciary of that trust. 110 F.3d 318, 324 (6th Cir. 1997).

Piercing the Corporate Veil
Applying Iowa law, the Eighth Circuit has held that a nonprofit corporation's corporate veil may be pierced if the sole director of the corporation is found to have mismanaged the corporation's funds. HOK Sport, Inc. v. FC Des Moines, L.C., 495 F.3d 927, 941 (8th Cir. 2007).

State Attorney General Not the Only Person Who Can Sue
In California, the state's supreme court held that the minority trustees of a nonprofit corporation can bring suit against the majority trustees for breaching that trust by improperly managing funds. Holt v. Coll. of Osteopathic Physicians and Surgeons, 40 Cal. Rptr. 244, 244. (Calif. 1964). The defendants had alleged that only the attorney general of the state could bring such a suit, which the court rejected. Id.

Liability of Former Directors
The Louisiana Supreme Court has held that past directors of nonprofit organizations may be held liable as fiduciaries of those organizations, for a limited prescriptive period. Mary v. Lupin Found., 609 So.2d 184, 187 (La. 1992). In that case, it was alleged that the defendants, the former directors of a nonprofit hospital, breached their fiduciary duties by negligently selling the hospital for less than its true price. Id. at 186. The court held that the directors had a fiduciary duty to act in good faith on behalf of the organization. Id.

Simple Negligence vs. Gross Negligence
In Osborn v. Univ. Med. Assocs. of Med. Univ. of S.C., the court held that South Carolina law stipulates that directors of the nonprofit are immune from claims of ordinary negligence, but not from claims of willful or wanton conduct or from gross negligence. 278 F. Supp. 2d 720, 729 (D.S.C. 2003).

In Bunkley v. Hendrix, the plaintiff sued the defendant, a member of the board of governors of an art association, when she was injured by an exhibit stand while at an event hosted by the defendant's nonprofit organization. 296 S.E.2d 223, 223 (Ga. Ct. App. 1982). In that case, the court held that Georgia state law stipulated that directors of such organizations are not liable for acts of simple negligence. Id. at 402.

The Minnesota Supreme Court held that the directors of a county humane society were not individually liable for negligence based on injuries that a worker incurred from the use of a chemical. Renn v. Fischley, 557 N.W.2d 328, 334-35 (Minn. 1997). The court derived its decision from Minnesota state law, which provides for immunity for the directors of a nonprofit organization for acts of simple negligence, excepting willful or wanton conduct or recklessness. Id. at 332.

In Eastwood v. Horse Harbor Found. Inc., the plaintiff covenanted with the defendant nonprofit organization for the latter to operate and care for the plaintiff's farm for a period of years. 241 P.3d 1256, 1259 (Wash. 2010). The court found that the level of waste caused by the defendant during this period constituted gross negligence. Id. at 1267. The court held that the directors of the organization could be held individually liable for the gross negligence because, as in many other states, Washington law does not shield directors of nonprofit organizations from liability in cases of gross negligence. Id. at 1267-68.

In Hous. Opportunities Project for Excellence Inc. v. Key Colony No. 4 Condo. Assoc. Inc., the court held that a Florida law that protects directors of nonprofit organizations from individual liability did not protect such directors from claims based on the Fair Housing Act ("FHA"). 510 F. Supp. 2d 1003, 1013-14 (S.D. Fla. 2007). The state law in question does not shield directors from liability in cases of "recklessness or an act or omission which was committed in bad faith or with malicious purpose or in a manner exhibiting wanton and willful disregard of human rights, safety, or property," which the court held included a violation of the FHA. Id. at 1014.

In conclusion, directors of not-for-profit entities must be diligent to afford themselves protection against liability by, where appropriate, having the organization obtain D&O insurance and other appropriate coverage (such as K&R insurance), adopting any protections afforded by state law, and exercising management oversight while establishing policies and procedures appropriate to the risk faced by the organization.

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