by Michael V. Coyle JD, CPHR*
Board members and prospective board members of incorporated non-profit and civic organizations often worry about the potential for personal legal liability if the organization should get into financial trouble or if they or the organization should be sued for a negligent act or omission. This concern is becoming so prevalent that, in this time of heightened worry about legal liability, organizations sometimes have trouble recruiting good people to their boards. Yet, much of that anxiety is over-blown in that the law already provides much more protection for volunteers than some might have us believe.
Often the source of these anxieties can be traced to some popular misconceptions that are repeated all too often by well-meaning but misinformed members of the public or by insurance agents who want to sell board liability insurance called “Directors and Officers (D&O) insurance. Some government funding agencies have taken it upon themselves to advise groups to buy expensive board liability insurance in the misguided belief that the group’s insurance will limit the Government’s exposure to liability claims. It is well documented that the Canadian insurance industry targeted the non-profit sector in an effort to sell them D&O insurance during times when the poor performance of the stock market (called a “hard market” in insurance lingo) was hurting their profits.
Some straight talk and some clear information are obviously needed.
Director’s Liability for the Organization’s Debts
Let’s deal first with debt, because it is in many ways the easiest. As a rule, if the organization is incorporated (under the Societies Act or otherwise), there is little or no real chance that the individual board members would be required to pay the organization’s debts personally, unless, of course, they signed a personal guarantee or in some other way assumed personal responsibility for the debt. That is because the debts are the debts of the corporation (a registered, paid up society is a “corporation”), and not a personal debt of the individuals serving as its directors.
The main exception to that rule is for amounts owing to the government as source deductions made from employees wages (Income Tax, EI, CPP, Workers Comp) and not remitted to the Government. In such a case board members may be held personally liable for those amounts where they cannot demonstrate that they acted with due diligence in causing them to be remitted. This liability arises directly from the relevant statutes. Fraud, theft and criminal acts are other exceptions, although they are very rarely seen.
Then there is the question of liability for wrongful acts or omissions (torts) committed by the organization or by the board or by an employee.
Director’s Personal Liability for Wrongful Acts (“Torts”)
The same general rule applies to torts: individual board members of incorporated non-profit bodies are not personally liable for damages caused by the organization or its staff. At one time it might have been argued that, if a volunteer board member personally made an error or omission that caused harm to a third party, that board member may have been personally liable as well as the organization. That source of personal liability (if it ever existed) was firmly plugged in Nova Scotia on May 30, 2002 when the Volunteer Protection Act was proclaimed.
The Volunteer Protection Act says that volunteers of any incorporated non-profit organization (which includes a society, a municipality, a school board, a regional library board or a hospital), directors and officers specifically included, are not liable “for damage caused by an act or omission of the volunteer on behalf of the organization”. “Damage” under this Act “includes both physical and non-physical losses and both economic and non-economic losses”.
The Volunteer Protection Act requires only that the volunteer must have been acting “within the scope of his/her authority” within the organization at the time of the act or omission (i.e. as a Board member) and that the volunteer was properly licensed or certified to carry out that activity, if the law required any such licenses or certification.
There are some exceptions to the statutory exemption from liability, of course, but they are really quite minimal. There is no exemption from liability if “the damage was caused by wilful, reckless or criminal misconduct or gross negligence by the volunteer” or if “the damage was caused by the volunteer while operating a motor vehicle, vessel, aircraft or other vehicle for which the owner is required by law to maintain insurance” or if “the act or omission which caused the damage constitutes an offence” or if “the volunteer was unlawfully using or impaired by alcohol or drugs at the time of the act or omission which caused the damage”.
It must be noted, of course, that even if the organization had board liability insurance it would likely be invalid in the circumstances amounting to the exceptions under the Volunteer Protection Act for conduct amount to “gross negligence” or unlawful activity. Indeed, board liability insurance wouldn’t be of much help in a case of failure to remit source deductions either, because it involves a breach of a statute and insurance is generally not available where an insured has broken the law.
(Please note that the legal protections outlined above, under the Volunteer Protection Act and otherwise at law, only apply to organizations that are incorporated as non-profit corporations or societies. That is, these protections, and the general legal protections that come with incorporation, do not apply to unincorporated clubs or groups, no matter how valid and worthy their activities may be.)
Accordingly, I would not hesitate to reassure voluntary board members that they have little to fear when joining an incorporated non-profit or (unpaid) civic Board about their own personal liability and, that unless there are unusual circumstances present, special board personal liability insurance is a huge waste of the organization’s precious resources.
In fact, if your organization had D&O insurance and if Board members were ever sued, the insurance company would use the Volunteer Protection Act to shield itself from having to pay out on claims. The only real advantage to D&O insurance, then, is that the insurance company would hire a lawyer (of its choosing) to represent “the Board” in a lawsuit. Actually, of course, the lawyer is representing the insurance company’s interests in the matter. Boards can decide for themselves whether this alone justifies the heavy premiums that insurance companies charge for D&O insurance, as the insurance companies say it does.
General Liability Insurance and Due Diligence
Directors and Officers (D&O) insurance should not be confused with General Liability Insurance for the organization as a whole. Prudent organizations will always continue to maintain appropriate policies of general liability insurance covering the organization, as well as appropriate insurance coverage for any special risks (for example, if alcohol is served at functions). And, of course, directors must make sure that their annual filings have been maintained with the Registry of Joint Stock Companies and that their annual fees are promptly paid. Above all else, boards must act with due diligence in order to maintain the protection afforded by the corporate status of the organization. This involves good risk management and board governance habits including maintaining good record keeping practices for board meetings, proper financial and activity reports, ensuring that employee payroll deductions are being remitted as required, occupational health and safety awareness for the staff and volunteers, and having a realistic assessment of the risks associated with the organization’s programs and activities and insuring appropriately for those risks.
Independent Legal Advice
Voluntary organizations should not hesitate to obtain qualified outside professional advice on these liability issues. Lawyers volunteering on boards may not always in the best position to give this kind of advice because lawyers will usually refrain from giving professional advice on personal liability issues when they are also personally involved as members of a board, because that may be seen as a conflict of interest.
In the same way that you would not normally expect the accountant on your board to do the annual audit for free, you should not necessarily expect a lawyer who has volunteered to be on your board to provide free legal advice and services on all aspects of the organization’s affairs. Rather, in the same way that an accountant on your board would be sensitive to any accounting issues that the average person might not easily see, a lawyer would normally be quick to flag any legal issues that others might miss. The lawyer should then feel comfortable to recommend that the organization take independent professional advice, and if he or she does not do so, another board member should not be shy about making that suggestion. This is part of due diligence.
*Mike Coyle has been advising non-profit and civic organizations and conducting workshops throughout Nova Scotia on board governance, risk-management and employment issues for more than 37 years. The information and opinions provided here are of a general nature and they are not a substitute for qualified professional advice on the particular facts and circumstances of your organization.
An earlier version of this article appeared in e-Newsletter of the Dalhousie University Department of Continuing Education (Henson College), Spring/Summer 2004.