Nonprofit directors often ask if they can be held personally liable for their board actions. The somewhat unsettling answer is probably not, but maybe. In other words, state statutory immunity and indemnification protections generally apply to a volunteer director’s misconduct, but subject to certain exceptions for misconduct. More specifically, a director may have heard that he or she may be personally liable for “gross negligence” or “intentional or reckless misconduct.”[1] What do these terms mean? The following guidance addresses how nonprofit laws define the type of misconduct that triggers personal liability for volunteer directors and discuss additional safeguards such as indemnification and directors’ and officers’ insurance.
Willful or Wanton Conduct – Explained.
Most states’ statutes provide a limited level of immunity for volunteer directors serving on nonprofit boards. By way of background, directors and officers owe fiduciary duties of care, loyalty, and obedience to the corporate mission. Under these statutory provisions, a director will not be personally liable for damages resulting from their actions carried out in furtherance of such fiduciary duties, so long as these actions do not rise to a certain level of misconduct. This level is often described as “gross negligence” or “reckless misconduct.” The Illinois General Not-for-Profit Corporation Act (the “Act”) uses the classic legal phrase “willful or wanton conduct.” The federal Volunteer Protection Act (“VPA”), which protects volunteer directors at the federal level, uses similar language. (Notably, a lower legal standard of “ordinary negligence” typically applies to paid directors and officers, so payments of stipends or other modest compensation may likely be inadvisable.)
So, what exactly does “willful or wanton conduct” mean? Willful or wanton conduct means a course of action which either “shows an actual or deliberate intention to cause harm” or which, “if not intentional, shows an utter indifference to or conscious disregard for the safety of others or their party.” The “willful and wanton conduct” standard and definition is used in many areas of law. For example, an Illinois court determined that Chicago’s police department’s actions reached this standard of misconduct when officers dragged an injured man and threw him into a paddy wagon. See Burke v. 12 Rothschild’s Liquor Mart, Inc., 148 Ill.2d 429 (1992). In the opinion, the Court explained the difference between “willful and wanton conduct” and traditional negligence:
[Willful and wanton conduct] differs from that form of negligence which consists in mere inadvertence, incompetence, unskillfulness, or a failure to take precautions to enable the actor adequately to cope with a possible or probable future emergency, in that [willful and wanton conduct] requires a conscious choice of a course of action, either with knowledge of the serious danger to others involved in it or with knowledge of facts which would disclose this danger to any reasonable man.
The standard of misconduct may also apply to unintentional acts too. In Ziarko v. Soo Line R.R. Co., 161 Ill.2d 267 (1994), the court concluded that willful and wanton conduct does not have to be intentional. It can also be found “when there has been a failure, after knowledge of impending danger, to exercise ordinary care to prevent the danger, or a failure to discover the danger through . . . carelessness.”
In another instructive decision, the Illinois Supreme Court evaluated whether a public school district could be liable under the willful and wanton conduct standard. Murray v. Chicago Youth Center, 224 Ill.2d 213 (2007). The case involved spinal cord injuries sustained by a student who attempted to do a flip off of a miniature trampoline during an extracurricular gymnastics class. The student contended that the school board acted willfully and wantonly by failing to supply a harness and safety belt, proper trampoline landing mats, a spotter to help students perform tumbling techniques, and did not otherwise warn students of the risk of spinal cord injury from the activity. The Court found that the student’s pleadings provided enough facts for a jury to reasonably find that the school district’s actions constituted willful and wanton conduct.
This case illustrates how an entire governing body, as opposed to a single volunteer director, can be accused of the willful and wanton standard of misconduct. Here, the organization failed to exercise care in evaluating and implementing necessary safety precautions for youth activities, a common concern for many nonprofit organizations. The case also highlights another important legal point. Whether or not an individual or organization’s actions constitute “willful and wanton conduct” is a question of fact for a jury to decide, which is typically quite risky for defendants – especially in contrast to injured and therefore inherently sympathetic plaintiffs.
Additional Safeguards
May an organization indemnify a director if a jury finds that the individual’s actions constitute willful and wanton conduct? Within the nonprofit context, indemnification is a protective measure by which a corporation agrees to hold directors, officers, and other agents harmless and provide reimbursement for liabilities, expenses, and other losses incurred in the event of a lawsuit or other proceeding. Indemnification should therefore be quite attractive to volunteer and paid nonprofit leaders alike, and provision therefor should be included in nonprofit bylaws.
Interestingly, the Illinois Act does not use the same phrase “willful and wanton conduct” in the context of indemnification for directors. Rather, the Act empowers an organization to indemnify a director if the individual “acted in good faith and in a manner [they] reasonably believed to be in, or not opposed to, the best interest of the corporation.”[2]
Despite the differing definitional standards in the statute, generally personal liability and indemnification will be equivalently applied in most situations. There may, however, be cases and situations when they are not. A nonprofit organization’s governing body should understand that while “willful and wanton conduct” is a matter for the jury to decide, the decision to indemnify is for the board to determine based on a different standard. It may be possible that a board finds that a director was acting in good faith and in the best interest of the corporation, despite a jury’s determination that the conduct was willful and wanton. Any indemnification decision that is based on such a fine line of reasoning though should be carefully supported by law and fact.
Finally, even when the statutory law does not afford immunity for the director and indemnification does not apply, a volunteer director’s misconduct may still be covered under the nonprofit’s directors’ and officers’ (D&O) insurance. While an analysis of D&O coverage is beyond the scope of this article, many nonprofit boards should consider securing insurance policies that provide broader protections than state laws and, in some cases, draft language to cover additional situations where indemnification is not available. Often times, the D&O insurance provides the financial backing for a nonprofit corporation’s promise to indemnify its leaders and other representatives, including provision for legal defense coverage if needed.
[1] Personal liability may exist as well under other specific statutory provisions, such as a director’s knowing misuse of employment payroll tax monies or criminal activity.
[2] For criminal actions, the director also must have had “no reasonable cause to believe his or her conduct was unlawful.”
