March 29, 2018

A Lesson about Liability

Editor's Note: This story is not based on a specific claim. It is an example of a situation that could happen to anyone.

Linda was an avid gardener who had carved out a plot of land in the rear corner of her large backyard to grow organic fruits and vegetables for her family. She had such a green thumb that even with four school-aged children and a husband, she often had excess produce, which she donated to a local homeless shelter.

One day in August, while dropping off a box of tomatoes and cucumbers, she struck up a conversation with a woman named Alicia, who was also donating food. Alicia was the executive director at FarmTeach, a local nonprofit organization that had been teaching children and youth about gardening, farming and nutrition for over a decade. The two hit it off and arranged to meet for coffee the next week.

Soon, at Alicia’s request, Linda had agreed to fill an empty spot on FarmTeach’s board of directors. It was her first time doing ongoing volunteer work since her children had been born, and she enthusiastically brought her MBA and love of plants to bear on an organization with a mission she believed in, also serving on the board’s Audit Committee.

Then in April, a news story appeared on a local TV station. A FarmTeach donor was questioning what had happened to the funds he had given the organization to build a small barn and greenhouse. Costs had increased so much during the construction of the barn that the greenhouse was never built, and the donor was unhappy. The investigative reporter put forth evidence that made it appear that Alicia had a personal friendship with the owner of the company that was awarded the construction contract, implying that there may have been some shady dealings.

Alicia gave an interview defending the construction company and the cost overruns without consulting the board first. The board chair was dismayed.

He called an emergency meeting, where the majority of the board voted to suspend some of Alicia’s duties while they looked into the allegations of wrongdoing. Linda, who had gotten to know Alicia and felt she knew her character, did not agree, but she was in the minority. The board released a statement to the media about their actions. Alicia resigned.

Ten weeks later, Alicia was cleared of any wrongdoing. Fourteen weeks after that, she filed a $1.6 million lawsuit against the board for defamation, wrongful termination and discrimination.

FarmTeach had a director’s & officer’s (D&O) liability insurance policy for $1 million in place to protect the board from personal liability. When Alicia won her case, the insurance policy paid out, but the eight board members were each liable for an equal share of the remaining $600,000, which came to $75,000 each.

Linda and her husband had the funds and were able to pay what was due. But she was disappointed and upset that her family had to pay the price for actions that she hadn’t even supported. Her enthusiasm for working with the other board members diminished, and she resigned from the organization that she had grown to love.

63% of nonprofit organizations reported a D&O claim in the last 10 years; 43% of high-net-worth individuals serve on boards. If you are one of those people, Kelly Klee can help to analyze your risk and ensure that you have the right amount of excess personal liability insurance so you can continue your charitable work without worry. Please contact us at 844-885-1600 or email to learn more.

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