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The "Immunity" Myth
Some states have provided "blanket" immunity to directors and officers of nonprofit organizations, while others have provided immunity to directors and officers only when their boards have procured certain prescribed minimum limits of Directors & Officers Liability coverage. There is an unfortunate myth circulating - perpetuated by well-meaning, but uninformed individuals - that these state immunity laws effectively shield members of boards of directors of nonprofit organizations from personal liability. The fact is that members of boards of directors can be held liable for decisions made in their capacities as board members in all 50 states, regardless of state immunity legislation.
Immunity legislation passed by many states fails to adequately protect board members against personal liability for the following reasons:
(1) Deprivation of Constitutional Remedy for Injury
Under the federal and state constitutions, citizens are entitled to remedy in a court of law for injuries sustained as the result of another citizen's actions, whether intentional or negligent. When reviewed by various state and federal courts, immunity legislation has often been determined unconstitutional as depriving injured citizens of their constitutional right to remedy.
(2) The Supremacy Clause in the Federal Constitution
The Supremacy Clause of the United States Constitution states that federal laws take supremacy over state laws. Therefore, to circumvent state immunity laws, a plaintiff seeking remedy against a member of a board of directors, the board itself, or its property manager would merely need to bring his or her lawsuit in federal court, as opposed to state court. States cannot immunize individuals or entities (like associations) against federal laws.
An example might be helpful:
Peter Pecker, president of Association "A," does not like Purple People. John Janitor is the maintenance person at Association "A"; he is also a Purple Person. Peter Pecker terminates the employment of John Janitor not because of John Janitor's incompetence, but, rather, because John Janitor is a Purple Person. Peter Pecker has consulted with his local attorney about personal liability. His local attorney advises him that State X, in which he lives, has passed a law stating that if an association purchases $2,000,000 limits of Directors & Officers Liability, no member of the board of directors can be held personally liable. Peter Pecker relies on that advice. Rather than bringing a lawsuit for wrongful termination as a result of discrimination under state law, John Janitor sues Peter Pecker, president of Association "A," the property manager of Association "A," and the board of directors of Association "A" under Title VII of the Civil Rights Act of 1964, a federal law. That law states that no employment decision may be made solely or primarily based on race, ethnicity, religious beliefs, or sex. By suing under federal law, John Janitor has completely circumvented State X's immunity legislation. As such, State X's immunity legislation becomes relatively useless.
(3) No Insulation for Gross Negligence or Wanton Behavior
State immunity legislation often provides no protection against personal liability for acts deemed to be "grossly negligent," "wanton," or "reckless." These terms are vague and subject to the interpretation of the courts. Coupled with the fact that courts typically endeavor to find remedy for injured plaintiffs, a precarious situation results for board members. If no deep pockets are readily available, i.e.- an insurance company, a court might determine an act of a board to be "grossly negligent," "wanton," or "reckless," even though most people would not consider it to be such. Once an act is deemed to be "reckless," or the like, a plaintiff is home free to seek remedy against the personal assets of affluent board members. A court that declares a board action to be "reckless" neuters state immunity laws.
(4) Despite Immunity, Defense Costs
State immunity laws, even if they withstand constitutional scrutiny, cannot protect a defendant against a lawsuit. A board of directors that is sued must still provide a defense, i.e.- incur defense costs. While a plaintiff might not be permitted to attach the personal assets of the board members, the board must still hire an attorney to defend itself. Proving one's righteousness is often a costly endeavor. In fact, defense costs constitute the majority of claims cost. Without broad coverage, and high limits, the defense costs would be borne by an association.
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