Nonprofit board members can become subject to personal liability in a number of ways. A director may be subject to liability for a breach of the duty of care, the duty of loyalty or the duty of obedience. In addition, board members may become liable to third parties resulting from the director’s involvement in contributing to some harm sustained by a third party. Finally, a director may also be exposed to liability under various federal and state statutes applicable to the corporation on whose board they serve. Fortunately, there are protections against potential liability.
Under I.C. § 34-30-4-1, a qualified director is immune from civil liability arising from the negligent performance of the director’s duties. Director means an individual who serves without compensation for personal services as a director for purposes of setting policy, controlling or otherwise overseeing the activities or functional responsibilities of a nonprofit corporation operating for charitable, educational, religious or scientific purposes. Compensation does not include payments to reimburse the expenses of a qualified director and for per diem.
Under the Indiana Nonprofit Corporation Act, a director is not liable for an action taken as a director or for failing to take an action unless the director has breached or failed to perform the duties of the director’s office in compliance with the duty of care and the breach or failure to perform constitutes willful misconduct or recklessness. Under this provision, a director would not be liable for his or her mere negligence.
The Indiana Nonprofit Corporation Act also provides that, unless otherwise limited by the corporation’s Articles of Incorporation, a nonprofit corporation shall indemnify a director who is wholly successful in the defense of a proceeding to which the director was a party, because the director is or was a director of the Corporation against reasonable expenses actually incurred by the director in connection with the proceeding. Expenses for purposes of this indemnification obligation includes attorney’s fees. In general, a director qualifies for indemnification, if the director’s conduct was in good faith, and the director reasonably believed his or her actions were in the best interest of the corporation. The indemnification provided for in the Nonprofit Corporation Act does not exclude other rights to indemnification under the corporation’s Articles of Incorporation, Bylaws, resolution or other policy of the board of directors. Many nonprofit corporations may not have sufficient assets to fund their indemnification obligations to their directors. Therefore, it is important that a nonprofit corporation obtain insurance to cover the liability for wrongful acts committed by directors and officers.