Learn why malpractice insurance may not cover healthcare professionals serving on nonprofit boards and how D&O insurance can address governance-related claims.
Healthcare professionals often give back by volunteering at charitable clinics, serving on nonprofit boards, advising professional associations, helping community foundations, or supporting organizations connected to healthcare, education, animal welfare, or faith-based outreach.
That service can be personally and professionally rewarding. It can also create responsibilities that are very different from those encountered while treating patients or operating a healthcare practice.
A pharmacist, dentist, veterinarian, physical therapist, audiologist, physician, or home healthcare professional might reasonably assume that an existing malpractice policy, or the nonprofit's charitable status, provides all the protection needed.
That may not be the case.
When a healthcare professional provides clinical services, professional liability insurance may be the central coverage consideration. When that same person participates in decisions involving the nonprofit's finances, employees, contracts, fundraising, or governance, directors and officers liability insurance may become much more relevant.
What Does Nonprofit D&O Insurance Cover?
Directors and officers liability insurance, commonly called D&O insurance, is designed to respond to certain claims alleging wrongful acts in the management or governance of an organization.
Depending on the policy, covered allegations might involve:
- Breach of fiduciary duty
- Mismanagement of organizational funds
- Conflicts of interest
- Failure to follow bylaws
- Improper governance procedures
- Misrepresentations to donors, members, or grant providers
- Decisions involving contracts or vendors
- Membership or disciplinary decisions
- Certain employment-related allegations when appropriate employment practices liability coverage is included
D&O coverage may protect the nonprofit organization, its directors and officers, and sometimes other individuals such as committee members or volunteers. The exact definition of an insured person varies by policy, so it should never be assumed that everyone working with the organization is automatically covered.
Serving on a Board Is Different From Donating Clinical Services
For healthcare professionals, the first question is what role the individual is performing when an alleged mistake occurs.
Consider a pharmacist who volunteers at a nonprofit community clinic.
If the pharmacist is accused of making a medication error while providing patient care, that allegation would ordinarily raise a professional liability question. The pharmacist would need to determine whether coverage is available through the clinic's insurance, an individual pharmacist professional liability policy, or another applicable program.
Now suppose that pharmacist also serves on the clinic's board and votes to approve a new vendor, redirect grant money, eliminate a program, or terminate an executive director.
A lawsuit challenging one of those decisions would involve the pharmacist's governance responsibilities, not the delivery of pharmacy services. A professional liability policy may not be designed to cover that exposure. This is where the nonprofit's D&O insurance becomes important.
The distinction can be summarized this way:
- Patient-care allegation: professional liability or malpractice insurance
- Board-management allegation: nonprofit D&O insurance
- Employment allegation: employment practices liability insurance
- Data breach or privacy incident: cyber liability insurance
- Bodily injury unrelated to professional treatment: general liability insurance
- Alleged mishandling of an employee benefit plan: fiduciary liability insurance
Some policies combine multiple coverages, but one type of insurance should not automatically be treated as a substitute for another.
Situations Healthcare Professionals May Encounter
Healthcare professionals can serve nonprofits in many different capacities. Each role can produce a different combination of risks.
A Dentist Serving on a Community Health Foundation Board
A dentist may help a foundation decide how donated funds will be distributed among oral-health programs. A donor could later allege that restricted funds were used improperly, or another organization could challenge the grant-selection process.
The claim would not necessarily involve dentistry. It could allege mismanagement, failure to honor donor restrictions, or breach of a board member's fiduciary responsibilities.
A Veterinarian Serving on an Animal Rescue Board
A veterinarian might help an animal rescue evaluate care standards while also participating in decisions about contracts, personnel, fundraising, or shelter operations.
An allegation arising from veterinary treatment may implicate professional liability coverage. A complaint challenging the board's use of donations, selection of a vendor, or handling of an executive's alleged misconduct could instead create a D&O exposure.
A Pharmacist Serving a Free Clinic
A pharmacist serving on a free clinic's board might vote on expanding services, purchasing dispensing technology, selecting a pharmacy partner, or allocating grant funds.
If the decision results in financial loss or is challenged as a conflict of interest, the resulting allegation may concern governance rather than pharmacy malpractice.
A Physical Therapist Serving on a Professional Association Board
A physical therapist may participate in membership, certification, education, or disciplinary decisions for a professional association.
A member who loses a credential, leadership position, or association benefit might allege that the board failed to follow its bylaws or applied its procedures unfairly.
A Healthcare Executive Serving an Aging-Services Nonprofit
A home healthcare owner or executive may join the board of an organization serving older adults. The board might oversee employees, volunteers, government grants, vendor relationships, transportation services, or community programs.
Decisions in these areas can result in employment, contractual, regulatory, or governance allegations, even when the board member receives no compensation.
Can Volunteer Board Members Be Personally Sued?
Yes. A person does not necessarily avoid being named in a lawsuit simply because the individual served without compensation.
The federal Volunteer Protection Act provides certain liability protections for qualifying nonprofit and government volunteers acting within the scope of their responsibilities. However, those protections are subject to conditions and exceptions. They do not create universal immunity, eliminate every state-law issue, or necessarily prevent someone from filing a lawsuit in the first place.
Among other requirements, the federal protection generally depends on the volunteer acting within the scope of assigned responsibilities and holding any license required for the activity. The law also contains exceptions involving certain types of misconduct and other circumstances. State volunteer-immunity laws can vary as well.
Even when a volunteer ultimately avoids liability, legal representation may still be required to respond to allegations, establish that a protection applies, or obtain dismissal from the case. That is one reason the defense provisions in a nonprofit D&O policy deserve careful attention.
Does the Nonprofit's Indemnification Provision Provide Enough Protection?
Many nonprofit bylaws contain indemnification provisions promising to protect directors and officers under specified circumstances.
Indemnification is valuable, but it is not identical to insurance.
An indemnification provision is a promise from the organization. Its practical value can depend on:
- Whether indemnification is legally permitted under the circumstances
- Whether the organization's bylaws cover the individual and allegation
- Whether the organization has sufficient financial resources
- Whether the board properly authorizes the indemnification
- Whether misconduct exclusions or other limitations apply
D&O insurance can provide a funded source of protection subject to its terms, conditions, exclusions, retention, and limits. A board candidate should review both the organization's indemnification provisions and its insurance program.
Conflicts of Interest Deserve Special Attention
Healthcare professionals frequently bring valuable industry knowledge and business relationships to nonprofit boards. Those same connections can create potential conflicts.
For example, a pharmacist serving on a clinic board might own a pharmacy being considered for a service contract. A dentist might have a financial relationship with a vendor seeking the foundation's business. A healthcare executive might sit on the boards of two organizations competing for the same grant.
A potential conflict does not always mean that the transaction is improper. It does mean the interest should be disclosed and handled under an appropriate conflict-of-interest procedure.
The IRS encourages charitable organizations to maintain written policies requiring directors and staff to act in the charity's interests, disclose relevant financial interests, and follow an established process when a conflict arises. Its sample procedures contemplate the interested person leaving the meeting while the remaining board members deliberate and vote.
A D&O policy may contain exclusions related to self-dealing, personal profit, or intentional misconduct. A board member who participates in a transaction involving a personal financial interest, without following the organization's conflict-of-interest procedures, may face questions about whether coverage applies.
Questions to Ask Before Joining a Nonprofit Board
Before accepting a board position, a healthcare professional should consider asking:
- Does the organization currently carry nonprofit D&O insurance?
- Who qualifies as an insured person under the policy?
- Are committee members, advisory-board members, and other volunteers covered?
- What are the policy limits, retention, and aggregate limit?
- Are defense expenses paid within the policy limit?
- Does the policy include employment practices liability coverage?
- Are the limits shared among the organization and all directors and officers?
- Is the policy written on a claims-made basis?
- What happens if a claim is reported after a board member leaves?
- Does the organization have written indemnification and conflict-of-interest provisions?
- Are there exclusions that could affect the organization's particular activities?
- Does the nonprofit also maintain appropriate professional liability, general liability, cyber, and other relevant coverage?
Board candidates can also request evidence of coverage or ask to review the relevant D&O policy documents. A certificate of insurance may confirm that a policy exists, but it will not explain all of its terms, limitations, or exclusions.
What About Coverage Through the Healthcare Professional's Employer?
Some healthcare organizations provide limited coverage when an employee serves on an outside board at the employer's request. This is sometimes referred to as outside directorship liability coverage.
However, a healthcare professional should not assume employer-sponsored protection applies to every personal volunteer position. Coverage may depend on whether the employer formally requested or approved the board service, whether the nonprofit meets the policy's requirements, and whether the individual followed the employer's reporting procedures.
The answer should be confirmed in writing before relying on it.
D&O Insurance Protects More Than the Board
A well-structured insurance program helps protect the nonprofit's mission as well as the individuals supporting it.
Without appropriate coverage, a serious governance or employment claim could consume money intended for patient services, community programs, scholarships, animal care, education, or charitable outreach. The organization may also find it more difficult to recruit qualified board members if candidates are uncertain about their personal exposure.
D&O insurance cannot prevent every disagreement or lawsuit. It can, however, help the organization respond when leadership decisions are challenged.
The Bottom Line
Healthcare professionals should distinguish between donating professional services and serving in a leadership or governance role.
Professional liability insurance may address allegations arising from patient care or licensed services. Nonprofit D&O insurance may address allegations involving organizational decisions, fiduciary responsibilities, finances, employees, contracts, bylaws, and conflicts of interest.
Before joining a nonprofit board, ask about the organization's insurance, indemnification provisions, governance procedures, and conflict-of-interest policy. The fact that the position is unpaid, or that the organization supports a good cause, does not mean the role is free from risk.
Coverage ultimately depends on the facts of the claim and the language of the applicable policies. An experienced insurance professional can help the nonprofit and its prospective board members identify potential gaps before a claim occurs.
Let's Review the Risks Before You Serve
If you are a healthcare professional considering a nonprofit board position, or you help lead a nonprofit organization, I can help you examine how D&O, professional liability, employment practices liability, cyber liability, and other coverages may apply.
Contact Jeremy A. Jones to discuss your organization, your responsibilities, and the insurance questions worth addressing before a claim occurs.
This article is for general informational purposes and is not legal advice or a guarantee of insurance coverage. Policy terms, state laws, and individual circumstances vary.
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Jeremy A. Jones
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