Nonprofit board members often wear a lot of hats and their roles can vary widely depending on the nature of the organization from fundraising to hands-on oversight of programs to strategic planning. Legal liability may not be top of mind but it is critical that nonprofit board members understand their fiduciary duties to protect themselves as well as the nonprofit they’ve invested in.
What Are Fiduciary Duties?
Board members carry legal obligations to the organization they serve — collectively called fiduciary duties. These exist to protect charitable assets and ensure the nonprofit stays true to its purposes. The two key fiduciary duties are:
1. Duty of Care — Board members need to be engaged, not just present. That means moving beyond simply reviewing financial reports to actually understanding the story behind the numbers, showing up to meetings prepared, and speaking up when they have questions or something seems off. Courts typically defer to good-faith, informed decisions under the business judgment rule, but that protection depends on directors actively engaging rather than providing rubber stamp approvals.
2. Duty of Loyalty — When a director’s personal interests and the nonprofit’s interests point in different directions, the organization must always come first. Conflicts of interest aren’t automatically disqualifying but failing to disclose and properly approve them is a serious issue. The safeguard is process, not avoidance. When directors provide full disclosure, recuse themselves from the vote, and the disinterested directors consider all relevant facts and independent data before determining what is in the best interest of the organization, the safeguard is achieved.
On paper, none of this sounds complicated. In practice, a lot of well-meaning boards find themselves falling short in one of these areas.
Where Legal Claims Typically Arise
Most nonprofit legal disputes or audits don’t begin with egregious actions such as someone stealing money. They begin with governance gaps that, over time, create openings for claims. Financial mismanagement, undisclosed conflicts, inadequate executive oversight, and misuse of restricted funds are among the most common areas of concern. Increasingly,
boards must also monitor modern operational risks, such as data privacy vulnerabilities, cyber hygiene, and the deployment of automated tools or AI systems, where a lack of governance can quickly evolve into a significant liability. Employment disputes and whistleblower complaints are another critical area of exposure. These actions can come from several directions (a state attorney general, a donor, a terminated employee, or even a fellow board member), which is part of what makes the exposure hard to predict.
And here’s the part that catches some boards off guard — even if the nonprofit is completely in the right, defending a legal claim is expensive, distracting, and may be damaging to donor confidence.
Understanding D&O Liability Insurance
Directors and Officers (“D&O”) liability insurance is designed to covers claims brought against the people running a nonprofit — board members, officers, and executive leadership — for decisions made in their official capacities.
D&O insurance exists to covering legal defense costs in the event that individual directors and officers are named personally in a claim and, depending on the policy, certain damages. While D&O insurance is advisable for most organizations, keep in mind that it only addresses the consequences of a claim, not the root cause. A policy won’t prevent a lawsuit or investigation, and it won’t protect the organization’s reputation while litigation plays out. Most policies also carve out coverage for fraud, intentional misconduct, or circumstances known but undisclosed when the application was submitted, as well as claims brought by one covered party against another such as an internal board dispute.
Reducing Risk Through Strong Governance
The boards that tend to stay out of legal trouble aren’t necessarily the most sophisticated — they’re just consistent, engaged, and thoughtful. Regular meetings, appropriately drafted minutes, a conflict-of-interest policy that is properly utilized, and routine financial reviews all go a long way toward demonstrating that directors take their responsibilities seriously. In addition, having a whistleblower policy and clear indemnification provisions in the bylaws round this out, giving directors and staff a safe channel to raise concerns and clarity on how the organization will stand behind them if a claim follows.
Training matters, too. Many nonprofit board members come to the role with deep expertise in a field that has nothing to do with nonprofit governance. They care about the mission, but they may not know what meeting their fiduciary duties actually requires of them. Periodic education on legal obligations and compliance basics can close that gap before it becomes
a liability. Governance policies are also worth revisiting every few years — organizations change, and policies that made sense at an earlier stage may not serve the board today.
Conclusion
Good governance isn’t just about staying out of trouble, though it does help with that. It builds the kind of institutional credibility that makes donors trust you, staff want to stay, and the organization sustainable over the long run. At The Law Firm for Non-Profits, we work with nonprofit boards on governance practices that are practical, legally sound, and built around the specific needs of the organization. If you’re looking at your policies, working through a conflict-of-interest situation, or just want a clearer picture of where things stand, we’re glad to help.
NOTE: The information contained herein is not intended to be legal advice, and the reader should know that no attorney-client relationship or privilege is formed by the posting or reading of this article, which is also not intended to solicit business.
Casey Summar, Managing Partner
The Law Firm for Non-Profits
1812 W. Burbank Blvd., #7445
Burbank, CA 91506