| Volunteer Legal Handbook, 9th Edition Handbook > Risk Management |
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Risk management is the name for a collection of techniques and procedures a nonprofit corporation can use to minimize the risk of liability and, in the event of a problem, to minimize the consequences of the problem. Please note: risk management cannot eliminate the risk of liability; we live in a world that is filled with risk. Nor can risk management control all risks; almost by definition, the kinds of claims discussed earlier in this manual are uncontrollable to some degree. However, risk management can reduce the chances of nonprofit corporation and volunteer liability to an acceptable level. This section of the materials focuses on risk management techniques as they relate to volunteers and nonprofit corporations.
It may help you understand risk management by examining a specific risk situation:
If you see a man drowning in a river, and turn your back and walk away, and the man drowns, you are not legally liable to anyone for the death of that man. Legally, you owe him no duty. Absent a duty, you cannot be liable. You can successfully avoid all legal risks by doing nothing. But if you have made it this far in the Handbook, you aren't the type of person who will let a man drown for fear of being sued.
If you are reading the Handbook, you are probably a volunteer. You are the kind of person who does not turn away from that drowning man. But if you undertake to rescue that drowning man, you must not be grossly negligent in your efforts. If you are, you may become liable for the death of that man. Legally, if you undertake a duty, even as a volunteer, you must exercise some degree of care. By volunteering, you assumed certain risks. The required degree of care varies with the situation.
If risk management principles were applied to these facts you would have obtained training in water safety and water rescue, and would have a good understanding of what to do and how to do it safely for yourself and the victim. You would have managed the risk by anticipating the possible risk, identifying how to manage that risk, and then taking the steps to manage it.
Chapter 1. Volunteer Screening and Placement
If, as some authorities suggest, a volunteer is a worker serving without consideration, then a nonprofit corporation utilizing volunteer services should put substantially the same amount of work into locating and placing volunteers that it would put into locating and placing paid employees. Volunteers frequently have a highly public role on behalf of a nonprofit corporation; they are the persons that individuals dealing with the nonprofit corporation see first and most often. You can manage several risks by effectively screening, evaluating and placing volunteers.
Work Descriptions. Wherever possible, you should develop "work descriptions" for volunteers, analogous to job descriptions for employees. Like a job description, a work description should describe the requirements for the volunteer who will perform the work, and the expectations the nonprofit corporation has for the volunteer. Absent such a work description, it will be difficult to screen, place and evaluate volunteers in a fair, reasonable, and defensible way. Work descriptions are also helpful in establishing statutory immunity under the federal Volunteer Protection Act, described above.
Evaluation. Any technique which is permitted for evaluation of employees is permitted for evaluation of volunteers; indeed, you may ask questions of potential volunteers which would be illegal for employees. There are sensitive issues here: a volunteer does not expect to be grilled or to be required to furnish credit references. But if the volunteer is to act as treasurer, or bookkeeper for a nonprofit corporation, those levels of inquiry may be appropriate. Your level of screening should reflect an appropriate balance of sensitivity and thoroughness.
Mandatory Screening. If your organization provides day care or child care services, or performs other services that brings its employees and volunteers into regular contact with minors, you may be subject to mandatory screening procedures. In the case of programs using federal funds or under federal contracts, criminal background checks for employees and volunteers are mandatory. 42 U.S.C. Section 13041. Such checks may have become mandatory as to any such volunteer or employee in the State of Alaska; AS 47.35.017 was amended in 1994, and became effective on January 1, 1996. The regulations implementing those amendments are complex. Consult your attorney.
Documenting Your Actions. It's hard to overstate the importance of documenting your volunteer screening and placement activities. Keep written records and documents; you not only need to take these steps, you must be able to prove later, sometimes years later, that you did.
Placement. Not all volunteers are appropriate for placement in all situations. An uninsurable driver should not be placed in a program that involves driving. Volunteers who will be working with children should be of suitable experience, temperament, and moral character.
Preferences. Ordinarily, you should solicit a volunteer's interest areas and preferences. Not only does it assure a higher level of commitment from the volunteer; the higher level of interest reduces the risk of a claim arising by reason of the volunteer's unfamiliarity with the subject, field or area in which the volunteer is placed. This is not just a matter of intelligent use of volunteers; it is a matter of risk management.
The most important single technique for nonprofit corporation risk management is education. The nonprofit corporation should provide for the education of the directors and officers of the nonprofit corporation, the employees of the nonprofit corporation and the volunteers who deliver services for the nonprofit corporation. Most lawsuits and liability arise from mistakes of ignorance, not mistakes of malice. Ignorance can be cured.
Develop orientation programs for new employees and new volunteers. The programs should include the nonprofit corporation's mission statement, policy, goals, procedures, and culture. While you will have other purposes for orientation, it should include a thorough discussion of risk management. An increasing number of liability insurance carriers are requiring orientation programs as a condition to issuing you an insurance policy.
Nonprofit corporations should implement programs that orient, develop, update, and refresh the skills of volunteers. As the laws change (this is the 7th Edition of the Handbook), or the nonprofit corporation enters new areas of activity, or simply because of the passage of time, from the board of directors down, continuing education programs should address and expand the knowledge of your volunteers. If you can locate the resources at a price the nonprofit corporation can afford, try to obtain training from outside the nonprofit corporation. An outsider will frequently see risks that you cannot.
Wherever possible, volunteers should be trained for the specific job, tasks or service description which they are being asked to assume. Training programs should assure you that the volunteer knows how to perform those tasks your way and has the necessary skills.
Again, apart from issues of volunteer satisfaction and retention, updates and continuing education programs serve risk management functions as well. By assuring that a volunteer not only has skills but refreshes and refines those skills, you help assure the volunteer's skills and commitment, all of which reduces the chance of a claim being brought against your nonprofit corporation.
Chapter 3. Reviews and Evaluations
Conduct risk management reviews and evaluations at regular intervals. Your accountants are usually able to help you with review of financial risks. Insurance carriers sometime provide risk management audit services for liability matters.
Every nonprofit corporation should be audited on a regular basis. The risks of financial problems are so great, whether from taxes, employee misconduct, or otherwise, that your nonprofit corporation cannot afford not to have an audit. The board of directors should appoint an audit committee to review the audit, and especially the management letter that should accompany any audit, and report to the board of directors on how the changes suggested in the management letter will be implemented.
Every nonprofit corporation should have a risk management committee to identify the risks associated with the nonprofit corporation, its programs, its employees and its volunteers, and then address how to manage those risks.
No board of directors is perfect. While it would be wonderful to hire an outsider to come in and evaluate your board of directors, it's not practical financially. But there are excellent "self audits" which a board of directors may administer to itself. Done honestly and conscientiously, self audits can help identify and resolve problems the board of directors may not even be aware of. Self audit materials are available through the United Way of the Tanana Valley Volunteer Action Center and through United Way of America.
Be creative here: find a retired building inspector to review your structures; a lawyer who will review your Bylaws and insurance. And use common sense: don't use "volunteers" referred by the criminal courts under drunk driving sentences to transport your clients.
Remember that insurance is just one form of risk management; risk management is not simply purchasing insurance. All of the insurance in the world will not protect you from intentional actions, and every insurance policy has a limit of coverage. But insurance serves useful purposes.
Insurance is expensive for the kinds of risks that will concern you most. You should consult a competent insurance agent for advice on coverages, but at the risk of being unduly cynical, insurance agents and brokers earn their money from commissions. The more insurance they sell, the more money they make. You need to know coverage types, special considerations and the factors that go into an insurance premium to purchase insurance intelligently.
Kinds of Insurance
General Liability. Liability insurance provides coverage against third parties who assert claims against you. General liability covers all claims not excluded, but the list of exclusions is discouragingly long. A class of claims that might otherwise be excluded often can be included by purchasing an endorsement or amendment to the policy for an additional premium. The ability to amend or endorse an insurance policy applies to most of the kinds of insurance discussed below.
Auto Liability. Liability arising from automobile-related claims (your volunteer was in an accident and injured someone) is not covered by general liability policies. Instead, you must purchase a special auto liability policy. Auto insurance typically provides separate coverages - with separate premiums for your liability for injuries to others, for damage to your auto, and for the risk that another motorist may be uninsured or underinsured. Again, read the coverages and exclusions carefully. A policy insuring only your nonprofit corporation's vehicles won't help if your volunteer is driving his own auto when an accident occurs, and the volunteer's policy may be inadequate or exclude "business" activities, including volunteer work.
Casualty. Casualty insurance covers damage done by third parties or acts of God to your property: vandalism and malicious mischief, fire, flood, earthquake, collapse and so on. If volunteers use their own property in operation of your business, you need to address casualty to their property as well.
Professional Liability. To the extent that you engage in delivery of services requiring expertise or licensed activities, you need to consider professional liability insurance as well as general casualty insurance. General liability usually excludes coverage for professional activities.
Director's and Officer's. This is usually referred to as "D & O" insurance. General casualty policies exclude claims against officers or directors for their actions or inactions. You may have difficulty in attracting board members without D & O insurance, and any prospective board member should consider carefully before agreeing to serve on a board that does not have D & O coverage. The amount of coverage need not be terrifically high, but you should make certain that adequate coverage for the costs of defense is present.
Bonding. You should bond your officers and the nonprofit corporation's employees who have financial responsibilities to the amounts that they routinely handle. Liability insurance does not cover employee theft or gross misconduct. Bonding assures that the bonding company will pay any losses (to the limits of the bond and subject to a deductible) sustained by the nonprofit corporation as a result of employee or officer misconduct.
Umbrella Coverages. Umbrella coverages are excess liability insurance policies; that is, they provide coverage when and only when the primary coverage is exhausted. Since most insurance claims never exceed the primary policy limits, umbrella coverages are generally less expensive, all other things being equal.
Special Considerations.
Insurance is a regulated industry; all policies tend to be more or less the same although, as always, the problems arise in the details. Several aspects of Alaska law as its relates to insurance are unique and merit special consideration.
Costs of Defense. Make certain each policy of insurance you purchase includes coverage for the expenses of legal defense. In the legal system today, it is not at all unusual for the costs of defense in a lawsuit to equal or exceed any ultimate award against you or your nonprofit corporation. Alaska law separates the duty to defend from the duty to pay a claim; as a result, sometimes you can obtain coverage for the cost of defense where it might not be available to pay the actual claim.
"Rule 82" Coverage. Alaska is almost unique in the United States in awarding a portion of the winner's costs and attorneys' fees to the loser: that is, if your nonprofit corporation loses a lawsuit, it will not only pay its attorneys' fees but a portion of the winners' fees as well. Fees are awarded under a formula set out in Alaska Rule of Civil Procedure 82; hence the name. In a complex lawsuit, this can amount to tens of thousands of dollars. Make certain that your insurance policy addresses this risk as well. CAUTION: many nonprofit corporations obtain insurance from vendors who generally do not do business in Alaska and have never heard of Alaska's Rule 82. Their policies are usually silent as to this risk.
Purchasing Insurance.
Alaska has had a dreadful insurance "experience" or claims history, and in its relatively small market, the effect has been to increase premiums significantly. Remember, insurance companies are in the business of not paying claims. As a result, you must carefully balance the factors that go into your premium calculation.
Deductible. A deductible is the amount of an insurance claim that you agree to bear ñ sometimes called "self-insurance." The higher the deductible, the lower the premium. A responsible nonprofit corporation will maintain a reserve for any large deductible. The deductible is different from what is called "co-insurance," which is an insurance policy under which you pay a portion of any claim or defense costs ñ usually 20% ñ up to the policy limits. Ordinarily, you won't want that kind of policy, and if you do get one you will want to have a very large reserve indeed.
Scope of Coverage. As you might expect, the broader the coverage ñ the fewer the number of exclusions ñ the higher the premium. The narrower the coverage, generally the lower the premium.
Amount of Coverage. Again, as you might expect, the higher the potential liability of the insurance company the higher the premiums. You must carefully balance the highest reasonable risk you expect against the cost of insuring that risk. You cannot afford to insure against the largest possible claim you could conceivably face; you can only insure against the largest probable claim you are likely to face.
Time of Coverage. A decade ago, essentially all liability insurance policies were "occurrence" policies; now it's much more complicated. The date a claim occurs in relation to the date you have an insurance policy is now critical.
For example, "occurrence" policies insure against a claim which occurs during the term of the policy, no matter when the claim was made. So if a claim arose in 1979, and you had an "occurrence" policy of insurance in that year, it didn't matter if you had insurance in 1998, the year the lawsuit was filed.
Today, the greater number of policies are "claims made" policies, providing coverage for a claim asserted during the term of the policy, no matter when the claim might have arose. A "claims made" policy makes it difficult to determine when it is safe to stop carrying insurance. If your nonprofit corporation has stopped performing a specific activity, and wants to insure against the risk of a subsequent claim, you should investigate "tail policies" which insure against those kinds of risks.
Evaluation of Insurers. Finally, there is no tactful way to say this: insurance companies go broke, and leave their insureds with no coverage. There are insurance rating agencies; A.M. Best's is probably the most highly regarded of the lot. Try to get an insurer with a Best's rating of AA or better. But recognize that Alaska is a small market, not all carriers write insurance here, and sometimes you have to take the best you can get. Limited on-line ratings are available at:
Chapter 5. Statutory and Contractual Protection
Statutory Protection.
Alaska law provides only slight risk management benefit and only in very narrow areas. See the discussion at statutory protection earlier in these materials. Some kinds of statutory protection are available only if the nonprofit corporation takes certain kinds of action.
As described at the discussion on nonprofit corporation law, directors can enjoy a limited statutory protection for certain classes of activities, but only if the Articles of Incorporation for the nonprofit corporation contain specific language. See the discussion at nonprofit corporate law earlier in these materials.
In addition, Congress adopted the Volunteer Protection Act of 1997, discussed above.
Contractual Protections.
You can manage some risks with contract provisions, but there are both practical and legal limits on your ability to do so.
The terms of contracts are the result of bargaining power, and nonprofit corporations are rarely the strong party in negotiations. Therefore, a nonprofit corporation is rarely able to negotiate provisions which protect its interests. It is much more likely that a nonprofit corporation will be required to provide contract indemnity to the other side. For example, a nonprofit corporation which provides contract services to the state under a grant or other agreement will not be able to obtain indemnity for actions or requirements of the state. Nor can a nonprofit corporation insist with any success that its clients and customers indemnify it from liability for the nonprofit corporation's own negligence.
For example, imagine a nonprofit corporation offering day care services requiring a customer to agree in advance that the nonprofit corporation won't be liable for anything happening to the child. Do you think it would be enforced by a court?
Alaska law does not permit a party to contract away risk without limit. There are a large number of limitations and restrictions. Here are a few.
Releases. The best-known contractual provision for allocating risk is the anticipatory release. An anticipatory release causes one party to agree in advance that the other party will not be liable for any injuries or other harm suffered by the person signing the release. Alaska law has small sympathy for releases, and they are very strictly construed against the party drafting them.
For example, the Elmendorf Air Force Base Flying Club’s release was deemed ineffective as to a claim arising out of an airplane crash in which the passenger signing the release was killed. While the release surrendered claims for injury, property damages and "all other claims," the release did not actually say the word "death" so the court ruled it did not apply to a wrongful death lawsuit.
The Alaska Supreme Court has ruled that releases are construed narrowly and will only release a party from liability for potential harms or hazards specifically identified in the release. For example, in Moore v. Hartley Motors, 36 P.3d 628 (Alaska 2001), the court held that the language of a release did not reach a claim for negligence in preparing an ATV training course because it did not discuss or mention liability for general negligence, and therefore the release only applied to “unavoidable and inherent risks” of ATV riding. The court did find that the release was valid as to the risks expressly mentioned in the release, however.
Even releases that do specifically mention “negligence” may not be sufficient if the release does not “conspicuously and unequivocally” inform the signers that they are abandoning claims beyond those associated with the inherent risks of the activity. In Ledgends, Inc. v. Kerr, 91 P.3d 960 (Alaska 2004), the court affirmed without substantive comment the trial court’s decision that a release did not absolve Ledgends of its own negligence because “pre-recreational exculpatory agreements have been held to a very high standard of clarity and that any ambiguity in that regard should be strictly construed against the party seeking exculpation.” Even though the release at issue in Legends specifically mentioned “negligence,” it did not “conspicuously and unequivocally” alert signers that they were giving up claims beyond the inherent risks of the activity.
Some insurers require their nonprofit customers to have customers sign anticipatory releases as a condition to the insurer providing insurance. That’s a good reason to use an anticipatory release. But as a risk management tool they have yet to work in Alaska in any reported case. Until legislation is enacted addressing this issue, or unless the court reverses its current line of cases, anticipatory releases are of dubious value.
Policy Considerations. The courts regard certain obligations and duties as being non-delegable; that is, a nonprofit corporation can be held liable for a violation of a duty even if it has by contract allocated the risk to another person. If a nonprofit corporation has agreed to perform a service, and then hired another to perform that service, it remains liable even if a contract term provides otherwise.
Chapter 6. Alternative dispute resolution
Look, you can always have a lawsuit. But it is usually hideously expensive. There are less expensive options, which may prove to be less damaging to ongoing relationships among the persons involved. Consider alternative forms of dispute resolution.
Mediation. Mediation is a conflict resolution process in which one or more impartial persons intervene in a conflict with the parties' consent and help them negotiate a mutually acceptable agreement. The mediator does not take sides or decide how the dispute should be resolved. One advantage of mediation is that it carries the greatest odds of preserving the ability of the disputants to work together in the future. It is also less expensive than litigation and, generally, much quicker.
Arbitration. Arbitration is a conflict resolution in which the parties submit their dispute to one or more impartial arbitrators who decide the dispute for the parties. No judges or juries are involved. Arbitration may be "binding" upon the parties or just "advisory."
Advisory Trials. Several companies offer "advisory trial" services, under which the parties present an informal, non-binding "trial" on the merits to a privately selected judge. The judge reaches an informal decision, so that parties better understand and can evaluate their claims.
Chapter 7. Practical Guidelines for Directors
It's very tough to give useful, general guidelines for nonprofit corporate directors. The challenges that face you are variable and, to a large extent, contextual. The following guidelines are adapted from an article Hoffer Kaback wrote for Directors & Boards Magazine, a magazine aimed at for profit corporate directors. Kaback set out a series of inconsistent, even contradictory "principles" to illustrate the attitude expected of directors. By examining the strengths and weaknesses in each of these "principles," you can perhaps glean a set of guidelines that will work for you. This version is adapted for directors of nonprofit corporations.
The Davy Crockett Principle. You'll remember that Davy Crockett said, "Be sure you're right and then go ahead." Crockett would say what he thought was right, fight hard for it, vote "no" when he disagreed, and resign if something was decided against his principles. This is an absolutist principle and won't work in the practical world. Isn't it more effective to work over time to persuade your fellow directors on key issues? Crockett also "picked his spots" and "saved his bullets." You should, too. Otherwise, you compromise your ability to effect change.
The Sam Rayburn Principle. The late speaker of the House of Representatives, Sam Rayburn, held the view that "To get along you have to go along." Carried too far, this becomes "I'll ignore your problems if you'll ignore mine." Remember your duty is to the nonprofit corporation and its members, not to your fellow directors. While there has to be give and take, you must strike a balance between too little flexibility and too much.
The Justice Rabinowitz Principle. The Justice Rabinowitz principle, named after the late Alaska Supreme Court Justice Jay Rabinowitz, says "Never do anything you wouldn't be comfortable explaining to the Alaska Supreme Court." It's a useful rule, but all it does is avoid risk, it doesn't help you with the day-to-day decisions you have to make to serve as a nonprofit corporate director.
The Always Trust Management Principle. "Always trust the executive director." This is a prescription for disaster. It's the error the United Way of America board made with its former president, William Aramony. The unwillingness to challenge management, when challenge is warranted, is a breach of your duties as a director.
The Never Trust Management Principle. This is too extreme and grossly unfair to your executive director and staff. Most executive directors are diligent, forthright, honest and hard-working. This attitude will make your tenure as a director unpleasant and ineffective, and can drive off competent staff.
The Healthy Skepticism Principle. This term comes from the attitude required of outside auditors engaged to perform audits or reviews of a business. In essence, it says that your executive director must earn your trust. It's not too far from what the law requires of a director, and it serves for all manner of board of director decisions, not merely risk management issues.
The Emanuel Lasker Principle. Grand Master chess player Emanuel Lasker believed in playing not the objectively best move inherent in a chess position but the best practical move tailored to his opponent's style. Your response and performance as a nonprofit corporate director to a given situation must be suited to the particulars of the situation. The right answer at one point in time may be the wrong answer at another. It is legitimate to resolve some questions differently at different times or in different situations.
One solution to the problem of old and even obsolete statutes, scanty case law and vast “grey areas” in the law is to adopt and adhere to “best practices.” Some of these “best practices” have been formally developed; others are a reporting requirement to the IRS. See page 76. If your nonprofit adopts and follows the procedures and policies which the best nonprofits have adopted and followed, you will at least have a strong position in the event of a dispute. “Best practices” may only be the “total quality management” of the new millennium – a passing fad – or it may prove to be a long-term useful approach.
In Alaska, there are several sources for “best practices” guidelines. A good starting point is the “Recommendations for Charitable Organization Action” set out in the Panel on the Nonprofit Sector’s Final Report and Supplemental Report. Those reports are available on-line at
and are well worth your study.
The Foraker Group
and the Rasmuson Foundation
both offer materials, classes and resources focused, at least in part, on “best practices.”
In addition, an informal group is presently working at developing model bylaws and other corporate forms. As those efforts proceed, the sample forms or links to the sample forms will be posted at the Handbook’s website.
http://www.iciclesoftware.com/VLH7
You should check there for those sample forms.
Risk management does not have as its primary goal the protection of the nonprofit corporation from liability, although that is a desirable side effect. Rather, the primary goal is to prevent injury to the persons the nonprofit corporation is trying to help, who might otherwise suffer physical or economic injury and, if an injury does occur, to assure that the nonprofit corporation will still be able to deliver its services in the face of any claim that might arise from the injury.
The benefits of risk management are much greater than merely having money around to pay claims. Properly implemented, a risk management program benefits everyone involved in the nonprofit corporation's activities.
There are a number of related techniques that directly or indirectly act as risk management tools. One of the most interesting is the sheaf of tools called quality initiatives. In the manufacturing industry, this might be called "zero defect" goals. In the service industry, it is usually called "the Quality Challenge" or "exceeding customer expectations."
Nonprofit organizations should also be aware that the IRS appears to be cracking down on charitable contribution abuse. The U.S. Attorney for the Northern District of California issued a press release reporting a tax fraud conviction on a plea bargain. The taxpayer, Tim Mosley, tried to treat tuition payments for his children as charitable contributions. Of course, the heart of a charitable contribution is a gift, which requires no return benefit to the donor. Washing the transaction through a private foundation, as Mosley reportedly did, just makes it look worse. The significance of the conviction may be the signal from the IRS. It is not clear what, if any, effect such enforcement will have on nonprofit organizations. However, nonprofit organizations should take precautions to ensure that they are not being used to “wash” transactions.
Chapter 10. Records Retention Policy
Careful readers will recall that one of the focuses of the Best Practices discussed earlier was developing a records retention policy. And that the IRS, as described earlier, in its most recent revisions to IRS Form 990, requires nonprofits to describe their records retention policy. The reason for all of the excitement is that what records you keep and how long you keep them is an important part of risk management.
A records retention policy is a prudent balance between avoiding drowning in paper, the cost of preserving records and the identification of which records are truly important. The identification of important records also involves recognizing how much time must pass before the records cease to be legally important.
The hard fact is that some records never cease to be important during the life of your nonprofit organization. The obvious examples are your articles of incorporation, IRS determination letter and certificate of incorporation. Others are also easy to identify as critical: Form 990s, your Form 1023 seeking that IRS determination letter and audits.
Others can be harder. Minutes of meetings of the board of directors, missions statements, policy manuals and the like are important, but are they important enough to justify permanent retention? Each nonprofit has its own unique issues and concerns, which makes it impossible to create a “universal” records retention policy. And because nonprofits’ goals and missions change over time along with the law, a records retention policy needs to be revisited regularly. But at the risk of oversimplification, here’s a sample records retention policy. We urge you to review it against your records, concerns, risks and needs and treat it only as a kind of imperfect starting point.
Sample Records Retention Policy
| Record Type | Retention Period (Note 3) |
|---|---|
| Organizational Documents | |
| Board of Directors minutes and related Documents | Permanent (Note 1) |
| Board of Directors Committee materials | Permanent (Note 1) |
| Incorporation documents | Permanent |
| Bylaws and bylaw revisions | Permanent |
| IRS exemption application and letter | Permanent |
| Human Resources | |
| Personnel files | 7 years after termination |
| Job descriptions | 10 years after modification |
| Job applicant materials (unsuccessful applicants) | 2 years after job is filled |
| Job applicant materials (successful applicants) | 7 years after termination |
| Log of occupational injuries and illnesses | Employee’s job tenure plus thirty years |
| Publications | |
| Newsletter | Permanent (Note 1) |
| Annual Report | Permanent (Note 1) |
| Other Publications | Permanent (Note 1) |
| Development Documents | |
| Grant applications, reports and correspondence | 10 years |
| Bequests | 7 years after the close of the estate |
| Endowment donor records | Permanent |
| Other donor records | 5 years if no activity |
| Financial Documents | |
| Payroll and bank records | 7 years |
| Audits | Permanent (Note 1) |
| Audit workpapers | 7 years |
| Quarterly board reports | 3 years |
| Form 990 and schedule filings | Permanent (Note 1) |
| Invoices and cancelled checks | 7 years |
| Endowment and annuity records | Permanent |
| General ledger | 10 years |
| Other Documents | |
| Vendor files | 3 years after termination of relationship |
| Retention period depends upon the content of the email as covered elsewhere in this policy | |
| Policies and procedures | 7 years after replacement or elimination |
| Contracts | 7 years after expiration |
| Legal documents | 7 years (Note 2) |
| Documents not listed above | 10 years |
Notes:
1. May be scanned and stored electronically after 7 years.
2. Where a charge or lawsuit is filed, all relevant records must be kept until 7 years after final conclusion of the charge or lawsuit.
3. If an official investigation is underway or suspected, all document destruction must be stopped until the investigation is completed.
Confidential Material
Any documents that are confidential must be shredded on site or by a commercial shredding service. Donor credit card information and any documents containing social security numbers must be shredded on site.
Chapter 11. So Should You Be Worried?
At the start of the Handbook, I presented five hypothetical lawsuits brought against you as a volunteer. We now re-visit those lawsuits in light of the principles of risk management you've seen here. Each claim is analyzed with and without careful risk management.
The Auto Accident. You volunteer to drive a group of little league baseball players to a baseball game. You are involved in an accident and some of your little league passengers are hurt. Are you liable for their injuries?
With risk management - no problem. You have several "layers" of protection. Here's how and why.
As a careful volunteer, you made certain that the nonprofit corporation's auto insurance covered your car and its passengers while you were performing volunteer services for the nonprofit corporation. So there is insurance available through the nonprofit corporation, and while people may be hurt, at least you don't face a big claim. As a very careful volunteer, you made certain that even if the nonprofit corporation's insurance didn't cover an accident in your car while on volunteer business, your insurance did. Now you have the luxury of having two insurance policies in place.
Without risk management - bad news. The nonprofit corporation's auto insurance only covers vehicles owned by the nonprofit corporation. Your personal auto insurance policy excludes use of your auto for "business purposes," and defines volunteer work as "business purposes." Even if the auto accident wasn't your fault, you may get to defend a lawsuit brought against you. Or the nonprofit corporation may go broke defending you.
The Embezzling Employee. You serve as a director and the treasurer of a nonprofit corporation. You are advised that your executive director has embezzled monies that were supposed to have been paid to the IRS as withholding taxes. Now the IRS has asked you to pay them the embezzled monies. Are you liable?
With risk management - no problem. You have several "layers" of protection. Here's how and why.
As a part of a comprehensive risk management program, you helped put in place an audit committee that carefully reviewed the financial statements, and obtained outside audits on an annual basis. You are able to show the IRS that the former executive director's scheme was so clever it fooled the audit committee and the outside CPA firm as well. You also obtained bonding for all employees who dealt with funds, including the executive director. The bond amount is large enough to cover any claim of the IRS. It's the bonding company's problem. Even if the bonding is inadequate, there's still the director's and officer's insurance policy. A claim by the IRS falls squarely inside the policy, and best of all the insurance company will have to hire an attorney to represent you in any fight that may occur with the IRS.
Without risk management - bad news. You just signed whatever your executive director asked you to sign. Apparently that included large checks drawn to him. You never got around to getting bonding. And the director's and officer's coverage contains an obscure exclusion for claims arising out of a breach of criminal law. It turns out it's a crime to fail to take appropriate steps to prevent the loss of withholding monies. The IRS debt isn't even dischargeable in bankruptcy.
The Fired Volunteer. You are an unpaid supervisor of a group of volunteers. One of the volunteers has failed to perform adequately, and you have terminated his volunteer status with the organization. Now the former volunteer has sued you and the organization for wrongful dismissal. Are you liable?
With risk management - no problem. You have several "layers" of protection. Here's how and why.
The Risk Management Committee instituted a volunteer review process three years ago. The discharged volunteer had received bad reviews on three occasions, and after the third bad review had signed a written agreement that if he failed to meet specific, detailed requirements he would be released or placed in a different situation. He failed to meet those requirements. But instead of releasing the volunteer, he was transferred to a different organization where he might perform more acceptably. Since it was a transfer instead of a release, the claim was never brought.
In addition, the Risk Management Committee obtained a policy of liability insurance that covered not just tort liability but claims based upon a claim of breach of contract, thereby assuring coverage for the former volunteer's lawsuit. You will be defended and the insurance policy will pay any claim.
Without risk management -bad news. You should have gotten rid of the bum years earlier, but you never wrote anything down, and now it's your word against his. And the general liability policy only covers tort claims, not claims for breach of contract. The nonprofit corporation will try to defend you, but it's already got problems defending itself.
Sexual Misconduct. One of your organization's volunteer coaches has been arrested and charged with child sexual abuse. Now several of the parents are threatening to sue you and the organization. Are you liable?
With risk management - no problem. You have several "layers" of protection. Here's how and why.
Because your organization instituted a program of reasonable screening for volunteer coaches, which included a requirement that they complete a form providing information about their background and experience, your officers and directors are not likely to be personally liable for negligently selecting the coach, who lied on his application. However, your organization may still be exposed to vicarious liability for the coach's sexual misconduct.
In addition, your program had an ongoing system for review and evaluation of volunteers, including evaluations from parents whose children worked with the coach, so rumors of the coach's potential for misconduct reached you before real harm could be done. And concerned parents had a means of advising you of their concerns.
Finally, since you knew there was a risk of this kind of claim, you made certain that your liability insurance included coverage for this kind of risk. You purchased an endorsement to the standard general liability policy for this specific kind of claim, including the cost of defense. You also maintain a reserve in your budget for the amount of the deductible.
Without risk management - bad news. You never dreamed it could happen in your organization. Because it is so difficult to find volunteer coaches, you accept everyone who signs up, with no questions asked. Because you took no preventative measures and because some people now are saying that unmistakable signs of the coach's misconduct were overlooked or ignored, your officers and directors are exposed to personal liability for gross negligence. Worse, you are dismayed to learn that the organization's liability insurance explicitly exclude coverage for that kind of claim.
Overpaid Executive Director. The IRS asserts you conferred excess benefits on your executive director three years ago. Is your executive director liable? Are you?
With risk management - Because you took all of the steps necessary to take advantage of the "safe harbor" under the excess benefits rules, the IRS will have to prove you paid too much, rather than you having to prove the compensation was reasonable. You were careful not to have the executive director or anyone else with a conflict of interest involved in any part of the process, and you have a fully compliant wage study demonstrating the compensation was in the zone of reasonableness. You have detailed minutes documenting the meetings at which the board of directors reviewed its options and decided on the compensation package.
Because you are in the "safe harbor," you don't have an awful lot to worry about. Neither your executive director nor you face the excise taxes.
Without risk management - Bad news. You cannot qualify for the safe harbor, because you didn't know such a thing as excess benefits existed. Now, three years later, you are going to have to scrape together proof that the compensation was reasonable. And the burden is on you, not the IRS. You've got a problem.
Risk management is not going to solve all legal problems, but it will help anticipate and avoid many claims, and provide a defense and the costs of defense in most claims that do arise. If the nonprofit corporation or you as a volunteer are required to pay money to someone, there will be a source of funds besides your pocket or the nonprofit corporation's budget, so the nonprofit corporation will still be able to deliver its services. Good risk management involves work and a continuing commitment to its goals, but everyone wins.
| Volunteer Legal Handbook, 9th Edition Handbook > Risk Management |
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Revised