Indiana Nonprofit Corporations – What is Indemnification?

Fancy - Question MarkFrom the email inbox:

Our nonprofit Board has been talking about getting D&O insurance.  Our bylaws says that the nonprofit must indemnify the Board of Directors.  What is indemnification, and why do we need D&O insurance?


This is a complicated issue that generates a lot of questions.

“Indemnification” and “Directors & Officers” insurance (also known as D&O or “errors and omissions” insurance) are related, but two separate things.

OK – here’s an overview of how each works:

First, it is important to note, that this information only applies to Directors & Officers issues and insurance.  General liability and specialty insurance (like sexual misconduct insurance) are separate types of insurance, and the benefits of those types of policies is not discussed, here.
Second, this only applies to Indiana nonprofit corporations, so if you are involved with a nonprofit in another state, check local laws.

1.  The State of Indiana (in Indiana Code 23-17-13-1(d)) provides protection for nonprofit organizations and their board members (not general members) for actions taken in good faith in the execution of their duties the normal course of their activities.

2.  It is important for the nonprofit organization’s bylaws to reflect this by adding indemnification language (Indiana Code and 23-17-16-1, et seq.), so that protection is acknowledged and enforced at the Board (organization) level.  Smart board candidates refuse board service with an organization that does not include indemnification language in the Bylaws.  (More on Directors & Officers insurance, in a minute).

— This means that if a Board member is sued for actions of the Board or of the organization, then the Board member is covered by Indiana law with the same protection provided to nonprofits.

— Further, this means that the nonprofit is required to defend (and pay for the defense) of a Board Member sued for actions taken in good faith in the performance of duties as a Board Member.

— Generally speaking, if a nonprofit organization is sued, the Board members are included in the lawsuit – by name – as a matter of course.  That’s just how the shot-gun approach to lawsuits works.

— By the way, this language is typical for all types of corporations – this is not just peculiar to nonprofits.  ALL formal organizations use (or should use) indemnification language  in the bylaws.

3.  A separate question is whether a nonprofit organization should purchase Directors & Officers insurance (D&O).

— Most of the time, if there is a claim, the purpose of D&O is to pay for the attorney to defend the lawsuit.   Generally, the State protection for nonprofits will prevent a claim from being successful, but will not prevent a claim from being filed (anyone can sue anyone for anything – but that does not mean that “anyone” will win).  That said, lawyers are expensive, so there is value in the insurance, from that perspective.

— However, there are instances where there might be a successful claim, and this is why D&O insurance is important.    This is usually in situations where a board decision has either consequences that affect someone’s livelihood or income, or has tragic consequences.  I use the example of an experimental aircraft club.  The Board’s decision to allow (or not) a particular experimental aircraft to fly into an event could have tragic consequences.  A more mainstream example would involve organizations that benefit “protected classes” – the young, the elderly, the disadvantaged, the disabled, etc.  A Board decision that has a negative impact on the life (or quality of life) of a protected class could result in a lawsuit.

— Another example would be a nonprofit that handles significant amounts of money or distributes a significant amount of money or assets that might be an attractive target for a lawsuit.  A typical use of D&O is for economic development organizations that work on development projects that can be worth millions of dollars.

— Small nonprofits that fit none of these trigger points might choose to forgo D&O insurance.  This should be a board discussion and a cost-benefit analysis (the cost of D&O weighed against the relative risk of a lawsuit)

Bottom line:

1.  Nonprofit corporations must have indemnification language in the bylaws.  While not legally required, it is considered bad practice and bad faith treatment of your Board Members to not have it.

2.  Nonprofit corporations might need D&O insurance, but that should be an analysis of the Board, based upon their activities and perceived risk.

Nonprofit Yoga Poses

Blue Avocado LogoTerrific article by Vu Lee in the latest Blue Avocado newsletter.

My favorite is “The Mountain of Emails” Pose.

Check it out:  Downward-Facing Budget and other Nonprofit Yoga Poses.

Blue Avocado is a look at nonprofits and the nonprofit world from the trenches of the Executive Director.  It has wonderful articles about boards, governance, executive directors, and both troubles and blessings found in each.  If you are a nonprofit board member, staff member, executive director or donor,  Blue Avocado should be required reading.

Donor Developement and the “Big Score”

Chasing the Big ScoreQuestion from the mailbag:  Just thinking about all that lies ahead and thought I would plant this seed with an attorney who handles this kind of thing.  We just need one good sized farm to be willed to us and we will have an endowment.  I don’t see how we are going to do all this without one. ~ Question from a board member of a new nonprofit organization as the organization discusses its budget needs for current and long-term projects.


Answer:  Short answer is – This kind of donor development (waiting for that large bequest from some generous donor’s estate) should have a very limited role in the long-term fundraising model of a nonprofit organization.

Estate Planning and the Big Score

Over the years, I’ve seen a lot of articles and nonprofit training programs about donors and estate planning (including attorney continuing education courses), but have only one time in all my years of estate planning practice had a client ask for suggestions on where to leave a charitable gift.  Usually (and especially for large gifts) the potential donor already has a charity in mind, or considers the kids the “favorite charity,” or doesn’t wish to leave anything to charity.  Almost always, when I broach the topic of charitable gifts to an estate planning client, I am either brushed off (politely, of course), or the client already has something in mind.

And, strictly speaking anecdotally, when I have seen those “big farm gifts” – and I have seen them several times – it has always been from a donor that is the “last of the line” and has no children or other heirs.   Also, at least three times that I can think of off the top of my head, that largesse has been sprinkled about in the community, rather than bestowed upon only one charity.

While attorneys can certainly be helpful in developing the documents – and I’ve offered that service to some of my nonprofit clients – that kind of donation has to start with a heart-string already with the charity in question.

In other words, don’t expect the attorney to do your donor development for you.

Where the Big Score Fits in Donor Development

If your nonprofit board thinks that donor estate planning is an appropriate fund raising tool, a good start would be to have a “wish list” in some sort of eye-catching and easy-to-read form as part of donor development.  Something as simple as “Remember [insert your Nonprofit’s name here] in your Estate Plan” as a small by-line in the donor acknowledgment letters (or annual appeal letters) would plant the seed the might result in that “big score.”

Even with wealthy donors, estate planning is the last question you ask, not the first.  First, develop the event attender, then the casual donor, then the patron, and only after you have a long-established and solid relationship with a potential “big score donor” should you start a serious discussion about the endowment.

Where the Big Score Fits in Nonprofit Development

From a practical perspective, I’ve always wondered about the “big score” approach to fund-raising.  While I agree that it would be a huge benefit to the organization, I’ve always questioned how it fits with the overall fundraising goals of the organization:

(1)  That kind of gift is extremely rare, so putting resources toward its pursuit it is a little like playing the lottery

(2) it should be considered to be only one tool (and, in terms of resource allocation, a minor one) in the fund-raising toolbox and

(3) this once-in-a-lifetime gift, while very much like hitting the lottery does not have the “reach” of getting the organization’s name out in the world.

Questions the Nonprofit Board Should Ask About Donor Development and the Big Score

Using estate planning as a donor development angle should be discussed by the Board or the Fundraising team.  This should never be a matter of writing a letter to the people on your donor list.  It takes a dedicated development of a long-term relationship with a donor and – when the “ask” time comes – it takes someone with the knowledge and skill to both present the idea to the donor and also answer questions about both the bequest and how it will be used.

The nonprofit board needs to decide how – or if – the bequest or endowment element will fit into the overall fundraising plan of the organization:

  1. What’s the nonprofit’s philosophy on fundraising?
  2. Would you rather have one donor give a million dollars or a million donors give one dollar?
  3. How does a nonprofit organization effectively and appropriately reach out to all types of donors to both maximize resource allocation and maximize total “yield” from efforts?
  4. Where does the “big score” fit into the nonprofit culture?
  5. What are the variables to consider in allocating resources?


Do Nonprofits Need Insurance?

Question:  My new nonprofit has a mission of promoting and encouraging folks to discover their local historic treasures.  We are sponsoring guided and unguided walks, including weekend activities.  Do we need insurance, and what kind of insurance do we need?

ANSWER:  All Nonprofit organizations should develop a relationship with a friendly insurance person, so he/she can offer some guidance on what works best for you.  Nonprofits are varied and unique, and insurance policies may need tailoring to sufficiently cover the organization and its members and board of directors.

Short answer – yes, you should have insurance.

Long answer – there are different kinds of insurance that could apply, here:

1.  General Liability insurance – this is insurance that would cover your organization and the general activities of the organization, and would generally include coverage for situations where someone is injured “under your watch” or property is damaged because of something your organization does.  Since your organization will be focusing on sponsoring and encouraging walking tours, your GL insurance could tailored to cover routine events.  Your insurance agent likely will need to know a few things — (1) how many “supervised” activities (events), (2) how many participants (3) whether there is food or other ancillary activities (dinner, gathering, demonstrations, etc.)

2.  Event insurance – this is a possibility for routine events, but my guess would be “overkill” for what you have in mind.  Event Insurance tends to be expensive, because the expectation is coverage for an event that attracts a lot of people, has a lot of activities, and a lot of opportunity for claims of all types.  Roughly speaking, you can expect to pay more for event insurance for a one-time thing than you would pay for GL insurance.

A knowledgeable insurance agent can guide you on what is best for your organization, and what types and liability limit of coverage would work the best for you.  Be sure your insurance agent has experience with nonprofit organizations – nonprofit is different from commercial.
In my experience, GL should be sufficient.  One of my organizations has GL coverage and not event coverage, but they have several events during the year.  This is noted on the GL policy, so is included in the coverage.

Nonprofit Demographics – Service Areas has published an interesting infographic about nonprofit service areas – this is a simple compilation of the NTEE (National Taxonomy of Exempt Entities) codes to generate the distribution you see below.  Original article here. Click on image for larger view or download as PDF document at the website. is a terrific website with all sorts of data about nonprofits, as well as helpful information for nonprofits.  If you are in the nonprofit world, you must become familiar with this resource.

Nonprofit Tax Tip – §501(c)(3) Reinstatment

More than 275,000 nonprofits lost exempt status in July of 2010. Since that time, the IRS has continued to revoke the exempt status of nonprofits that fail to file a 990N, 990EZ or 990 for three consecutive years.

Consequences for having exempt status revoked are severe – the nonprofit loses its §501(c)(3) status, no longer qualifies for most grants, donations are no longer tax-deductible and (horrors!) net income could be taxed at for-profit corporation rates!

In order to regain §501(c)(3) status, nonprofits must file a new Form 1023 Application for Tax Exempt Status. This is a lengthy and somewhat complex form. There is also a salty filing fee – $400 for nonprofits with gross receipts less than $10K per year and $850 for nonprofits with gross receipts $10K or greater.

For small nonprofits, this fee can be reduced to $100 upon request to and approval by the IRS. However, in order to take advantage of this reduced fee, a nonprofit MUST FILE the Form 1023 by December 31, 2012.

If your nonprofit lost its exempt status, and you think you will re-file – don’t delay! File today!