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Volunteer Legal Handbook
Section III 
Risk Management


III. Risk Management

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.

A. 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.

1. Volunteer 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.

2. Volunteer 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.

a) 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. §13041. Such checks may become mandatory as to any such volunteer or employee in the state of Alaska; AS 47.35.017 was amended in 1994, effective on January 1, 1996. The regulations implementing those amendments are complex. Consult your attorney.

3. Volunteer 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.

4. Volunteer 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.

B. Education

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.

1. Orientation programs

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.

2. Update and continuing education programs

Nonprofit corporations should implement programs that develop, update and refresh the skills of volunteers. As the laws change (this is the 5th 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.

a) Development programs

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.

b) Updates and continuing education

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.

C. 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.

1. Audit committees

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.

2. Risk management committee

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.

3. Board of directors self audit or evaluation

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.

4. Example

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.

D. Insurance

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.

1. Kinds of insurance

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.

a) 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.

b) 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. Again, read the 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.

c) 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.

d) 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.

e) Director's and officer's

General casualty policies exclude claims against officers or directors for their actions or inactions. You will have great 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 coverages. The amount of coverage need not be terrifically high, but you should make certain that adequate coverage for the costs of defense is present.

f) 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.

g) 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.

2. 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.

a) 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.

b) "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.

3. 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.

a) Amount of deductible

A deductible is the amount of an insurance claim that you agree to bear &endash; 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 &endash; usually 20% &endash; 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.

b) Scope of coverage

As you might expect, the broader the coverage &endash; the fewer the number of exclusions &endash; the higher the premium. The narrower the coverage, generally the lower the premium.

c) 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.

d) 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.

(1) "Occurrence" policies

These kinds of 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.

(2) "Claims made" policies

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.

4. Selecting an insurer

There is no tactful way to say this: insurance companies go broke, and leave their insureds with no coverage. There are insurance rating agencies; 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.

E. 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.

1. Limited director immunity

As described at the discussion on nonprofit corporation law, directors and officers can enjoy a limited statutory protection for certain classes of activities, but only if the articles of incorporation for the nonprofit corporation are amended to contain specific language. See the discussion at nonprofit corporate law earlier in these materials.

2. Federal statutory immunity

Congress recently adopted the Volunteer Protection Act of 1997, discussed at Tort Law.

F. 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.

1. 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 your 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.

2. 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.

3. The Justice Rabinowitz principle

The Justice Rabinowitz principle 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.

4. 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.

5. 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.

6. 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.

7. 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.

G. Contractual Protections

You can manage some risks with contract provisions, but there are both practical and legal limits on your ability to do so.

1. Practical limits

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.

a) 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.

2. Legal limits

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.

a) Releases

The best-known contractual provision for allocating risk is the release. A release causes one party to agree in advance that 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.

(1) 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.

b) 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.

H. 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.

1. 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.

2. 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."

3. 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.

I. Additional issues

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.

1. Benefits of risk management

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.

a) Customers and clients

You protect your customer, by reducing the chance of harm. You protect your other customers, in the event an injury occurs, since the nonprofit corporation is more likely to survive intact. The availability of funds to defend against and pay a claim means less chance a claim will disrupt delivery of services.

b) Employees and volunteers

You protect your employees, officers and directors from personal liability, allowing you to attract and retain higher caliber talent.

c) The nonprofit corporation itself

You improve the chances that the nonprofit corporation will avoid catastrophe and the consequences of unforeseen disasters.

2. Related areas

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."


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