Should our bylaws include an indemnification clause?

I’m reading your amazing ebook The IRS and Your Homeschool Organization, and I noted a difference in the bylaws example in your ebook vs your website.

There is an Article 7 Indemnification on the website sample bylaws.

Is an Indemnification section necessary to have in our bylaws?

Thank you,
Nicole

 

Nicole,

I’m glad the book is helpful!

You asked, “Is an Indemnification section necessary?”

 

What:

Let’s start by explaining what indemnification is. It means ‘to indemnify’:

indemnify

to compensate for damage, loss sustained, expense incurred, etc.
to guard, secure against anticipated loss; give security against (future damage or liability).

 

How does it work?
A nonprofit organization might include in their bylaws a clause such as this:

Indemnification
“The Organization agrees to indemnify, defend and hold harmless the board members, its officers, directors and employees, from and against all liability, loss, cost or expense (including attorney’s fees) by reason of liability imposed upon the Organization, arising out of or related to organization’s activities, whether caused by or contributed to by the members or any other party indemnified herein, unless caused by the sole negligence of the member or any other party indemnified herein. Organization may maintain insurance, at its expense, to protect itself and any such person against any such liability, cost or expense.”

Why have an indemnity clause:
It assures nonprofit board members that the nonprofit organization will pay any legal fees related to the organization’s activities or their board service (unless caused by the sole negligence of the board member). Typically, the nonprofit purchases Directors and Officer (D&O) insurance to pay for the legal bills when and if they arise.

Some people will not serve on a nonprofit board without an indemnity clause and without Directors and Officer insurance. So having this clause in the bylaws and a D&O policy helps attract and retain board members.

 

Why not have an indemnity clause:
Some nonprofits are small and they do not have the financial means to pay legal bills of board members or purchase Directors and Officer insurance.

True Story: I am on the board of a local charity (not a homeschool group) and we were reading over the bylaws word-by-word and updating them (a great idea to do that every few years!). The bylaws had an indemnification clause much like the one above. We were all a bit confused by the language and unclear what it meant.
One of the long-time, experienced board members said that the last sentence was the most important. It said: “The organization may purchase insurance for such indemnification as determined by the board.” This is a tiny charity, all volunteer, and we do not carry insurance to cover Directors and Officers. We decided to delete the indemnification clause since we had no resources to pay for attorney fees or D&O insurance. The indemnification clause was a promise we could not keep.

 

What should we do?

It’s best to research indemnification and talk it over with your board. Your board can decide to include it in your bylaws or not.

This is not legal advice. I recommend you contact an attorney if you need additional assistance.

 

Carol Topp, CPA

Helping Homeschool Leaders