As a new organization takes off, it usually doesn’t take long before a founder realizes the importance of carrying Directors and Officers (D&O) insurance. That’s assuming the founder didn’t know about this type of coverage before. This coverage provides some teeth behind the indemnification provision in your organization’s bylaws.

Let’s break that apart for a moment.

The Indemnification provision in the bylaws establishes that a person acting on behalf of the organization will not be held personally liable for a wrongful action. This provision is not only generally expected to be found in an organization’s bylaws, but it’s also required in several states. Indemnification is the basis of what might be more commonly known as the “corporate shield.” If a person is acting on behalf of the organization, then it is legally considered an act of the corporation, not of the individual.

In the nonprofit setting, indemnity is doubly important to ensure that you can recruit new board members with confidence. After all, why would someone volunteer to support an organization and its mission if there is no protection from getting sued?

Should a single board member or a group of board members act outside their authority — known as ultra vires acts — they risk breaking the corporate shield. Even if a majority of the board agrees on an issue, a decision must be made within the context of a properly called meeting.

I had a conversation recently with an ousted founder who made a good point that even if a group of board members acts outside their authority, they can still successfully ousting a founder. The action itself, or the way they took the action may not be technically legal, but the founder will wind up having very little (if any) recourse available to them. This reflects my own experience as well.

In this regard, insurance is not your friend. D&O insurance will not protect a founder, even if a founder is improperly removed, in violation of the law or the organization’s bylaws and board-approved policies. In the case where I have direct experience, the insurance company hired an independent attorney to defend the board members against the claims made against them.

The coverage provided by insurance is reactionary. A founder cannot depend on insurance to protect them against wrongful terminations before they happen. The insurance company is not going to step in and instruct the board members to stop what they’re doing. In a more common scenario, the insurance company will offer a meager settlement to the founder in exchange for a confidentiality agreement. No matter how improperly the board members acted, they will still very likely succeed in removing the founder through some means.

Once the damage is done and evident, the founder’s best possible means of recovering at least some of the damage is through the insurance claims process. The alternative is an ugly and costly legal battle where only the lawyers will win. Insurance will not protect an organization from a destructive board. But insurance can at least save the founder from having to engage in a long fight.