A non-profit organization should always consult with legal counsel and make sure that the by-laws are written to take full advantage of any indemnification provisions available through state statute. A formal program should be initialized to retain any documents to create that aver important 'paper trail' for your defense. In addition, a non-profit organization may want to consider a legal audit of there procedures. These three measures are discussed in detail below:

Maximize Indemnification Protection

The internal indemnification provisions of the organization should be reviewed to ensure that they provide the maximum protection permitted by law.  Suggested provisions to maximize indemnification rights include:

• The articles of incorporation or by-laws should provide for indemnification to the full extent permitted by law

• The provisions should require indemnification, rather than merely permit the organization to indemnify

• The provisions should require the advancement of defense expenses, subject only to an unsecured obligation to repay the expenses if a court subsequently determines the indemnification was not permitted

• The provisions may require the organization to reimburse the director and officer for any expenses incurred in a claim against the corporation for such indemnification if the director or officer is successful in whole or in part

• The provisions may provide that the director or officer has a right to an appeal or an independent de novo determination as to indemnification entitlement

• The provisions may expressly state that the indemnification rights constitute a contract, intended to be retroactive to events occurring prior to its adoption and shall continue to exist after the rescission or restrictive modification of the provision with respect to events occur-ring prior to that rescission or modification. Alternatively, a separate indemnification contract could be executed by the organization and the director or officer

• The provisions may provide that any director or officer who serves a subsidiary of the organization or any employee benefit plan of the organization or such subsidiary is deemed to be providing such service at the request of the organization

To avoid any argument that the expanded indemnification protection is unfair; the organization may obtain member approval for the indemnification provision, even if unnecessary under the law.  To assure adequate funding for any indemnification claim, the organization may secure its indemnification obligation by establishing a reserve fund, providing a guarantee by a related entity or agency, or by purchasing a surety bond, letter of credit or other similar financial instrument.

Document Retention Program

To guarantee that valuable documents are not destroyed and that potentially harmful documents are not retained, a document retention program should be established. This program should define the administrative procedures for retaining documents relating to the organization and the actions of the board, including financial and legal documents, personnel records and other files of the organization.

This program should include procedures for periodic review of documents to determine those that should be retained and those which should be destroyed. Such determination should be made in light of state laws and evidentiary rules which may apply, the degree to which the documents are superfluous and unnecessary, and the possibility that the documents may be misconstrued or confusing. When in doubt, the document should be retained.

Such a document retention program should be implemented not only by the organization, but also by individual directors and officers with respect to documents in their personal files.

Legal Audit

A non-profit organization may use a 'legal audit' to inspect and evaluate its legal structure, its pending litigation and potential claims and its internal policies, procedures and guidelines with a view to avoiding future D&O claims.  Risk management techniques, including indemnification provisions and D&O insurance policies can also be reviewed for scope and adequacy.

In addition to identifying potential problem areas, a legal audit emphasizes to all participants the necessity for compliance with all legal requirements at all times and the importance of preventive planning.

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