After the nonprofit NC New Schools suddenly collapsed in April, its high-profile board of directors learned that the unpleasant news went beyond a bankruptcy filing.
The board’s insurance policy had lapsed, leaving the directors unprotected against lawsuits or legal claims.
It is extremely unusual for nonprofits to lack directors and officers insurance, commonly known as D&O insurance, according to UNC law professor Thomas Hazen, an expert on nonprofits.
“My basic advice is never serve on a board that doesn’t have insurance,” Hazen said. “Not even a neighborhood association.”
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The organization’s top officers were also left unprotected.
NC New Schools made North Carolina the nation’s leader in early colleges, which provide college-level classes for high school students. The organization won $11 million in grants from Bill and Melinda Gates, more than $35 million in federal grants and more from North Carolina’s biggest businesses.
In April, New Schools abruptly shut down, giving its 80 employees less than 24 hours notice that their jobs had evaporated. It filed for bankruptcy, showing debts of $1.5 million more than its assets.
Bankruptcy trustee J.P. Cournoyer said the $1 million D&O policy lapsed sometime in 2015.
The board of directors includes a group of heavy hitters. The chairman was Jeffrey Corbett, a senior Duke Energy executive. Others include former BlueCross BlueShield executive Bob Greczyn, former Wake County manager and state senator Richard Stevens, two senior executives at the pharmaceutical giant GSK and others.
Corbett did not return calls about the lack of insurance.
“It’s not what I expected,” said board member Burley Mitchell, a former chief justice of the state Supreme Court. “I guess there were a lot of things I didn’t know.”
Mitchell, who said he had little interaction with NC New Schools over the past three years, said state law protects nonprofit board members more than those who sit on the boards of for-profit corporations.
Hazen agreed, saying state law grants nonprofit board members almost complete immunity from liability. But directors would be liable for legal fees, which are typically covered by insurance.
The court-appointed bankruptcy trustee will investigate NC New Schools’ finances and can seek to recover funds disbursed by the organization.
The News & Observer has reported how chief executive officer Tony Habit knew at least as early as June 2015 that New Schools could face a $2.1 million deficit. In the months before the collapse, emails showed that Habit told his staff to delay the disbursement of federal funds in violation of federal regulations.
When the N&O asked Habit about the lapsed insurance policy, he replied by email, “It was not my decision.” He said another employee allowed it to lapse.
Habit then sent an email saying he had replied by mistake and asked the newspaper to delete his original email.
Hazen, the law professor, said it seemed strange that the insurance policy was allowed to lapse as financial difficulties loomed. Officers, such as Habit and his senior staff, are more exposed to liability under state law than the board of directors.
“The insurance is primarily there to protect him,” Hazen said.