The nonprofit sector was stressed by daunting challenges in the wake of the last decade’s economic collapse, in some ways modeling Charles Darwin’s perspective of a world in which the strongest survive while the weak die by the wayside.
Consider that the past six years saw:
• A complete leadership overhaul at the Susan G. Komen Foundation, including its founder’s resignation as CEO, following donor outcry because of the board’s decision not to continue funding Planned Parenthood;
• Sweeping changes at Livestrong Foundation to preserve the organization after founder Lance Armstrong’s fall from grace in the competitive cycling world;
• The New York City Opera’s bankruptcy after years of widening deficits and seemingly desperate leadership decisions;
• In Connecticut, the executive director of Hartford Areas Rally Together recently resigned after she admitted using the nonprofit’s money for personal expenses.
These and countless other cases nationwide illustrate that, while employment-related matters may still be the most frequent sources of claims against nonprofit leaders, the risk landscape is changing – with startling results.
Today’s nonprofits operate in an environment of increased consumerism, outcomes-based philanthropy, intense competition for reduced government funding, and greater regulatory scrutiny. As a result, they’re accountable to higher standards of financial discipline, operational transparency, and prudent stewardship — and they’re scrutinized by donors, constituents, watchdog groups, and regulators, among others.
Issues that have invited litigation include executive compensation levels, directional shifts in grantmaking and programming, alleged employment discrimination, and financial mismanagement.
United States Liability Insurance (USLI), a Berkshire Hathaway company that insures over 55,000 nonprofits nationwide, reports that employment-related offenses, misrepresentation/fraud, financial mismanagement, deceptive fundraising practices, and data breaches comprise the top five leading causes of action it now sees against nonprofit directors and officers.
Christine Murray, USLI’s chief underwriting officer for professional liability, observes: “Nonprofits are under increasing pressure to do more with less, forcing them to make difficult decisions. Those decisions at the board table can have unintended consequences – sometimes even threatening an organization’s survival – leading to lawsuits against the directors and officers.”
The best antidote for nonprofit management liability is a healthy board of directors with diverse talents and perspectives, the courage to challenge the status quo, and an unflagging commitment to act with complete financial and operational transparency, placing the organization’s interests above all else. Progressive organizations promote board-level engagement in enterprise-wide risk management, often by a finance/audit committee.
Bearing in mind Buffett’s oft-quoted admonition that, “It takes 20 years to build a reputation and five minutes to ruin it,” the organization should also develop and periodically stress-test a crisis management and communication plan.
From an insurance standpoint, a nonprofit organization should:
• Consider separate policy limits for directors’ and officers’ liability and employment practices liability risks. Although both types of protection are commonly packaged within a single insurance policy, the ideal structure firewalls the two risks from each other, with a dedicated limit for each. Defense costs should be covered outside, or supplementary to, the policy limits.
• Insure against third-party discrimination. Even if an organization has no employees, volunteers and other third parties – clients, patrons, members, or suppliers – can sue for harassment and discrimination.
• Explore specialty insurance for network security and privacy liability risk. Today’s electronic age of online fundraising, crowdsourcing, social media, e-commerce, and electronic recordkeeping raises the stakes for custodians of donor, client, and employee data – but management liability insurance provides only a partial solution, at best.
• Periodically seek skilled professional help to assess the threats on the organization’s risk landscape and the extent to which its commercial insurance can be expected to respond. No one likes surprises – least of all in a moment of acute need.
Scott R. Konrad is an executive of HUB International Ltd., a global insurance brokerage and risk advisor. He resides in Essex.