7 Critical Risks Facing Nonprofit Organizations

Adhering to charitable missions with limited budgets presents unique risks for nonprofit organizations.

By: Katie Dwyer | July 9, 2018

Nonprofit organizations face many of the same risks as for-profit businesses, but the impetus to honor donors’ contributions of time and money make those risks even harder to mitigate within constrained budgets. Financial instability, damaged reputation and D&O liability are just some of these key exposures are the top concerns for nonprofit institutions:

1) Theft

Theft of funds can be perpetrated by an employee, a third-party vendor or even a client. According to the “Report to the Nations on Occupational Fraud and Abuse, 2014 Global Fraud Study,” by the Association of Certified Fraud Examiners, not-for-profit organizations make up more than 10 percent of frauds committed.

For organizations with limited resources and liquidity, any lost dollars can have an impact on their ability to deliver services or otherwise fulfill their core functions. Those same limitations also make it harder for nonprofits to implement stringent anti-theft controls, as they can increase administrative costs.

2) Fundraising Fraud

Unscrupulous parties may impersonate a nonprofit organization to host fundraising events, keeping the profits for themselves. If the fraud is discovered, the organization risks losing donors’ trust and could be held liable for the losses incurred by those who donated to the fake fundraiser.

It is incumbent upon nonprofits to protect their brand and logo, monitor for any misuse and prosecute any impersonators to deter future instances of fraud.

5Ks, community fairs, bake sales and other fundraising events present their own set of safety, property and legal liability risks.

3) Reputation

Given that nonprofits’ operations are built on the generosity of others, they rely heavily on a positive public perception and the confidence of their donor base.

Losing those would make it impossible for a nonprofit organization to obtain the grants and charitable donations it needs to deliver the services it promises and could drive away clients who don’t want to accept the help of an institution that has garnered negative press for things like fiduciary mismanagement, theft or any claims of discrimination or harassment.

4) Regulatory Compliance

To maintain their tax-exempt status, nonprofits are subject to specific rules set by the IRS. Primarily, nonprofits must demonstrate that they are using funds for a charitable purpose and not for any type of financial or political gain.

The IRS prohibits any political activity beyond communicating with legislators as a constituent or responding to government inquiries. Lobbying, for example, is considered inappropriate for a charitable organization and could cost a nonprofit its tax exemption.

Even if a nonprofit maintains its status, it could be hit with painful fines.

5) D&O Liability

A board’s directors and officers are responsible for maintaining a nonprofit’s vision and long-term strategy. That includes managing funds so that the organization can keep the lights while also ensuring that the majority of the donor’s dollar goes to a charitable cause.

Directors and officers also increasingly take on personal risks from liabilities associated with their professional duties within the organization. They may be held personally liable for claims like wrongful termination, discrimination, harassment and misallocation of funds.

The organization’s standard D&O liability coverage likely will not extend to personal liabilities.

6) Special Events

5Ks, community fairs, bake sales and other fundraising events present their own set of safety, property and legal liability risks. Even if no injuries or damages occur, the organization is still at risk of losing money if the turnout is low.

Proper planning can help keep costs in check to mitigate the risk of financial loss, while clear safety procedures, training materials and emergency preparedness documents can minimize exposures like bodily injury and physical property damage.

Given that nonprofits’ operations are built on the generosity of others, they rely heavily on a positive public perception and the confidence of their donor base.

7) Volunteer Staff

Organizations tend to take a more relaxed approach to the screening and training of volunteers versus paid employees, thinking it overkill to question the intent or abilities of people who are willing to donate their time.

But if a volunteer causes injury or damage or even steals from an organization, the nonprofit can face claims of negligence — and the cost to defend or settle those claims is often more expensive than the injury or damages themselves.

Katie Dwyer is a freelance editor and writer based out of Philadelphia. She can be reached at [email protected].

How a Carrier Partner Can Help Navigate a Challenging Management and Professional Liability Market

A combination of a choppy economy with increased claims frequency and severity could lead to rate increases in the Management & Professional Liability market.

By: Risk & Insurance | April 3, 2024

Rates in the management & professional liability (M&PL) markets were on the rise from 2020 to early 2023 and are now falling rapidly.

M&PL divisions manage a number of different insurance products including management liability (D&O), professional liability (E&O), employment practices liability (EPL), fiduciary liability policies, cyber, etc. In 2023 and into 2024, a big influence on the marketplace has been the extremely aggressive and softening public company D&O market.

Though these rates have been softening for management liability, that may change over the next few years as companies continue to adjust their business models motivated by economic uncertainty. Layoffs were up nearly 200% last year, Forbes reported, even as other recession indicators, like the inflation rate, improved. A recession could lead to an increased claim activity and force carriers to raise rates.

“Whenever there is a meaningful downturn in the economy, we tend to see claim frequency pop up,” said George Schalick, Jr., senior vice president of the Management and Professional Liability Division at Philadelphia Insurance Companies (PHLY).

With continued fiscal uncertainty, businesses potentially already burdened with pandemic-related claims should seek a carrier with a long history in M&PL products. They will provide much-needed risk management guidance and be better positioned to support their insureds during market fluctuations.

Why Insureds Might See an Uptick in M&PL Claims

George Schalick, Jr., Senior Vice President of the Management and Professional Liability Division, Philadelphia Insurance Companies

The current soft market might come as a bit of a surprise as it does not track with previous underwriting cycles and economic conditions. Afterall, many privately held and non-profit organizations struggled during the early days of the pandemic with shutdowns and rapidly declining revenues. But the Government assistance programs, like the Paycheck Protection Program loans, helped keep many afloat during the tough times.

“During COVID many organizations stopped doing business until they were able to sort out all of the health and safety challenges,” Schalick said. “They were forced to lock down, but then all the government assistance programs allowed them to keep people employed. The increased volume of claims we anticipated we would see coming from the lockdowns and restrictions that were imposed upon businesses in the U.S. didn’t manifest at first.”

“Just because there wasn’t an onslaught of reported claims at the beginning of the pandemic, doesn’t mean the circumstances that would give rise to a claim being reported didn’t occur. Courts and the judicial system were closed or slowed and now that they are back open, we’re starting to see the circumstances that occurred during the COVID lockdowns becoming claims today,” Schalick said. “Litigation is progressing.”

Added to the delayed pandemic litigation is a concern over newer claims that might be filed as the country inches toward an economic downturn. Though a recession was avoided in 2023, experts think a soft dip could occur in 2024, with 76% of economists saying there’s a 50% or less chance of an economic downturn this year — that almost always results in more management liability claims.

“During the Great Recession in 2008, we saw an almost immediate spike in claims because of the economic conditions and the pressure it placed on organizations. They were making personnel changes with significant belt tightening almost immediately.” Schalick said.

What’s in Store for M&PL Policy Rates in 2024?

Despite an uptick in claims and increased economic uncertainty, management liability rates haven’t increased, resulting in market-wide pricing levels that may not meet the increased pressure of rising settlements and jury verdicts.

“Rates are going the other direction and settlement values are not falling,” Schalick said.

The mismatch between rates, claim frequency and severity is, in part, because carriers experiencing the dramatic soft market in the public D&O market are seeking premium gain in the private and non-profit market.

“In the public company market, the rates have been decreasing significantly. The rates were increasing in the private, not-for-profit market, and rightfully so, but there’s a desire to supplement overall mid-size D&O for carriers who also write private not-for-profit, and they see that as an opportunity to aggregate premium,” Schalick said. “So the always competitive landscape in the private, not-for-profit market has dramatically increased in the last 18 to 24 months.”

Still, companies of all sizes and types should be concerned about management liability rates in the future. Legal system abuse is resulting in increases in both the amount of litigation and the size of verdicts plaintiffs are receiving.

Certain areas of the country are particularly vulnerable to this type of legal system abuse. As a result, insureds in these localities are likely to be vulnerable to rate increases.

“The environment is so positive for the plaintiff that forces premium increases so carriers are able to stay in that market long term,” Schalick said.

Why a Tenured Carrier Partner Can Help Insureds Navigate An Uncertain Market

It’s clear that insureds are facing an uncertain M&PL market over the next few years. Fortunately, carriers with a long history in the M&PL space will be there to offer stability.

Philadelphia Insurance Companies has been supporting this market for 35 years. PHLY is committed to offering long-term rate stability, even as economic and claims trends start to push premiums upwards. They have an appetite for all sorts of companies, large and small, for-profit and nonprofit alike.

“We’ve been at this game for a long time and are one of the most tenured underwriters in this space,” Schalick said. “We like to stay very consistent.”

PHLY has worked with both for-profit and non-profit on management liability policies. With dedicated M&PL teams throughout the company’s 13 regions, PHLY provides the support agents and brokers are looking for on behalf of their clients. The teams know their regions well and can respond to local trends. They’re also dedicated to making the renewal process as easy as possible for their partners and policyholders.

“We have real confidence in our results, so we focus a lot on making the renewal experience as painless as possible for all agents and insureds,” Schalick said.

The company is also investing in tools to help insureds avoid losses. Earlier this year, they launched a new online risk management platform, PHLYGateway, which offers resources for insureds on how to create an employee handbook and trainings on issues such as recognizing workplace sexual harassment and discrimination.

If insureds have questions, they can consult a Best Practices Help Line, provided via the platform. That way, they can get on the spot risk management guidance to help them prevent claims.

To learn more, visit: https://www.phly.com/mplDivision/managementLiability/default.aspx.

This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Philadelphia Insurance Companies. The editorial staff of Risk & Insurance had no role in its preparation.