Nonprofit Risk

7 Critical Risks Facing Nonprofit Organizations

Adhering to charitable missions with limited budgets presents unique risks for nonprofit organizations.
By: | July 9, 2018 • 3 min read

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.

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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.

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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 an associate editor at Risk & Insurance®. She can be reached at kdwyer@lrp.com.

More from Risk & Insurance

More from Risk & Insurance

2018 Risk All Stars

Stop Mitigating Risk. Start Conquering It Like These 2018 Risk All Stars

The concept of risk mastery and ownership, as displayed by the 2018 Risk All Stars, includes not simply seeking to control outcomes but taking full responsibility for them.
By: | September 14, 2018 • 3 min read

People talk a lot about how risk managers can get a seat at the table. The discussion implies that the risk manager is an outsider, striving to get the ear or the attention of an insider, the CEO or CFO.

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But there are risk managers who go about things in a different way. And the 2018 Risk All Stars are prime examples of that.

These risk managers put in gear their passion, creativity and perseverance to become masters of a situation, pushing aside any notion that they are anything other than key players.

Goodyear’s Craig Melnick had only been with the global tire maker a few months when Hurricane Harvey dumped a record amount of rainfall on Houston.

Brilliant communication between Melnick and his new teammates gave him timely and valuable updates on the condition of manufacturing locations. Melnick remained in Akron, mastering the situation by moving inventory out of the storm’s path and making sure remediation crews were lined up ahead of time to give Goodyear its best leg up once the storm passed and the flood waters receded.

Goodyear’s resiliency in the face of the storm gave it credibility when it went to the insurance markets later that year for renewals. And here is where we hear a key phrase, produced by Kevin Garvey, one of Goodyear’s brokers at Aon.

“The markets always appreciate a risk manager who demonstrates ownership,” Garvey said, in what may be something of an understatement.

These risk managers put in gear their passion, creativity and perseverance to become masters of a situation, pushing aside any notion that they are anything other than key players.

Dianne Howard, a 2018 Risk All Star and the director of benefits and risk management for the Palm Beach County School District, achieved ownership of $50 million in property storm exposures for the district.

With FEMA saying it wouldn’t pay again for district storm losses it had already paid for, Howard went to the London markets and was successful in getting coverage. She also hammered out a deal in London that would partially reimburse the district if it suffered a mass shooting and needed to demolish a building, like what happened at Sandy Hook in Connecticut.

2018 Risk All Star Jim Cunningham was well-versed enough to know what traditional risk management theories would say when hospitality workers were suffering too many kitchen cuts. “Put a cut-prevention plan in place,” is the traditional wisdom.

But Cunningham, the vice president of risk management for the gaming company Pinnacle Entertainment, wasn’t satisfied with what looked to him like a Band-Aid approach.

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Instead, he used predictive analytics, depending on his own team to assemble company-specific data, to determine which safety measures should be used company wide. The result? Claims frequency at the company dropped 60 percent in the first year of his program.

Alumine Bellone, a 2018 Risk All Star and the vice president of risk management for Ardent Health Services, faced an overwhelming task: Create a uniform risk management program when her hospital group grew from 14 hospitals in three states to 31 hospitals in seven.

Bellone owned the situation by visiting each facility right before the acquisition and again right after, to make sure each caregiving population was ready to integrate into a standardized risk management system.

After consolidating insurance policies, Bellone achieved $893,000 in synergies.

In each of these cases, and in more on the following pages, we see examples of risk managers who weren’t just knocking on the door; they were owning the room. &

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Risk All Stars stand out from their peers by overcoming challenges through exceptional problem solving, creativity, clarity of vision and passion.

See the complete list of 2018 Risk All Stars.

Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at dreynolds@lrp.com.