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December 18, 2018

Beware of Nonprofit Board and Reputation Exposures

Nonprofits can be sued over a wide range of claims, just like their for-profit counterparts. In fact, Insurance Journal reports that directors and officers liability claims occur twice as often in nonprofits compared to private companies.

The increase in nonprofit lawsuits could stem from a number of possible issues.

  • Nonprofits may be so focused on their cause that they neglect other issues.
  • Nonprofits may incorrectly believe their nonprofit status makes them an unlikely target.
  • Individuals serving on nonprofits may be busy with other duties, and they may be working outside their normal sphere.
  • Donors typically have high expectations for how funds are managed.
  • Nonprofits regularly work with vulnerable populations.
  • Volunteers may not be screened properly.

Regardless of the cause, nonprofits get sued – a lot. When this happens, the nonprofit’s financial stability and reputation can be put in jeopardy.

Nonprofits depend on their reputation.

Reputation is important to all corporations, but this is especially true in the case of nonprofits. As Risk & Insurance explains, nonprofits depend on their reputations to secure grants and donations.

Many things can damage a nonprofit’s reputation, from claims of mismanaged funds to inappropriate actions of volunteers. Some threats may come from outside. For example, cyberattacks that reveal personal data could damage a nonprofit’s reputation. Fundraising fraud, described in Risk & Insurance as people who impersonate nonprofits to elicit and steal donations, is another worrisome threat.

Personal liability is about to increase.

Serving on the board of a nonprofit is a great way to give back to your community while boosting your reputation – unless something goes wrong.

In some cases, individual board members could be held personally liable. In fact, this may be about to become more common. The Department of Justice recently announced policy revisions that will make holding individuals responsible a top priority in corporate investigations.

According to Business Insurance, the new policy will likely drive up demand for directors and officers liability insurance as individuals seek to protect themselves from the increased risk of personal liability. This is why it is important to have board insurance for nonprofits.

How nonprofit boards can limit risk

To limit risk, nonprofits and their board members must be proactive.

  • Before becoming active on a board, take time to understand the board’s policies as well as any relevant regulations. This is especially important if the work you’re doing is outside your normal area of expertise.
  • Any potential conflicts of interest must be treated seriously. Nonprofit boards must have a written conflict of interest policy. Every year, nonprofits will file IRS Form 990, which asks about the conflict of interest policy and how it is enforced. Make sure all board members understand and adhere to this policy.
  • Screen and monitor volunteer staff for any potential problems. Volunteers are generally admired, but some volunteers may have malicious intents or past problems that could harm the nonprofit and the people it serves. VolunteerHub explains why volunteer background screening is essential these days.
  • Pay attention to cyber risks. From negative tweets to viruses and data breaches, many online threats can harm a nonprofit’s reputation.   
  • Don’t assume that your other nonprofit insurance coverage types, like general liability, will protect you against liability associated with serving on a board of directors. Make sure you are protected by a directors and officers liability insurance policy, and that the limits are sufficient. If the nonprofit doesn’t provide adequate coverage, individuals will need to get their own policies.

Need help controlling the cost of risk at your nonprofit? Heffernan Insurance can help. Learn more about our nonprofit insurance practice.

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