Nonprofits invite new exposures when they act like for-profits

The risk to nonprofits may actually exceed that facing for-profits because nonprofits may have smaller budgets, less financial and legal help, and undefined employment practices.

As they face pressure to do more with less, nonprofit organizations are increasingly modeling some of their fundraising, employment practices and marketing of services after for-profit businesses. According to a recent study, this has risks for charitable, social service and nonprofits and their directors.

“Not surprisingly, as nonprofits become more like their for-profit counterparts, the laws and duties that apply to, and the claims that are asserted against, nonprofits likewise evolve,” wrote the study’s authors. “The result is that nonprofits face more exposure to legal risks.”

The study, “Be Prepared: Nonprofit Organizations’ Legal Risks and Protections,” authored by lawyers with Ross, Dixon & Bell LLP, noted that even if they do not adopt the ways of for-profits, nonprofits and their directors and officers face numerous potential claims.

Typical exposures

Some of the exposures relate to their tax-exempt status, nature of activities, workforce and populations served. Most frequently, claims against nonprofits and their directors involve employment practices. Allegations concerning civil rights, defamation, breach of fiduciary duty and anti-trust also are common.

The risk to nonprofits may exceed that facing for-profits because of their smaller budgets, fewer personnel, restricted access to financial and legal counseling, and less formal practices and procedures, particularly surrounding employment practices.

“These factors may increase the likelihood of supervisory lapses or other errors. The potential liability may be of particular concern for directors, who very often serve on the boards of nonprofits without compensation,” the authors added.

The study was prepared for ALTRU, a Cincinnati-based managing general underwriter that provides nonprofit D&O liability coverage to independent agents and wholesalers. (The full study can be downloaded at www.altru.com). ALTRU partners with Arch Insurance Co. on a program for nonprofits that covers employment practices, discrimination complaints, harassment, fiduciary liability, defamation and workplace violence.

Healthy market

Despite the study’s cautions about increasing legal risk for nonprofits, “Insureds have an easier time obtaining broad coverage in 2006 than they have in the past four years,” said John Bolan, underwriting officer at ALTRU. “There are more than 40 commercial insurers providing nonprofit-specific insurance.”

He stressed the importance of employment practices protection. Also, nonprofits should have proper employment applications and anti-discrimination and harassment guidelines, and a “structured progressive discipline policy for wayward employees,” Bolan said.

Topics Profit Loss