Nonprofits invite new exposures when they act like for-profits

As they face pressure to do more with less, nonprofit organizations are increasingly modeling some of their fund raising, employment practices and even marketing of services after for-profit businesses. According to a recent study, this so-called “capacity building” process has its risks for charitable, social service and other nonprofits.

“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,” write the authors of “Be Prepared: Nonprofit Organizations’ Legal Risks and Protections.”

“The result is that nonprofits face more exposure to legal risks. Moreover, even the successful resolution of a matter may leave a nonprofit facing significant legal defense costs,” the study concludes.

The study, authored by lawyers with Ross, Dixon & Bell LLP of Washington, D.C., notes that even if they do not adopt the ways of for-profits, today’s nonprofits and their directors and officers face numerous types of potential claims just from being themselves.

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

The risk to nonprofits may actually exceed that facing for-profits, the study’s authors contend, for a number of reasons. Nonprofits may have smaller budgets, fewer personnel, restricted access to financial and legal counseling and less formal practices and procedures, particularly surrounding employment practices.

“All of 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 add.

The study was prepared for ALTRU, a Cincinnati-based managing general underwriter that provides nonprofit organization directors and officers liability coverage to independent agents and wholesalers. (The full study can be downloaded at www.altru.com). ALTRU partners with Arch Insurance Co. on its program. The program includes coverage options for employment practices, discrimination complaints, harassment, fiduciary liability, defamation, workplace violence and other features.

Healthy market
Despite Ross, Dixon & Bell’s cautions about increasing legal risk for nonprofits, ALTRU thinks nonprofits enjoy a healthy insurance market.

“The market for nonprofits is robust,” John Bolan, underwriting officer at ALTRU, told Insurance Journal. “Insureds have an easier time obtaining broad coverage in 2006 than they have in the past four years.”

He said there are more than 40 commercial insurers providing nonprofit organization specific insurance.