What is the Nonprofit industry?

Nonprofits are tax-exempt organizations formed for religious, educational, charitable, artistic, scientific or literary purpose that also help serve the public. The US, the technical term would be “not-for-profit,” which includes both non-profit organizations and charities. Since “nonprofit” is the more commonly used term, however, we’ll continue to use that here.

Although nonprofits are tax-exempt, they still face unique financial challenges. Most businesses don’t have to worry about funding operations largely through from donations and fundraising events (which are unpredictable), sponsorships, government grants and external investments. At the same time, they also have their own management and staff who are paid pursuant to state and federal labor laws.

This industry may seem small from the outside but, according to a 2016 brief from the National Center for Charitable Statistics, more than 1.5 million were registered with the IRS as nonprofits. This doesn’t even include smaller organizations with annual revenues under $5,000 which aren’t required to register.

In 2015, a whopping $373 billion was given by corporations, smaller companies and foundations. The vast majority of donations (71%) came from individuals, as per usual, but the massive inflow of donations from private industry broke records. The trend showed no signs of slowing in 2016. Total giving went up to $390 billion and corporate donations grew by 3.5%, according to Charity Navigator.

Some of the biggest U.S. nonprofits (by donations received):

$
0
3.7
Billion

United Way Worldwide

$
0
2.2
Billion

Feeding America

$
0
1.9
Billion

The Salvation Army

$
0
1.2
Billion

YMCA of the USA

Why is Insurance for Nonprofit Organizations Important?

A common misconception within these organizations is that, since they are small, they don’t really need insurance. Or that employees are protected, or “low risk,” since they engage in charity and promote human welfare.

This is where the problems start. Remember, it doesn’t matter how small or big your business is. Risks and unexpected events will always be waiting around the corner.

Nonprofits are exposed to risks and liabilities like any other business. A vendor slipping and falling at your office (general liability), a fire destroying furniture and computers (property insurance), an employee hurting his back while lifting a box (workers comp)…these are all standard business risks that you face whether your a Fortune 500 company or a tiny 501(c)(3).

Where nonprofits stand out is in the risk to their directors and officers. A Towers Watson survey reported that 63% of nonprofits dealt with D&O claims in the prior 10 years. That may seem surprisingly high, but many look at the financial and operational constraints, responsibility to the public good, and the limited scrutiny which can open the door to poor corporate governance, and suddenly that 63% starts to look a bit more realistic. According to Insurance Journal:

The applicable legal standards of conduct for nonprofit directors and officers are at least as high, and perhaps higher, than the standards applicable to their for-profit counterparts.

We’ve seen clear evidence in recent years of some of the risks faced by nonprofits:

Feed the Children

Feed the Children has been one of the most visible and long-running scandals in the nonprofit world. From the $800,000 wrongful termination suit from ousted founder, Larry Jones, to the retaliation and emotional distress lawsuit from former congressman J.C. Watts Jr. (the ousted replacement of the ousted founder) to investigations by special prosecutors into potential misuse of contributions, the excitement doesn’t end with this once-great charity.

Oxfam

U.K. charity Oxfam was in the news more recently following allegations from several directions that the charity had turned a blind eye to its aid workers engaged in sexual misconduct. This has led to millions of dollars of funding being withheld and the loss of more than one high profile celebrity ambassador.

Cancer Fund of America

The Cancer Fund of America was sued by the Federal Trade Commission, all 50 states and the District of Columbia after allegations arose that they had defrauded the charity for as much as $187 million. The court eventually ruled against the company and the founder to the tune of over $75 million. The judgment also resulted in the dissolution of two national charities and the banning of the founder from any future charity leadership.

What insurance do Nonprofit organizations need?

Employment Practices Liability Insurance

What it covers:
Protects the organization and its management by paying the costs of defending against certain suits from employees or investigations from government agencies. Common claims include allegations of harassment, discrimination, retaliation, and wrongful termination.

Why you need it?:
EPLI claims are becoming more prevalent and the nonprofit industry has been a particular hot spot for litigation. If you or the organization itself is named in such a claim, the coverage would defend you and pay the judgment or settlement against you. Keep in mind how easy it is for an employee to start an action that requires a legal defense.

Directors & Officers Insurance

What it covers:
Protects the company and key individuals from liability related to the management of the organization. Companies that indemnify their executives against certain covered claims can turn to their D&O policy for reimbursement. If the organization itself is named in a suit, the policy would defend the entity in addition to its leadership.

Why you need it?:
Ensures the company and its leadership is protected from legal liability related to allegations of breach of fiduciary duty and other management-related claims. It provides the capital required to absorb certain legal costs without mortgaging the future of the entire organization

Professional Liability Insurance

What it covers:
Aka “Errors & Omissions (E&O)” or “malpractice” insurance covers the company if an act, error, or omission committed in the course of the company’s performance of professional services is alleged to have caused third-party financial loss.

Why you need it?:
Complex litigation is expensive. This pays all associated legal fees and judgments or settlements from a lawsuit for an alleged failure in the provision of professional services. E&O insurance protects your organization when you or an employee are accused of making a mistake.

General Liability Insurance

What it covers:
Covers the organization from some of the fundamental risks that come with running a nonprofit organization, such as ‘slip and fall’ claims, damage to a third party’s property, products liability claims, damage to rented space, and personal or advertising injury claims.

Why you need it?:
It forms the foundation of any risk management program. On top of protecting the company from legal liability caused by bodily injury or property damage, this coverage is usually required in contracts like office leases and vendor agreements.

Cyber Insurance

What it covers:
This protects your organization from lawsuits, fines and penalties arising out of a hacking attack or data breach. It can also reimburse the company for its direct expenses such as breach notification costs, credit monitoring, data restoration and forensic analysis.

Why you need it?:
If you collect any sort of personal or organizational information, have a “login” feature on your site, integrate with another organization’s systems in any way, have employees who could fall for a phishing scam, generate online content such as blog posts, store credit card information or even simply rely heavily on email communications, you need cyber liability insurance.

Property Insurance

What it covers:
Building coverage protects properties that are owned, while business personal property coverage reimburses for covered damage to the contents of a building. Lost income and extra expenses caused by a covered loss can also be addressed by business interruption coverage.

Why you need it?:
Any company with a physical presence runs the risk of their physical property being damaged or destroyed. Companies that hold the property of others, large amounts of inventory or those that invest in their office interior often have a lot at stake. On top of that, renting temporary office space after a fire is a surprise cost that no business needs to be caught off guard by.

Workers Compensation & Employers Liability

What it covers:
Provides a legally required coverage protecting employees if they are physically injured or get sick while on the job. Legal requirements vary state-by-state.

Why you need it?:
Fines could be imposed on any company that doesn’t comply with their state’s workers comp laws. Employers liability coverage also provides valuable legal defense costs if a lawsuit develops in connection with the injury or illness.

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