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?

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