Not-for-profit organizations receive the same treatment as for-profits regarding liability for errors, omissions or other wrongful acts involving governance, employment practices or misuse of funds. Penalties and court cases could be involved that implicate not-for-profit leadership and the board of directors.

Historically, not-for-profits are just as susceptible to litigation and settlements as their for-profit counterparts. Resolving employment, financial and governance-related liabilities can be particularly difficult for not-for-profit organizations as their operational budgets are significantly smaller and more susceptible to the reputational consequences that accompany liability issues. For example, allegations of wrongdoings with your funds could influence donors to reconsider their contributions.

A directors and officers (D&O) liability insurance policy can help your organization mitigate operational liabilities by offering coverage for these and additional scenarios. Consider these top exposures for not-for-profit leadership. 

Employee Classification

Employment practices liability is a standard component of most D&O insurance policies. This liability coverage typically can be used in situations that involve personnel such as wrongful termination, defamation, sexual harassment or discrimination. It can also offer you coverage if employees are inaccurately classified as contractors or wrongly labeled as exempt from overtime pay.

Classification of employees receives heavy scrutiny because of the Affordable Care Act. The employer-provided health insurance coverage mandate requires employers with more than fifty full-time employees to provide affordable health care coverage to their full-time staff. The Act defines full-time employees as individuals who work at least 30 hours for an organization per week or 130 hours per month. Exceptions are provided for volunteer employees adjunct faculty and on-call staff.

To ensure that insurance coverage requirements are being met, regulators may take a closer look at how your organization is classifying. Your not-for-profit should have documentation to support how you are determining which employees are full-time, including which method you use (monthly measurement or look-back measurement) to make that determination.

Terminations Can Lead to Allegations

The pandemic forced many organizations to lay off or furlough their staff. An organization that downsizes staff levels should be aware that terminations may trigger allegations of employee misclassification or unfair treatment. If the employee’s departure was not seamless, your organization should consider enlisting the help of outside counsel to reduce the risk of a tense situation becoming contentious.

Activity in the sector indicates that employment-related lawsuits have become increasingly common, and not-for-profits are being implicated along with their for-profit counterparts. D&O insurance can help you cover the cost of legal fees related to employee allegations.

Volunteers Have Federal & State Protections

Your not-for-profit should be aware that although there are federal and state protections for volunteer-related liabilities, those safeguards are designed for the individuals and not the organizations for which they offer their time. The Federal Volunteer Protection Act protects unpaid workers from liability when:

• An incident occurs while the volunteer is performing their assigned role with the organization.
• A volunteer has the appropriate accreditation to do what they are doing.
• The incident was not intentional or performed with conscious disregard for the law.
• The incident did not involve a motor vehicle.

Your organization could be liable if your not-for-profit neglected to implement the proper protocols to protect volunteers from harm or detriment to someone the volunteer assists on behalf of the organization.

If your organization employs a large volunteer workforce, make sure you are familiar with the volunteer protection statutes in the jurisdictions in which you conduct operations and ensure you have D&O coverage that protects you from volunteer-related liability.

How Not-for-Profits Use Contributions

High-profile reports regarding for-profits’ and not-for-profits’ expenditure of the money they receive from donors have brought scrutiny to financial management practices. Regulators and the public could question how your not-for-profit conducts fundraising and the distribution of donor funds. This would also include risks related to how your not-for-profit presents its financial position to donors. Organizations engaging in erroneous or misleading disclosures of financial information to donors are putting their organization at risk.

Mismanagement of fundraising and donor funds are breaches of a not-for-profit organization’s role as a fiduciary to the community. Not-for-profits are often organized to serve a specific purpose to the community and could face serious ramifications if their handling of donor contributions and fundraising efforts conflicts with this mission.

Additional fiduciary-related risks such as mismanagement of employee benefit plans or grant contributions may also trigger consequences. Including fiduciary liability coverage within your D&O policy can protect while you address financial management allegations.

Governance-Related Decisions Protection

D&O insurance can also cover your not-for-profit from governance-related errors or omissions. For example, an organization may not have adequate policies regarding nepotism. Without appropriate monitoring, a not-for-profit could face allegations and liabilities.

Many boards of directors are facing government scrutiny regarding their cybersecurity risk mitigation strategies and decisions. Organizations that have fallen victim to cybersecurity breaches are facing penalties or fines for negligence. Insurance protection may help minimize the financial damage post-breach corrective actions could influence.

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To select the right plan for your organization, meet with an experienced advisor who understands the risks in a not-for-profit environment and is also knowledgeable about what insurance coverage might be appropriate for your unique risks. For more information, connect with a member of our team.