Think D&O insurance is only for public companies, think again. We know donors can be pretty demanding and as a leader of a nonprofit, you’re accountable to them. You can face serious liability if you mismanage donations. And, that’s not to mention suits from vendors and suppliers who can sue for unintentional breach of contract. For instance, what may seem like an insignificant last minute vendor cancellation can lead to a D&O lawsuit. So when it comes to the business of running a nonprofit, you need a clear understanding of the issues that put your nonprofit at risk.
A nonprofit D&O insurance policy protects the board of directors and leadership from donor lawsuits related to improper fund management, changes to the organization’s mission and issues related to employee practices like wage and hour requirements.
Here are the three top D&O liabilities for nonprofit organizations.
Tax reporting
Regulators pay just as much attention to nonprofits as private and public companies. Nonprofits must consider how donations are accounted for and ensure they are properly valued and reported to the IRS. Any improper reporting of gifts or valuing of goods can lead to IRS investigations, fees and penalties.
Employee compensation
Wage and hour requirements and employee overtime pay are a constant concern for nonprofits. Legal discussions related to recently contested overtime regulations in the FLSA will have an impact on whether organizations are required to expand pay provisions. Compensation for any nonprofit employee will remain a hot topic for nonprofit donors who have a say in how funds are allocated.
Donor involvement
Donors just like shareholders expect to receive communications on revised mission statements and how their funds are appropriated and distributed. Foundations may face donor lawsuits for failure to communicate frequently on funding matters or proper distribution of funds.
Real Story:
Unintentional breach of contract leads to D&O claim for nonprofit organization
An inner-city, nonprofit organization that aims to help teens stay off the streets contracted a food truck for its annual picnic. Unfortunately, the organization was forced to cancel the picnic less than 24 hours before it was scheduled to begin.
While there was no cancelation clause in the contract, the food truck owner sued the nonprofit for the cost of food and paper goods already purchased, along with employee salaries. The nonprofit’s D&O insurance policy covered the costs to defend the suit.
