There were close to 2 million nonprofit organizations operating in the U.S. in 2023 with revenue totaling $2.4 trillion, according to the Internal Revenue Service (IRS). And with 12.8 million jobs in 2022, accounting for 9.9% of all private sector employment, according to the most recent data available from the U.S. Bureau of Labor Statistics, nonprofit organizations play a significant role in the U.S. economy and the sectors they serve.

While charities and other nonprofit organizations are mission-driven, they face many of the same legal exposures as for-profit organizations, including conflicts of interest, breach of fiduciary duty and theft.

“The absence of 'shareholders' does not negate the need for D&O insurance for nonprofit boards," says Thor Beveridge, head of executive liability, The Hartford. “Similar to corporate boards, nonprofit boards have fiduciary duties to their stakeholders, such as beneficiaries, donors, regulators and vendors. For example, a donor could sue the board of a nonprofit organization for the misuse of donated funds."

One key problem for many nonprofit organizations is that, while the members of their board of directors have a drive and passion for the cause, they often have less familiarity with the responsibilities of running an organization. Consequently, the importance of protecting personal assets and paying possible legal fees of the directors, officers and other leaders should not be overlooked. 

“Claims made against nonprofit organizations and their boards often have to do with an alleged breach of their fiduciary duty to act in the best interests of the organization," says Nicole Murphy, nonprofit D&O liability product manager, Travelers. “This can include allegations of mismanagement of operations and funds that is not in line with the organization's mission and bylaws."

To help limit such claims, agents should encourage their clients “to employ rigorous corporate governance to ensure they meet all regulatory compliance and execute their duties within the scope of their charter," Beveridge says. “This includes documented policies and procedures, seeking expert consultation and a routine review of operating results and procedures."

This is particularly important as “claims can come from inside the organization in the form of board disagreements, as well as derivative suits, but they can also come from outside the organization and may be brought by disgruntled members, donors, creditors and contractors," Murphy says.

Funding plays a significant role in the operations and survival of nonprofit organizations. It's common practice for most nonprofits to seek funding through numerous revenue streams, including those from the public, bequests, foundations and corporations. While financial giving can be unpredictable, an estimated $557.16 billion was given to U.S. charities in 2023, according to “Giving USA 2024: The Annual Report on Philanthropy for the Year 2023."

Further, any claims brought against a nonprofit can bring “negative press and lead to declining public support, which can severely impact a nonprofit organization's viability," Murphy says.

For example, a charitable nonprofit organization applies for and receives government funding. The government later conducts an audit and determines that the government funds were not used for the purposes described in the funding application. The government then sought damages due to alleged negligent misrepresentations in the application in violation of the False Claims Act. The claim was resolved by way of a negotiated settlement. Costs incurred to defend the claim totaled approximately $300,000, according to Great American Insurance Group.

Even outside the boardroom, nonprofits are facing the same challenges that for-profit organizations are currently dealing, with including financial difficulties, the struggles with hiring and retaining staff, and managing the changes in cyber risks and artificial intelligence (AI). 

“Agents can address exposures and their implications with their clients and recommend nonprofit D&O insurance to help protect them from allegations of wrongdoing," Murphy says. “Many carriers also offer valuable risk mitigation resources to insureds at no additional cost."

“Best practices to mitigate these concerns are to have the right mix of board members and employees for diversity of thought as well as checks and balances; a mission that is broadly communicated to all stakeholders and practiced by the board and employees; clear expectations of employee roles and behaviors, both internally and externally; and transparency with the public," Murphy says.

Olivia Overman is IA content editor.