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4 Common Claims Among Not-For-Profit Organizations

Coalition Executive Risk Not-For-Profit Announcement

Not-for-profit organizations can take many forms — museums, sports clubs, environmental groups, even zoos — but their defining qualities relate to function, governance, and taxes. 

Not-for-profits don't earn profits for their owners and put all their revenue, including donations, toward operations. They can also apply for exemptions from things like property taxes and sales tax. However, the IRS grants tax-exempt status based on purpose, so if an organization is found to be acting outside of its stated purpose, it can lose its tax status.

Loss of tax-exempt status can create hardship for not-for-profits, as donors often rely on the status for their own tax deductions. A change in tax status can result in fewer donations and force funds that would otherwise support the organizations to be redirected.

Despite these strict requirements, not-for-profits face many of the same exposures as for-profit businesses, such as wrongful termination, conflict of interest, breach of fiduciary duty, and theft. However, their unique structure creates additional risks that can result in financial losses, reputational harm, and legal repercussions.

Now that our Active Executive Risks appetite has expanded to include not-for-profits, let's look at four common claims to see how Coalition can help protect organizations against these risks.

1. Misuse of funds

Not-for-profits are held to a high standard of financial transparency and accountability. Misuse of funds, intentional or not, can result in severe reputational damage and legal liability.

Not-for-profits must put all of the money generated, and donations received back into the organization. Spending money earmarked for one thing to pay for another — like using pension plan funds to pay for personal expenses — can result in fraud charges, significant fines, and penalties, as well as the loss of tax-exempt status.

If a not-for-profit faces legal action and is found liable for damages, it can also be forced to pay retroactive taxes on its earnings.

2. Compensation issues

Even when not-for-profits are run by volunteers, they're often led by boards and executives who are compensated for their time. Organizations must carefully manage the compensation of leadership to ensure that funds are used appropriately — failure to do so can result in excess benefit transactions (more on this below). 

Not-for-profits must also consider compensation as it relates to overall spending. For example, if an organization pays its leaders disproportionately more than the amount it spends on business activities, it may constitute a breach of fiduciary duty and expose the organization and its board to legal action. As with other claims, legal actions resulting from compensation issues can result in the loss of tax-exempt status,

3. Excess benefit transactions

An excess benefit transaction is any transaction where a disqualified person receives an economic benefit from the tax-exempt organization with a value greater than the value provided by that person to the organization. Generally, board members, CEOs, COOs, CFOs, and treasurers are disqualified persons.

If a not-for-profit organization provides unwarranted compensation or benefits to board members or executives, it can face financial penalties and additional taxes for those who received the excess benefits, as well as the organization itself. 

4. Antitrust law violations

Not-for-profits, like any organization, are subject to antitrust laws that prohibit collusion, price-fixing, and other anti-competitive practices. Violations of antitrust laws can lead to significant fines and legal actions that can damage the reputation of an organization. 

Antitrust laws are especially relevant for trade groups and other professional organizations in the event that the group hinders the ability of others to compete. For example, if a not-for-profit requires professionals to purchase a membership to maintain certification, it may constitute an antitrust law violation.

D&O coverage for Not-For-Profit Organizations

Not-for-profit organizations and their leaders can protect themselves against allegations of financial mismanagement, breach of duty, criminal allegations, and more with Directors and Officers Insurance (D&O) from Coalition. 

Our comprehensive D&O coverage can be paired with any of the other offerings comprising our Active Executive Risks product suite, including Employment Practices Liability, Fiduciary Liability, and Crime.

All Executive Risks products are powered by Coalition's data-driven approach to insurance. Our streamlined application process and pre-claims hotline, training materials, and active monitoring and alerting can help organizations stay ahead of risks. 

As a broker, you can save time and energy by getting quotes for D&O and other Executive Risks products in minutes on our Broker Platform. To learn more about protecting your clients with Executive Risks coverage, download our new report: Unlocking Growth with Executive Risks.