This article originally appeared on Gallagher Insurance’s News & Insights page. Read it here.
The conversation has shifted in the world of nonprofit liability. Over the past decade, the nonprofit sector has seen a surge in both the frequency and severity of liability claims. Among the several factors contributing to this trend are revelations of latent historical abuses, heightened societal awareness, and the evolving tort landscape. Consequently, nonprofit organizations now find themselves increasingly entangled in legal disputes, necessitating a comprehensive understanding of their liabilities.
The nonprofit sector is a major cornerstone of the US workforce, ranking as the third largest employer, just behind the retail and manufacturing sectors. The sector’s significance is underscored by its substantial contribution to the nation’s gross domestic product (GDP), accounting for 5.6%.1 In 2022 alone, nonprofits injected a staggering USD1.4 trillion into the economy.2 However, this growth and impact pose challenges, most notably in the form of liabilities arising from member actions and a historical lack of investment in risk mitigation practices. Moving forward, the emphasis for nonprofit leaders must be on improving internal controls, standards of governance and risk management.
Historical abuses and latent claims
A significant contributing factor to the rising tide of legal actions against nonprofits is the latent nature of historical abuses. In the last few years, we’ve witnessed past misconduct coming to light — often after being concealed for years — and triggering a wave of litigation.
In the past, these claims were prevented by the statute of limitations (SOL). Now that a majority of states have either eliminated the SOL for reporting abuse and molestation claims or granted windows of opportunity for plaintiff attorneys to bring suits, we’re seeing claims from as far back as the 1970s. Despite insurance companies’ attempts to minimize this exposure, they are, in many situations, no longer willing to honor those long-term retroactive dates. They’re quoting retro-inception or only going back 5 to 10 years. This limitation puts a lot of additional exposure and limited protection onto the nonprofit.
The surge in legal claims, particularly those related to historical abuses, has profoundly affected the insurance landscape for nonprofit organizations. There are high-profile examples of cultural and religious institutions that have gone bankrupt from awards or settlements amounting to tens of billions of dollars.
Aware of this exposure, insurance carriers have adjusted their risk appetites, with liability coverage becoming significantly more restrictive and expensive. Many of the current challenges facing nonprofits can be traced to historically inadequate controls arising from mismanagement and poor risk management standards. Nonprofit liability insurance has become more intricate and nuanced, with carriers adopting a cautious approach to underwriting policies. The result is reduced capacity as carriers factor in the financial implications of potential nuclear settlements and demand detailed and transparent renewal submissions.
Survivors and advocacy groups are seeking justice for wrongs committed in the past, resulting in an uptick in claims for abuses that can span decades. Nonprofits must grapple with the challenging task of addressing the often unforeseen and long-term nature of these liabilities while navigating the legal complexities they entail. To combat these liabilities, nonprofit leaders must commit to instituting governance frameworks that prioritize health, safety and duty of care.
Nonprofits are establishing frameworks for youth and survivor advocacy
In the escalating risk environment, a growing number of organizations are taking significant steps to prioritize protection frameworks. A crucial aspect of these steps is the emphasis on youth protection, recognizing the vulnerability of this demographic and the potential for long-lasting harm if adequate safeguards aren’t in place. By implementing stringent policies and procedures, nonprofits aim to create safe and transparent environments that minimize the risk of abuse and encourage reporting concerns among staff members and other stakeholders.
There’s a growing focus on advocacy for survivors of past abuses. Nonprofits are actively engaged in initiatives supporting survivors, acknowledging the importance of restitution and healing. These efforts align with ethical imperatives and may help to stem potential legal liabilities coming from historical abuses of power.
More states move to lift the statute of limitations on abuse claims
The tort landscape is adding to an already complex risk landscape for nonprofit liability. Maryland recently became the tenth state to lift the statute of limitations on instances involving child sexual abuse and permit survivors to file a lawsuit for damages at any time. This year, 37 other states have also introduced bills that could extend their civil statutes of limitations.3
Employment practices liability coverage remains key
Nonprofits remain vigilant in this area, as a lack of supervision in employment practices can affect their overall risk profile, limiting the options available to them at renewal.
Again, there’s the potential for the long-term exposure. We’ve seen an increase in whistleblowing claims, as most states require anyone with any knowledge to report it to the county or state. If they don’t, they can be subject to criminal proceedings. This requirement has led some people to protect themselves by reporting claims that they’re unsure of.
A significant proportion of nonprofit liability claims are long tail, such as claims triggered by repressed trauma and health issues resulting from exposure to toxic substances over several years. Acknowledging victims’ rights to seek justice is crucial, as is prompt action to notify relevant parties and sensitive handling of claims against the organization. It’s important to note that most nonprofits do their work well, and that some of the current legal climate could be a latent reaction to the prior institutional abuse that was covered up for so long (part of the nature of this exposure). Some might argue that awards aren’t always in proportion to the actual negligence of the nonprofit. This perceived disparity bleeds over to areas like employment practices as well.
The Buck Stops at the Top
The increased engagement of family members and support of organizations in empowering survivors to share their stories signify a positive shift. Moving forward, nonprofit boards strive to be more accountable as they recognize the need to maximize efforts to uphold quality standards of youth protection and other essential aspects of governance and health and safety risk management for their staff. This collective responsibility will eliminate any compromises in the quality of care provided.
Ultimately, the buck stops at the top — Executive Staff / Leadership and Nonprofit Boards are responsible for the decisions they make, more so now than ever before. This creates the potential to be personally liable for their choices. Directors and Officers are protected from accusations for negligent claims, but if a judge determines there has been gross negligence, most states will allow the injured party to go after an officer’s personal assets, especially the President, CEO, and executive directors.
Nonprofits recognize the need for governance and compliance, which should be central to the organization’s enterprise-wide approach to risk management. The board of directors and trustees of third-sector organizations have to assume responsibility for establishing appropriate, reasonable and affordable limits while prioritizing transparency and best-in-class standards of care. This mandates nonprofits actively participate in risk management assessments to ensure community safety and well-being.
Areas of focus for nonprofits
To maintain best practices in risk management, here are some of the areas nonprofits are focusing on:
- Implementing safeguarding principles and recommendations to establish a robust and effective risk management framework
- Maintaining clear policies and procedures to identify and mitigate risks, fostering a safe working environment
- Establishing effective reporting mechanisms to encourage individuals to come forward without fear of reprisal, ensuring confidentiality of reports
- Providing comprehensive training to recognize signs of abuse or fraud, fostering a prompt reporting culture
- Ensuring strict compliance with safeguarding guidelines for both employees and volunteers
Guidance from specialist insurance brokers
Risk management, duty of care and commitment to excellence must continue to take precedence for nonprofit organizations. Navigating the current risk landscape calls for a taking a proactive approach, embracing evolving standards and recognizing the interconnectedness of risk management, governance, and accountability.
Given the nuanced nature of the nonprofit liability market, collaboration with insurance brokers specializing in the industry is essential to improving an organization’s risk profile and gaining access to more options at renewal. Gallagher’s vast network of industry specialists can provide bespoke solutions to address the unique challenges nonprofit organizations face in the insurance marketplace.
Creating a culture of safety and accountability in nonprofits
- Ensure strict compliance with safeguarding guidelines for both employees and volunteers.
- Get your nonprofit colleagues on the tack of moving from compliance to commitment, making behavioral change and awareness/empathy a constant presence of the operating culture.
- Consider pursing outside accountability. We’re now in an era of accreditations, and today’s specialists are offering a standardized, objective process to verify “safe environments” and allow nonprofits to publicly demonstrate their commitment to abuse prevention.
- Ample documentation is necessary because it’s the most effective way an agency can defend itself against long-term latent claims, especially when many of the witnesses could be deceased or memory challenged. It must be done consistently and ultimately is the best line of defense.
Sources
1“Health of the US Nonprofit Sector: Annual Review, “ Independent Sector, Nov 2023. PDF file.
2“Health of the US Nonprofit Sector: Quarterly Review,” Independent Sector, 30 Jun 2022. PDF file.
3Diaz, Adriana and Sheena Samu. “New Maryland Law Lifts Civil Statute of Limitations for All Child Sex Abuse Claims,” CBS News, 2 Oct 2023.
