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Charities and non-profit organizations are not immune to lawsuits, and underwriters and brokers would do well to review D&O policies for this sector.

By: Rob Bickerton – Quoted from Canadian Underwriter (Dec. 2009)

Canada’s non-profit organizations (NPOs) are as diverse as the country’s population. The boards of these NPOs are also diverse. Small NPOs may have board members with little or no prior board experience, while the members of larger NPO boards tend to hold positions on multiple boards. In both cases, liability exposure is a real and growing concern. NPOs, big and small alike, deserve the attention of brokers and underwriters.

Many Canadians are involved to some extent with a charity or non-profit organization. A 2004 Volunteer Canada Survey1 notes that 36% of Canadian volunteers serve on boards and committees.

The following statistics2 illustrate the significant impact of the non-profit sector on Canada’s economy:

• 2 million people employed;

• 2 billion hours contributed on a voluntary basis (the equivalent of 1 million full-time jobs), and annual spending of about Cdn$120 billion;

• more than 160,000 non-profit organizations are in operation (half of which are charities); and

• about 85% of the population contributes financially to Canadian charities — almost 6 million Canadians claim charitable tax credits for making approximately Cdn$9 billion in donations each year.

Charities are a large component of the broader non-profit sector in Canada. Tax-receipted donations, payments through lotteries, membership dues and other sources reportedly add up to roughly $40 billion a year.

As important as charities are, recent scandals have tarnished the image of some charities and opened the door to increased litigation against the boards of directors. The degree of skepticism of the donating public tends to vary proportionately to the frequency and severity of the scandals in the news.

Since their benevolent activities are generally motivated by altruism and compassion, charities are frequently thought to be relatively immune from lawsuits. Clearly this is no longer the case. Liability can emerge based on the organization’s internal and/or external activities. Employment practice claims account for as much as 90% of legal actions against non-profit directors and officers (D&Os). Such claims may include allegations of wrongful dismissal, failure to promote, failure to grant tenure or discrimination. It therefore comes as no surprise that a major driver of D&O premium is whether or not the organization has paid staff members. 3 Other sources of liability exposure include:4

• conduct of fund raising activities;

• payment of wages and deduction of taxes for employees;

• breach of statute (e. g. anti-money laundering laws);

• insolvency;

• breaches of fiduciary duty and duty of care;

• negligent supervision, screening or hiring of employees and volunteers;

• additional obligations and higher standards of care as trustees; and

• failure to meet requirements for tax-exempt status as a nonprofit.

Charities and their boards of directors can be held directly accountable for misuse of funds, or indirectly accountable by virtue of partnerships with charities under investigation for alleged wrongdoing. Underwriters and brokers would do well to keep abreast of news items concerning NPOs and charities. With news travelling so fast in an increasingly litigious society, word of a scandal in one charity will often cause donors and stakeholders to question the charities with which they are currently associated. All it takes is for one court decision by a litigant to set off a series of similar suits. Whether or not the suit is successful may be insignificant considering that defense costs alone can reach very high amounts.

In today’s economic climate, NPOs are faced with an ever-diminishing level of financial support from government and, at the same time, an ever-increasing burden of rules and regulations. The donating public is becoming increasingly savvy and more and more interested in making sure the donation is used to the maximum and best use.


The Charities Directorate, a division of Canada Revenue Agency, is the primary federal regulator in Canada. However, it has been labeled as “virtually powerless to deal with problem charities.” 5 This begs the question as to the implications of an ineffective public watchdog. I suggest that the absence of an effective regulatory regime makes it more likely that a charity will get away with abuse and that these problems will grow bigger and bigger until eventually being discovered by a donor or other member of the public. Without the ability to detect problems early on, the litigation against the board of directors of organizations in such cases could be very serious and result in larger claims made against the D&O policies.


Many tend to view NPOs as having less risk than a for-profit company. This perception may actually increase the risk of NPOs. Seen as low risk, NPOs may be under less pressure to initiate internal control and governance processes. In other words, the perception drives a reality.


In issuing a Director and Officer Liability policy to an NPO, the insurer is helping to maintain the integrity of the sector. Insurance is vital to attract qualified and experienced directors and officers. Without insurance in place, many would not consider sitting on a Board. A quality board symbolizes integrity and credibility to the donating public and makes them more likely to contribute their time or their money.

As with any prudent risk management program, the first and most important step in mitigating risk is to exercise good governance and due diligence.

Pro-active insurers will have to evolve on several fronts to meet the changing needs of NPO boards. Amendments to policy wordings are not the only factor to be considered. Wording enhancements in the current market include non-rescindable coverage for insured persons (Non rescindable Side A), sever-ability of exclusions and application, worldwide coverage, entity coverage and full employment practices coverage along with non-cancellable contracts. In considering the nature of the NPO board and the risk at hand, more insurers may begin offering multi-year policies. In any event, brokers and underwriters should work together to ensure under standing of the coverage afforded by the policy. Comparing coverage based on glossy highlight sheets alone is not a replacement for detailed analysis of the policies.

Return on investment is often associated with for-profit company analysis. I suggest the test is equally useful when analyzing the health and stewardship of a charity from an underwriting perspective. Administrative costs as a percentage of the charity’s revenues6 provides a high level indication of its financial stewardship. As the environment for charities becomes increasingly exposed to serious litigation in the wake of scandals, underwriters may find this a useful way to quantitatively assess stewardship of the organization.

Typical limits range from Cdn$1 million up to Cdn$5 million with some larger organizations carrying as much as Cdn$10 million or more on a primary or primary/excess basis. The increased litigiousness of the population combined with the effect of scandals may also drive requests for higher limits.


The risk to a director and officer of a non-profit organization is substantial. Some of that risk can be mitigated and significantly reduced by enhancing governance processes. Insurance also plays a key role in protecting the boards of directors of NPOs. In shielding the directors, insurance helps to maintain the integrity of the non-profit sector and maintain the trust of the donating public.

1 “The 2004 Canada Survey on Giving”, Volunteering and Participating (AON Reed Stenhouse).

2 “Assessing Not For Profit Boards”, Innovative Research Group Inc., October 2009

3 “See you in court: emotions run high when a charity gets sued” -The Non-Profit Times, July 15, 2007

4 Director Liability Protection for Non Profit Organizations, AON Financial Services Group, Shelley Lloyd, J. D, Legal and Research Practice, Aon Financial Services Group

5 Charity Scams Bust Public Trust, Toronto Star, June 2, 2007 -by Kevin Donovan

6 “A Basic Introduction to Analyzing a Charity”, Charity Intelligence Canada