Leaders and Liability: Dishonesty in Non-profit Organizations

Directors and Officers Liability provides insurance coverage for liability arising out of wrongful acts.
Categories: Business Insurance
Nov 28th, 2017 | By: Paula Garrecht

Non-profits, whether they appear to be from the outset or not, are big business. Big business in terms of the amount of money that changes hands and big business in terms of the exposures and risks faced by individuals within the organization. The difference between these entities and others can be viewed in terms of how their profits (or lack thereof) are structured and how the business is overseen. With the lax financial controls and the high level of trust in many non-profits, it can become very tempting for individuals within these companies to commit fraud or other acts of employee dishonesty. Protecting the assets of the non-profit should be a top priority for those in the organization.

Employee dishonesty is a problem which is faced by nearly every organization, from large multinational corporations to the small mom and pop shops in any town. Non-profits are no different and are not immune to the potential for employee dishonesty. As an example of how significant this type of exposure can be, consider the case of Ephonia Green, an administrative assistant for the Association of American Medical Colleges. Between2005 and 2013, Green was able to falsify documents and embezzle more than $5.1 million dollars. That is more than enough money to put most non-profits out of business completely. Employee dishonesty insurance exists primarily to cover the potential loss of money or other property resulting from acts of dishonesty or fraud by employees of the organization.

Directors and Officers Liability provides insurance coverage for liability arising out of wrongful acts. It provides coverage for defense costs and resulting settlements that the directors, officers and the legal entity are held responsible for. Often, board members of nonprofits serve on a volunteer basis and the thought of liability never crosses their mind. It is, however, a very real exposure. Should an officer, especially one in a position of financial authority, commit a wrongful act the entire organization is at risk. If the risks faced by an organization in terms of employee dishonesty are serious, imagine the risks faced by that organization should an officer or director fail to meet the standard of care expected of them in the performance of their duties.

One of the main issues that exist when it comes to these types of exposures are that the board often are not directly involved with the purchase of insurance (and often don’t know much about it) and the people who are involved are often the same ones who are the most likely to embezzle from the organization. It is imperative to ensure that your coverage is adequate for the amount of money that your organization handles. $5,000 to $10,000 of Employee Dishonesty coverage is not going to be of much help for an organization dealing in with hundreds of thousands of dollars.

There are some steps you can take to reduce your exposure to fraud losses. Make sure countersignatures are required on all checks, have the accounts reconciled by a third party, allow no pre-signing of checks, run standard background checks on prospective employees, and run external audits. Finally: ensure that you are covered for Employee Dishonesty and Directors and Officers Liability insurance. The limits and coverage required will vary between organizations, and each entity should give considerable thought as to their own needs. Most of all, make sure your board of directors understands what the insurance is for and that it adequately protects their exposures.

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