A recent report conducted by Outside the Lines, an ESPN investigative body, found that an alarming number of nonprofit charities run by sports celebrities score poorly on measures of acceptable spending and disclosure, as outlined by Charity Navigator.
Specifically, the study found that many athletes’ charities…
- Have stopped giving money to the foundations they claim to support, even though they continue to solicit and collect donations.
- Spend excessive amounts of money on administrative costs (e.g., top-tier lodging facilities for athletes and their staff around charitable events).
- Do not file appropriate or complete paperwork with the IRS.
- Staff their (paid) boards with friends and family members, who may not have a background in managing money or nonprofit organizations.
Naturally, this is upsetting news for anyone who donates to these charities and thought their money was going to a noble cause. But it also raises some important questions about the insurance implications for nonprofits that handle their funds improperly.
Insurance Implications of Mishandled Funds
One of the most important kinds of insurance for nonprofits is Directors & Officers, or D&O Insurance. This coverage protects the board and directors who advise and guide the nonprofit in an executive capacity.
Typically, the board of directors has the last word on making decisions about how to allocate the organization’s funds. If one of those decisions is challenged (e.g., if a donor believes that funds were used improperly), the nonprofit could face a lengthy legal process, which means hefty lawyer’s bills and court costs.
In addition, if the nonprofit is found legally liable for wrongdoing, it could be hit with a fine or damages. D&O Insurance covers both the court costs associated with defending a nonprofit against claims of negligence and any settlement fees in the event of a finding of liability.
Protecting Your Nonprofit against D&O Liability
As of now, it’s unclear whether any of the sports charities named in the Outside the Lines report will face repercussions from their supporters. But it’s certainly conceivable that the findings could trigger lawsuits from disillusioned donors. To make sure your nonprofit doesn’t face a similar fate, be sure to…
- Choose board members who have the right background. Raising and spending money effectively in a nonprofit organization is complicated and requires a certain amount of knowhow. Ensuring that your board members have adequate experience to make tough decisions helps minimize the likelihood that their decisions will lead to a D&O suit.
- File all tax documents in a timely manner. Staying in line with the IRS goes a long way toward avoiding legal trouble of all kinds. Ensuring that your accountant is on top of all filing deadlines and documentation requirements helps keep your nonprofit running smoothly at tax time and at audit time.
- Communicate with your donors as much as possible about your organization’s goals, strategies, and plans for the money it raises. Donors who feel alienated, tricked, or cheated will quickly lose interest in sending you money – and in the age of social media, they can easily encourage others to do the same. Protect your most valuable assets by communicating your mission statement along with details about how your money is spent. Transparency is priceless.