Some debate whether a nonprofit organization should purchase insurance or self-insure. The argument is that by self-insuring a nonprofit organization would protect its own capital. The more an organization relies on using someone else's capital, the more the insurance will cost. Therefore, in a cost-effective perspective, self-insurance might turn out to be a better approach compared to purchasing insurance coverage from a carrier. This sounds like a great argument at first, and can be a good idea for a large nonprofit organization. But with self-insurance, there is a risk that the organization could lose its capital if there were a serious claim. Purchasing insurance may cost more in the short term, but the organization will manage its capital with peace of mind, knowing that unforeseen events will not lead to dissolution.

Box 16.4 Typical Items in an Insurance Policy

Declaration pages: Name of the insured, policy number, risks or property covered, premium, deductible, cap, policy period

Definitions: Definitions of key policy coverage and interpretation Insuring agreement: Claims that will be paid Conditions: Conditions for payment by insurer Exclusion: Conditions for coverage cancellation Endorsement: Additional change provisions

Limits on coverage: Maximum amount of payment and occurrence of claims Umbrella coverage: Supplement to amount of coverage


To mitigate these issues, nonprofit organizations can rely on accurate budgets and financial forecasts to keep them out of trouble. Many future employees expect that a nonprofit organization will offer a more informal easygoing atmosphere than that of a typical business environment. Sometimes nothing could be further from the truth. Nonprofit organizations can be forced to do more with less, and executive directors can be stretched beyond their limits as they deploy limited resources to provide much-needed programs and services for their constituents, while in many instances they rely on sometimes undependable volunteers to fill the gaps. Instead of a warm atmosphere employees may find themselves in tense situations as they scramble to attract donors and serve the community at the same time. To address the concerns of staffing risk, nonprofit leaders need to institute the same employment practices as their for-profit counterparts.

Nonprofit organizations struggle to gain adequate funding, and in many cases are very eager for grants that can help them close the gap between revenue and costs. If the grant was awarded and the nonprofit cannot fulfill its part of the bargain, the leadership has put the entire organization at risk. Reputation risk in the nonprofit sector can bring a loss of confidence in the organization, resulting in a decline in demand for its services, diminished donor support, fewer volunteers, or even a withdrawal of strategic alliances and collaboration partners. To combat these challenges, nonprofit leaders must listen to their stakeholders, ask their board for advice, and consider all feedback as essential. Every nonprofit should provide communication channels that encourage compliments, complaints, and concerns as well as suggestions for improvement. A strong reputation is a key to attracting donors, volunteers, and constituents by building credibility, confidence, and trust. Nonprofit organizations that have an audit or finance committee, or an executive committee that assumes these functions, should be expanding their role to include not only financial reporting, but also assessing the organization for risk (see Box 16.5).

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