The Nonprofit:
A nonprofit membership association was governed by a board of directors composed of volunteer board members drawn from its membership. The board elected a president to oversee board leadership and provide direction between meetings.
Over time, the board president became the primary point of contact for financial matters, vendor relationships, and strategic decisions, with day-to-day administrative functions being delegated to staff.
The Incident:
Several members of the association sent a formal demand letter to the nonprofit’s board of directors alleging breaches of fiduciary duty. The allegations included conflicts of interest and financial mismanagement.
The claimants asserted that, over a period of several years, the board president had accumulated control over the nonprofit’s financial accounts and decision making processes. The letter alleged that this control had resulted in personal financial benefit to the president.
Additional allegations included fraudulent operation of the nonprofit, tax evasion, and civil conspiracy. The demand letter also alleged that the board had failed to adopt or enforce a written conflict of interest policy.
The Legal Action:
The demand letter requested copies of specific financial records, including bank statements, tax filings, and internal policies. The letter also requested governance documents related to board oversight and conflict management.
The claimants invited the board to engage in discussions regarding potential resolution of the concerns raised.
The Coverage:
Upon receipt of the demand letter, the nonprofit reported the incident to its insurance broker, who initiated the claims process under the organization’s Fiduciary Liability coverage, part of its Board & Executive policy with Nonprofits Insurance Alliance (NIA).
The Result:
Following receipt of the demand letter, the nonprofit engaged outside legal counsel to assist with reviewing the allegations and coordinating the organization’s response. The board conducted an internal review of governance practices, financial records, and applicable policies.
As part of this process, requested documents were produced to the claimants, and discussions were held regarding governance structure and oversight going forward. The board president stepped back from certain financial and administrative responsibilities while the review was ongoing.
The matter was ultimately resolved without litigation. The nonprofit adopted updated governance practices, including formal conflict of interest procedures and clearer documentation standards, and the claimants withdrew their demand.
How Can Your Nonprofit Help Protect Itself?
Nonprofits sometimes consider how board authority is distributed, how financial access is documented, and how conflicts of interest are addressed through written policies.
Regular documentation, clearly defined roles, and consistent governance practices can help organizations respond more effectively when questions about fiduciary responsibility arise.
NIA Resources:
NIA offers risk management consulting services to nonprofits insured by NIA. These services are intended to support organizations in reviewing key risk areas, including governance and oversight practices.
NIA provides access to My Risk Management Plan, an online set of tools designed to support the development of a risk management plan aligned with an organization’s needs, priorities, and culture.
NIA also offers BOARDnetWORK, an online board communication tool described as supporting more efficient and effective board operations.
In addition, NIA makes available a risk management reference library, including e books and sample forms designed for nonprofit organizations, along with webinars covering nonprofit specific risk management topics.
From the Claims Files stories are for general information only. They are simplified examples and do not guarantee coverage, a defense, or any specific outcome. Some losses described in this series may not be covered.
Coverage depends on the specific facts and on the terms, conditions, and exclusions in your policy. Contact your insurance broker or agent for guidance, and follow your policy’s claims reporting procedures if an incident may involve a claim.
This story is not legal, medical, financial, or professional advice. In an emergency, contact local emergency services first. Any risk management practices mentioned are general suggestions and may not apply to every nonprofit. Follow all applicable laws, licensing rules, and reporting requirements.
