How to protect leadership amid funding cuts
By Nelson Kefauver and Karli Moore
Nonprofits are operating under more pressure than they were just a few years ago. Funding can shift quickly, donor expectations are rising, and boards and leadership teams face greater scrutiny, especially when resources are tight.
As a result, risk management and insurance are no longer background considerations. They shape how organizations make decisions, document their work, and protect leadership when challenges arise. Increasingly, the organizations that stand apart are those that address risk proactively.
Funding pressure and leadership decisions
Many nonprofits rely on a small number of funding sources, such as a government grant, a key institutional partner, or a small group of major donors. When one of those sources changes or disappears, leadership has to move quickly. Teams rework budgets, adjust programs, and make staffing decisions in rapid succession.
At times, the situation becomes more complex. Funders may require repayment of previously awarded dollars or change terms mid-cycle, creating financial strain and raising legal questions that leaders did not anticipate. Resulting disagreements over financial priorities or governance roles can escalate quickly when an organization is already under strain. Beyond financial impact, these decisions can introduce new areas of risk across the organization.
Funding concentration also carries insurance implications. Organizations that depend on a small number of funding sources tend to experience greater volatility, and underwriters often reflect that risk in policy terms. Policy structure, including limits, retentions, and endorsements, determines how coverage responds to funding-related disputes or recovery efforts.
Employment risk during staffing changes
As financial strain builds, nonprofit leadership teams often make staffing decisions, including layoffs, furloughs, and role consolidation. While these steps may control costs, they also increase employment practices risk.
After workforce reductions, employees frequently bring claims alleging wrongful termination, discrimination, or retaliation. These claims often focus on how leaders made decisions, whether they applied criteria consistently, and how they communicated changes. Even when leaders believe the process was fair, defending a claim can divert time and resources from the mission.
Steps that can help reduce exposure include:
- Using clear, objective criteria for reductions or restructuring decisions and applying them consistently across teams
- Documenting decisions, approval rationale, and communication timing throughout the process
- Involving legal counsel early in workforce decisions and using employment practices liability insurance (EPLI) policy resources when responding to claims or disputes
EPLI plays an important role during periods of transition. Coverage helps, but clear process and documentation matter just as much.
Board governance and documentation
As operational and employment pressures increase, board oversight, documentation, and decision‑making processes are more likely to be scrutinized. Many nonprofit boards rely on volunteers, which can push documentation to the back burner amid day-to-day priorities. When issues arise, records are essential.
Board minutes and committee notes show how leaders discussed risks and reached decisions. Regulators, funders, and insurers often rely on these records when questions arise. Clear documentation helps boards demonstrate that members upheld their fiduciary responsibilities.
Board composition also influences governance quality. Members with experience in finance, legal matters, technology, or insurance often raise different questions and strengthen discussions, even in smaller organizations.
Given the range of pressures that nonprofits face,
insurance decisions increasingly reflect more than routine
renewal activity. Coverage plays a direct role in how organizations
protect leadership, respond to scrutiny, and navigate periods of financial stress.
Directors and officers liability exposure
Many of these pressures, from funding shifts to staffing decisions and governance challenges, ultimately converge in directors and officers (D&O) liability exposure.
Nonprofit leaders face many of the same allegations as their for-profit counterparts, including claims related to financial governance, operational decisions, regulatory compliance, or disputes with stakeholders. These claims do not always stem from wrongdoing; periods of organizational stress or change often trigger scrutiny on their own.
For individual board members and executives, the exposure can feel personal. Even when allegations lack merit, defense costs and reputational harm can be significant without adequate protection.
D&O insurance helps protect leadership by covering defense costs and potential indemnity. Organizations that regularly review limits, retentions, and endorsements are better positioned to align coverage with how they operate today. Many smaller nonprofits remain underinsured because leaders often underestimate governance and fiduciary exposure.
Crime risk and internal controls
Smaller nonprofits often operate with limited internal controls simply because few people are available to separate duties. That reality increases the risk of employee theft, embezzlement, or misuse of funds. These losses occur frequently and can cause lasting financial and reputational damage. In many cases, weak internal controls, not malicious intent, drive the issue.
Crime insurance, including employee dishonesty coverage, provides first-party protection, but organizations sometimes overlook it. Clear approval processes, defined responsibilities, and routine financial review can significantly reduce exposure.
Cyber, privacy, and emerging governance risk
Technology‑related risk increasingly intersects with leadership accountability, particularly as nonprofits rely more heavily on digital tools during periods of financial pressure. Organizations routinely handle sensitive donor, employee, and beneficiary information, often with limited internal capacity for oversight.
Artificial intelligence adds another layer. Many nonprofits now use AI tools to support fundraising, communications, grant writing, or internal operations. While these tools can improve efficiency, they also raise governance and management liability questions when guardrails are unclear.
From a leadership perspective, the risk is less about the technology itself and more about how decisions, oversight, and data use are defined and documented. Boards and executives who approach AI use as part of the organization’s broader risk and governance framework are better positioned to respond when questions arise from funders, regulators, or insurers.
Aligning coverage with leadership risk
Given the range of pressures that nonprofits face, insurance decisions increasingly reflect more than routine renewal activity. Coverage plays a direct role in how organizations protect leadership, respond to scrutiny, and navigate periods of financial stress.
Many nonprofits remain underinsured for governance‑related exposures, particularly D&O liability. Boards and executives often underestimate how quickly routine decisions—such as budget reallocations, workforce reductions, or funding changes—can draw attention from regulators, funders, or other stakeholders.
An effective nonprofit insurance program typically includes:
- Directors and officers liability
- Employment practices liability
- Crime coverage
- Cyber and privacy coverage
Just as important as the policies themselves is how they are structured. Limits, retentions, exclusions, and endorsements all influence whether coverage responds as expected when leadership decisions are questioned. Carriers with nonprofit‑specific expertise can provide valuable perspective on how coverage aligns with an organization’s operations, governance structure, and risk profile.
When resources are tight, thoughtful risk financing helps leadership stay focused on the mission, rather than on defending decisions after the fact.
The authors
Nelson Kefauver is Head of Financial & Professional lines, North America at Intact Insurance Specialty Solutions. Based in Chicago, he helps clients navigate complex employment practices risks in today’s evolving workplace landscape.
Karli Moore, J.D., RPLU, is Senior Claims Manager at Intact Insurance Specialty Solutions, where she leads the management liability claims team across executive and professional liability lines. She provides strategic oversight on complex matters, drawing on strong legal judgment and deep claims experience.
This article is provided for general informational purposes only and does not constitute and is not intended to take the place of legal or risk management advice. Readers should consult their own legal counsel or other representatives for any such advice. Any and all third-party websites or sources referred to herein are for informational purposes only and are not affiliated with or endorsed by Intact Insurance Group USA LLC (“Intact”). Intact hereby disclaims any and all liability arising out of the information contained herein.
