Still struggling through the recession, the last thing the nonprofit sector needed is the negative publicity generated by Jerry Sandusky and Lance Armstrong.
The recession was hard on just about everyone, particularly the nonprofit arena and those who provide services and products for that sector. From 2005 to 2010, private charitable contributions fell by nearly 10 percent after adjusting for inflation, according to Washington, D.C.-based economic and social policy research group Urban Institute.
Giving finally began to rise, but growth in giving in 2010 and 2011 was a modest 1 percent in each year, still well below pre-recession levels, according to the group. While final numbers for 2012 aren’t in yet, anecdotal evidence indicates giving may not have been any more brisk in 2012.
Now add two potential big black eyes to the nonprofit sector. First there was former Penn State assistant football coach Sandusky and his The Second Mile charity. Following Sandusky’s child molesting convictions the organization struggled, and in late January one of the victims filed a suit against Sandusky, the charity and Penn State seeking at least $75,000 in damages claiming that Sandusky’s behavior was “ratified” by the defendants.
Now nonprofits are watching how the multiple Tour de France winner Armstrong’s fall from grace may affect his Livestrong cancer survivors’ charity. After denying doping charges for years before being stripped of his Tour titles, Armstrong admitted in late January in an interview with talk show host Oprah Winfrey that he used performance-enhancing drugs.
While the negatives associated with Armstrong’s doping scandal may be much further removed than Sandusky and his charity that is targeted toward youth, both matters have given rise to concerns in the nonprofit sector about integrity and public perception, say those who deal with nonprofits.
The questions now are whether such publicity will hurt other nonprofits, how the sector will adjust and, from an insurance perspective, how insurers, brokers and agents are dealing with all of this.
“My concern is that people in the general public are going to be far more leery about giving because of these scandals,” said Rhonda Sciortino, national child welfare specialist for Markel Insurance Co., who also chairs Successful Survivors Foundation, a nonprofit in Southern California that assists abused children.
In the wake of the Sandusky and Armstrong affairs, Sciortino in her role as chair of Successful Survivors said she is trying to “wrap her arms” around how to explain to donors and others there are no scandals waiting to unfold at the organization.
And as an insurance professional, she said, “It’s all about identifying the risks and assessing the risks.”
A friend of Sciortino’s, whom she declined to name, has been involved in an acquisition of The Second Mile. The friend, Sciortino said, has been focused on delivering one message to the clients: “Make sure you don’t assume the liability. You don’t know if every molested kid has come forward yet.”
Since the Sandusky news and now again with Armstrong, Sciortino has been hearing anecdotally about a decrease in charitable giving, and she’s heard directly from clients and colleagues about charities taking a greater interest in the risks for which they are covered.
“I’ve talked to people, because of what’s happened, who are taking a closer look at their coverages,” she said. “The greatest nonprofit executive in the world can’t have their eyeballs on every single employee, and every single volunteer, every hour of the day. It has raised awareness about appropriate coverages.”
Among the coverages for which nonprofits are lately expressing interest are sexual misconduct, professional liability, directors and officers liability and employment practices liability. “Those things are definitely on the radar screens of the folks that I’ve talked to running nonprofit organizations,” Sciortino said.
Unlike Sandusky’s The Second Mile, Livestrong, which Armstrong, a cancer survivor, started in 1997, seems to have thrived. At the end of 2011 the group reported nearly $110 million in assets, a large increase from its $96 million in assets a year earlier.
However, it’s hard to say what will happen as the cyclist’s drama continues to unfold, and how the giving public will regard Livestrong. Armstrong has resigned from the board of the organization he founded.
“I think it will affect them in the short term in terms of donations,” said Stacy Palmer, editor of The Chronicle of Philanthropy, a nonprofit news source in Washington, D.C.
However, in the long term, if the charity is managed well, Palmer thinks Livestrong can continue to do well.
“They’ve established themselves enough as an institution that is operating well on its own,” she said. In fact, she added, “It may be easier now [that] the air is cleared and (Armstrong is) not an official part of the organization.”
Palmer does not believe that the Armstrong saga will hurt how people view, or give, to other nonprofits, though it may make those groups take a closer look at how they choose their representatives, especially those groups that relate to the public primarily through one personality or a celebrity ambassador.
“I think it points out to nonprofits the risks if you tie your identity to one person and that person gets into trouble,” she said.
Armstrong’s admission hasn’t affected Wayne Tesch, founder and CEO of Royal Family Kids, a network of camps for abused, neglected and abandoned children across the country. But the Sandusky case has.
“I realized the Sandusky case points to the one thing that keeps me awake,” Tesch said. “A perp has between 70 to 90 encounters before they are caught.”
Tesch described a set of protocols in place at the group for all volunteers: application forms with references; a background check; a 30-minute interview with a three member panel; 12 to 15 hours of annual training; private places to change; and rules like no sitting on beds and open doors at all times.
The effects of Sandusky hit home for Pamela Cutchlow, executive director of two centers for abused and abandoned children. It hurt her nonprofit, but not by costing donors who were scared away, or from increased costs for beefing up security measures.
Some of the children at her homes saw Sandusky on the news, heard the reports that he ran a charity to help youth, and they developed trust issues with their counselors, she said.
“That was devastating,” she said. “I think some of those kids, they kind of shut down. It may not have hurt me financially, but hurt our efforts to help children who started questioning the agenda of those trying to help them.”
Last year was a tough one for Cutchlow, who runs a boy’s home called Orange County Children’s Foundation Inc., and a girl’s home called Paragon Center Inc. The groups have four facilities around Southern California.
“I used to have far more contributors than I do now, but that’s because of the economy,” she said.
Every year a regular benefactor used to host parties that would net about $10,000 in donations for her nonprofit through raffles, gifts and checks.
“This past year they decided to go with a group of people who were doing far worse than us,” she said.
Tesch’s operation has been hit much the same as Cutchlow’s.
“The economy has caused some distress,” he said. “We haven’t made budget four out of the last five years.”
While nonprofits are ailing, they can still be seen by the insurance broker community as a future source of business growth.
Despite the financial woes following the recession and lingering high jobless rate, the nonprofit sector has continued to grow in total numbers, according to the Urban Institute. Data from the group shows the sector has been growing in size and financial impact. Between 2001 and 2011, the number of U.S. nonprofits rose 25 percent to nearly 1.6 million currently registered with the Internal Revenue Service. In fact the growth rate of the nonprofit sector has surpassed the rates of the business and government sectors, according to Urban Institute.
Data from the group also shows that in 2010, products and services from nonprofits added nearly $800 billion to the U.S. gross domestic product, or 5.4 percent of the nation’s GDP, and accounted for 9 percent of the economy’s wages.
Kathy Messmer is president of Newbury Park, Calif.-based New Beginnings Insurance Services Inc., which handles nonprofit clients doing work for foster care, group homes for kids, missions and developmentally disabled adults. Many of her clients have been impacted as much by government cutbacks as a reduction in giving.
“They’ve been hit hard by the government cutbacks,” Messmer said.
In fact one of Messmer’s clients is a drug rehabilitation organization whose insurance coverage is in jeopardy due to a financially strapped California state government.
“Their policy’s in cancellation status and the state owes them $60,000,” she said.
To deal with emptying coffers, her clients are trimming to keep their operations going, and they seem to be going to greater lengths to cut costs, including asking brokers to work for free, Messmer said.
“The nonprofits will try to get you to help them for free as a form of donation,” said Messmer, who noted that she donates to several nonprofits, but that she doesn’t work for free. “The best thing I can do is do my job and save them money. It’s different out there right now. I think they’re all looking for money wherever they can find it.”
Specifically, Messmer is seeing clients cut down on coverages like directors and officers liability, employment practices liability and healthcare.
“There are quite a few nonprofits that don’t carry D&O coverage,” she said.
It’s a prime way to cut costs, considering Messmer’s nonprofit clients typically pay $25,000 and up annually for insurance. Costs for some coverages are getting to a point where they are beyond the means of many struggling nonprofits, she said.
“D&O and EPLI coverage is very high,” she said. “We’re seeing that minimum deductibles for a renewal are like $10,000 for D&O, and it’s about $25,000 on an EPLI policy.”
Messmer — who has been in the business since 1988 — recalls not so many years ago when D&O deductibles were $5,000, and about $10,000 on EPLI.
Additionally, some of Messmer’s clients have been dropping umbrella coverage in excess of $1 million on their primary polices, reducing property coverage, or turning down comprehensive and collision insurance on their older vehicles.
Some clients are also trying to find ways to reduce their workers’ compensation premiums, particularly in California, where employers have been hit hard by rising workers’ comp costs.
“They want to try to find creative ways to get out of their situation with workers’ comp,” she said.
Among those creative situations is to lease employees through professional employer organizations in an effort to reduce their experience rating.
She added, “I do have clients that don’t have workers’ comp.”
Sciortino of Markel sees those cuts heading into dangerous areas that can leave her clients unprotected from some of the biggest risks nonprofits face.
“Lots of nonprofits are having to make some pretty significant cuts. Cuts in programs, cuts in insurance,” Sciortino said, adding that typical responses by nonprofits to hard times have been to lower limits, or to self-inure various coverages.
Greg Chapman, area president of Chapman, a division of Arthur J. Gallagher & Co. Insurance Brokers of California Inc., counts mental health providers, homeless shelters and charter schools among his clients.
Many of these clients continue to experience the lingering effects of the recession, he said.
“It seems like nonprofits are kind of the last to feel it when times get tough,” he said, adding that corporations that donate often calculate their cycles a year out. “They’ve been a lot slower to recover and are kind of lagging behind now. During these hard times our clients are needed more than ever.”
He added, “Those private donations definitely are harder to come by now.”
In particular small- and mid-sized nonprofits are hurting, often by being precluded from grant giving because of their size, where they weren’t before, and shunned by donors who have been more selective in choosing nonprofits, preferring bigger, or more financially healthy charities, or those which have a smaller percentage of their funds going into operations.
“Donors are being much more selective in how they are giving,” Chapman said.
He is hearing more about donors using tools like GuideStar, an online nonprofit database, or Charity Navigator, to get information on nonprofits and check their tax returns to view financials like revenue and overhead.
“We’re seeing a lot more people utilizing those tools,” he said, surmising the goal of those using the tools is to get a “better bang for their buck.”
As they continue to scrimp, nonprofits are going beyond eliminating or reducing coverages; they are asking their brokers to go to the market more often, according to Chapman.
“People that often go to the market every three years, they’re having us do that on a lot of our accounts every year,” Chapman said. “We’re spending a lot of time going out to the marketplace checking with other underwriters, can they beat the price?” Fortunately, the marketplace has been pretty receptive and we have been able to lower prices in the last few years.”
And while Messmer has seen some clients cut out EPLI, Chapman has seen an increased demand for that coverage in the wake of what he called a “rash of EPLI claims” from people getting fired or laid off by nonprofits while the economy was stagnating.
Among Chapman’s areas of expertise are medical clinics that provide medical care to low income families and individuals. The firm represents 200 of the 220 such operations in California by Chapman’s count.
“For medical clinics in particular, cyber liability is a big new issue for them,” Chapman said.
The Health Insurance Portability and Accountability Act (HIPPA) is still changing the way medical operations handle digital information, Chapman said, adding, “They’ve got a whole new set of exposures there.”
Best practices for dealing with sensitive data, and for how the data is being encrypted and stored, are rising to the top of the worry list for these groups, he said.
The Affordable Care Act is funneling grants to help some of these nonprofits transfer medical records to digital form and make the appropriate adjustments to their procedures, Chapman said. These reforms mean these operations must consider cyber liability insurance and take data security more seriously.
“Right now I would say 99 percent of our nonprofit clients do not purchase cyber liability,” he said. “But I think in the next few years, probably at least 50 percent will.”
In terms of technology, Smartphones and social networking are on Sciortino’s mind.
“The issue of technology continues to evolve quickly,” Sciortino said. “For example, we have yet to see the level to which social services organizations will be held liable for the unauthorized uses of Smartphones and social networking.”
For New Beginnings’ Messmer, technology concerns have been moving to the forefront with clients.
“Technology has been an issue the last few years,” Messmer said. “A lot of the nonprofits have websites and will include services or exaggerate what services that they actually will provide to the consumers which are not truthful. This causes problems with the insurance markets that receive submissions for insurance terms.”
Paul Tucker, an account executive who handles nonprofits at BancorpSouth Insurance Services Inc. in Tupelo, Miss., said technology has changed the way he deals with clients.
“Technology has greatly changed the way we approach working with social service organizations,” Tucker said. “What the worst part is, and hardest part to control is, that with the rate technology is increasing and how it seems that everybody in the world now has a Smartphone or access to some type of social media publication, we really don’t know all of the risk an organization could face.”
This technology that puts so many people in touch could actually pose a bigger risk in particular settings, according to Tucker.
“Whether we are talking about children’s homes or battered women’s shelters or emergency shelters, there are certain levels of controls that need to be maintained to prevent tragedies from occurring,” he added.
Those who run these nonprofits share these concerns. Cutchlow, the executive director of the centers for abused and abandoned children, embraces the technology that enables her to ferret out bad employees and sexual predators, such as the Megan’s Law databases, but there’s a big downside that weighs on her.
“The scary part of all of this is the social networking,” Cutchlow said. “Now children can buy these phones where you don’t have to have a contract and you can get internet on them and there’s people sometimes on there they are not supposed to be talking to.”
Besides restricting their funding, the recession has caused other risks for nonprofits, too, according to Markel’s Sciortino, citing risks related to collaborations, including mergers and acquisitions.
“Social services organizations are looking for ways to create economies of scale, and often do it through collaborations with other social services organizations that offer related services,” Sciortino said. “It’s important that the broker explore this with their client and that the carrier has a good understanding of the programs and services offered and the contractual relationships between the organizations involved.”