You Audit the Books Every Year. You’ve Never Audited the Thing Nonprofits Get Sued Over.
Every year, like clockwork, your board approves the financial audit. Nobody debates it. It’s in the budget, the finance committee expects it, and a $1M organization will spend $5,000 to $15,000 on it without anyone flinching. It’s simply what responsible organizations do.
Here’s the uncomfortable part: that audit examines a risk that almost never produces a lawsuit. The risk that actually produces lawsuits—the one generating roughly nine out of every ten claim dollars against organizations like yours—has never been audited at all.
The numbers ( I don’t do vibes)
I spent nearly a decade as a litigator before I started building people infrastructure instead of fighting over its absence or neglect. So let me show you what the data says, and then tell you what I saw from counsel’s chair.
Nonprofits face directors-and-officers claims at roughly twice the rate of for-profit companies. In the sector-standard Towers Watson D&O liability survey, about 63% of nonprofits reported at least one D&O claim over a ten-year period — approximately double the for-profit rate.
Those claims are overwhelmingly not about money. They’re about people. Employment practices—wrongful termination, discrimination, harassment, retaliation, wage-and-hour disputes—account for an estimated 85 to 94 percent of nonprofit D&O claim dollars. The Nonprofit Risk Management Center puts it simply: the most common and most costly claims against nonprofits are employment-related.
The average claim settles for around $35,000, and roughly 1 in 10 exceeds $100,000 in total costs. The average cost of defending an EEOC claim runs about $75,000—before anyone wins or loses anything. For an organization running on grant cycles, that is not a line item. That’s a program.
Gallagher’s 2025 Nonprofit D&O Management Liability Report states that employment practices claims “continue to be a lead loss in the nonprofit sector,” and that carriers are seeing “a high frequency of wrongful termination claims for organizations that lack a strong HR infrastructure with dedicated resources.” The insurance industry has identified, by name, missing HR infrastructure as the thing driving nonprofit claim frequency. The same report warns that federal funding disruptions are forcing layoffs across the sector, which it expects to push employment claims higher still, and notes that wage-and-hour claims are often not covered by insurance at all—its prescription is “adequate timekeeping and proper written documentation.”
The broader enforcement climate points in the same direction: the EEOC received 88,531 discrimination charges in fiscal year 2024 and recovered $700 million for workers, with retaliation cited in nearly half of all charges. And employment suits are not a big-company problem—morethan 40% land on employers with fewer than 100 employees.
So why is the rate double? The answer is structural, not personal.
I can tell you this one firsthand. The pattern isn’t “bad employers.” The pattern involves three structural forces, none of which is the nonprofit’s fault. One of them, in fact, is the funder’s.
1. The starvation cycle: You were rewarded for skipping this
In 2009, the Stanford Social Innovation Review named something every ED already knew in their bones: the nonprofit starvation cycle. Funders hold unrealistic expectations about the cost of running an organization. Nonprofits, competing for those funders, suppress and underreport overhead. The reported numbers then confirm the funders’ expectations, and the ratchet tightens. The researchers found organizations running on broken systems, untrained staff, and—in one case—office furniture so far gone the movers refused to touch it.
HR infrastructure is overhead. Handbooks, comp structures, classification reviews, personnel files, manager training—every dollar spent there is a dollar off the program-expense ratio that watchdogs score you on. The problem got bad enough that in 2013, the CEOs of GuideStar, Charity Navigator, and BBB Wise Giving Alliance—the watchdogs themselves—published an open letter to the donors of America declaring the overhead ratio a poor measure of nonprofit performance and naming the “Overhead Myth” as a problem they helped create. Overhead, they wrote, includes “important investments charities make to improve their work: investments in training, planning, evaluation, and internal systems.”
The letter was right. It was also thirteen years ago, and the sector’s people infrastructure still looks like it was funded by the ratio police, not the letter writers. Employment claims are what the starvation cycle looks like when it matures.
2. Mission attachment makes disputes hotter, not cooler
People take nonprofit jobs—often at below-market pay—because they believe in the work. That’s the sector’s superpower, and it’s also an accelerant. When something goes wrong for a mission-driven employee—a termination, a denied accommodation, a promotion that went sideways—it isn’t processed as a business decision. It’s processed as betrayal. By the organization, by the mission, sometimes by a supervisor who was also a friend.
Betrayed people call lawyers. And the “we’re family here” culture that made the workplace warm is the same culture that skipped the documentation, applied discipline inconsistently, and never wrote down why the last three decisions were made. From counsel’s chair, I can tell you that is PRECISELY the fact pattern that loses cases. Trust is a noble instinct. It is also dangerous.
3. Volunteer boards, professional exposure
Nonprofit boards are staffed by generous volunteers who, with respect, are usually amateurs (or worse) at employment oversight. A for-profit of the same size has a professional management layer that absorbs personnel decisions. A nonprofit board member who wades directly into a staffing dispute — with the best intentions — is creating exactly the kind of exposure D&O policies are meant to cover. The claims data reflect it.
An honest asterisk
I promised you research, not marketing, so here’s the caveat. Part of that “twice the rate” figure is likely a measurement artifact: nonprofit D&O policies typically bundle employment practices coverage in, while for-profits usually buy it as a separate policy. So a nonprofit’s employment claim is counted as a “D&O claim,” while a for-profit’s often isn’t. The gap between the sectors is real, and the direction is not in dispute—but the honest read is “meaningfully higher,” not “precisely double.” The survey behind the headline number also dates to 2010—though the 2025 insurer data above keeps corroborating its central finding, fifteen years on: employment is the claim category that matters for nonprofits, and the carriers pricing the risk say so in print.
However you count it, when a nonprofit gets sued, it gets sued by a person, not a ledger.
What this means for your next board meeting
None of this is an argument against the financial audit. Buy the financial audit. It’s the discipline working exactly as intended: an outside expert, on a schedule, examining a category of risk before it becomes a crisis. And it’s often required.
It’s an argument for noticing that your organization already believes in audits—it just aims that belief at the risk that produces management letters instead of the one that produces the majority of your actual claim exposure. The infrastructure nobody funded is still the infrastructure on which everything grows. The only question is whether it gets examined on your schedule or a plaintiff lawyer’s. So bring that same audit discipline to people infrastructure before someone else does.
I run a fixed-fee People Infrastructure Audit for exactly this reason—the same discipline as your financial audit, focused on classification, wage-and-hour, policies, comp, and personnel files. If your organization has 5–50 staff and you’ve been meaning to look under this particular hood, see if we’re a fit. This is the next step if you want that same audit mindset applied to people risk.
