Risk Management in Non-Profit Organizations- Philadelphia Insurance Companies

Understanding and Managing Non-Profit Contract Risks

Non-profit and human service organizations provide critical services to meet the needs of individuals in the communities they serve. Each organization is bound by a non-profit contract or service agreement that dictates the expectations and responsibilities of the services provided.

These non-profit contracts can also increase a human service organization's liability and risk, so it's important to closely review and understand all contract terms and conditions.

Know the Services Being Contracted

There are many challenges facing human service organizations today as individual clients and governmental entities request new or updated services.

To meet these changing needs, organizations are broadening their capabilities or contracting with other organizations. But taking on any new services or non-profit contracts can bring on additional liability risk, which should be carefully evaluated from an operational and insurance exposure standpoint.

One example is the use of host homes by non-profit organizations. Instead of group homes that are owned and managed by the non-profit organization, host homes care for individuals with developmental disabilities, like a foster care arrangement.

However, this arrangement poses additional contract questions for non-profit organizations, including:

  • What role does the non-profit organization play?
  • Is the organization a contractor (with the state) and its responsibilities are subcontracted to the host home?
  • What is the organization's duty to prequalify the host home?
  • What is the organization's duty to oversee and monitor the host home?
  • Does the state maintain any oversight, or is that delegated to the organization?

Pay Attention to Contract Wording

Since contracts are legal agreements, it is critical that organizations understand the details of non-profit contracts. Each fine point must meet the expectations of the non-profit or human service organization and be understood and acceptable from a liability standpoint.

As services expand or change, a new contract for services should be created and thoroughly reviewed for key points such as:

  • Is the scope of services in line with the organization's understanding?
  • Is indemnification language fair?
  • What does the dispute resolution stipulate?

Changes to non-profit contract agreements are not uncommon, particularly with government contracts, with 44% of non-profits reporting midstream government contract changes. Some of these contract changes have included agreed-upon payment cuts, redefining eligibility for payments, and being asked to perform new or additional services.

For example, a PHLY non-profit insured was asked by a state to expand its services, and the new non-profit contract agreement wording required the organization to indemnify the state for work that was outside of the organization's control. Once the organization realized this, it chose to decline the contract rather than take on that additional liability burden.

The state agreed to make the non-profit contract wording fair to both parties, and the organization ultimately signed the agreement to offer expanded service in that state.

Additional Resources

Non-profit and human service organizations should review all non-profit contracts for operational, legal, and insurance risk, regardless of whether they are providing the service or subcontracting it to another organization.

PHLY's Smart Contracting guidance document walks you through the key points in a contract and ways to protect yourself from liability. A MyPHLY account is required to access the document.

Human service organizations should also consult with their legal counsel, insurance agents, and PHLY's risk management specialists for additional assistance.

Please contact us with any questions at PHLYRMS@phly.com or (800) 873-4552.

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