Running a charity, NGO or non-profit organisation can be rewarding and make a big difference. They are the very few organisations that work and raise money for those in need. However, running a charity in Hong Kong takes a lot of work, as various risk and liability issues follow.
Charities are very different to a common business but share similar risks. One of their main risks includes fund theft/stealing, which leads to liability lawsuits. Employees, guests, volunteers and even managers can steal from the charity anytime.
When an investor discovers that the charity funds are being used for personal or wrong reasons, they have the right to sue the charity and its founders. Unfortunately, in these situations, the founder or most managers may not even know about the stealing and will still be liable.
The following case study explains how an investor sued a charity in Hong Kong due to misuse of funds and why D&O insurance is crucial to protect charity liability.
Client Background – Charity in Hong Kong
Our client is a charity in Hong Kong that raises money for stray animals in need. It is an animal charity/non-profit that uses its donations to help save injured animals and provide them with an adoption home.
Running a charity for animals takes work as there are a large number of expenses involved. The costs/expenses include animal medications, emergency treatments, a place to keep them and more. All these costs can add up to thousands of dollars each month per animal.
Hence the client gets its money from donations and investors who want the charity to succeed and grow into a bigger organisation. However, when investors and serious donators provide a large donation, they expect their funds to be used for the right reason and only for charity.
Client Problem – Charity Liability
The charity in Hong Kong fell into liability trouble when one of the head managers was caught stealing money. The investor discovered this misuse of funds information simultaneously with the founder and other managers.
However, the investor assumed the whole company was liable for misusing funds. He did not believe that it was the action of just one manager. So he and other investors decided to take legal action against the charity.
The investors sued the company, which put the company’s liability and future in question. Even if it was not the founder’s fault, they must spend on legal and settlement costs.
How D&O Insurance Covered the Charity in Hong Kong?
Fortunately, the charity in Hong Kong purchased director & officer (D&O) insurance, among other insurances. D&O insurance is one of the most important insurances for charities and non-profit organisations.
The insurance will cover legal fees, settlements, and financial losses when the charity is held liable. D&O insurance will cover directors and officers who belong to the charity and protect their liability. However, the insurance will not cover if the founder or protected manager is proven guilty.
Therefore the animal charity used this insurance to protect the innocent founders and managers. The insurance helped them prove they were innocent, and the misuse of funds was only one manager who had instantly been terminated (founders sued this manager).
The insurance is critical for any charity in Hong Kong, as directors and officers never know when investors or employees may sue them. In addition, a charity runs on only funds – when sued without insurance, they will not have the funds to fight and may be forced to shut down.
The D&O insurance reimbursed the following costs:
- Legal fees: HKD 60,000
- Financial loss: HKD 30,000
- Compensation costs (funds invested): HKD 50,000
Total costs: HKD 140,000
Conclusion
Most charities never have enough donations for the good job they do, and whatever they raise deserves to be invested back into a good cause. Hence, insurance allows that by ensuring they do not have to spend their funds on liability lawsuits.
Misuse of funds could happen at any charity, as one never knows what employees may do when no one is watching. It takes just one bad employee or accidental negligence to cause an issue that leads to lawsuits.
These organisations should focus more on raising money and spreading their cause. A charity in Hong Kong should not have to worry about lawsuits, and insurance helps provide that peace of mind.
You can also read our other article about all the insurance needed to be nonprofit organisations.
To Learn More about D&O insurance and cover your charity liability in Hong Kong and Asia, contact Red Asia Insurance.
