Minimizing Risk with Nonprofit Insurance
Protecting your organization is a critical part of your nonprofit management. Nonprofit insurance minimizes the financial risks associated with unexpected events, liabilities, and lawsuits. However, knowing and finding the best insurance for your organization is not always an easy task. This resource outlines the reasons for insurance, state insurance requirements, additional insurance options, and how to best determine your organization’s insurance needs.
Why Insurance?
Every organization faces risks in their work environment. Damages occur, injuries happen, and people make mistakes. Insurance helps protect the organization against expenses that arise if the organization incurs damage or is sued.
The risks of doing business nonprofits may be even higher than the risks for-profit businesses. In addition to working with volunteers, donors and vulnerable populations, nonprofits typically do not have reserve funds to pay for any damages they may incur. Recent history demonstrates that the number of lawsuits against nonprofits have grown over the past several years. As nonprofits review their insurance needs, it is important to remember that the organization needs to provide insurance for itself as well as coverage for its board members.
What Type of Insurance Does Your Organization Need?
This resource will discuss two different types of insurance. The first is Statutory Insurance, which is what a state requires for nonprofits. Types of insurance that fall into this category are various mandated employee benefits such as worker's compensation and statutory disability. The second is ‘Optional Insurance’, which, while not regulated by state law, may be beneficial to a nonprofit and may be required for any organization that rents or owns property.
1. Workers’ Compensation
If you have any full-time or part-time employees, your state likely requires your nonprofit to have a workers’ compensation policy. Workers Compensation covers legal expenses associated with an employee’s claim of inappropriate termination, work-related illnesses or injuries. Employment-related claims are the most common types of claims filed against nonprofits.
2. Statutory Disability
Employers who hire staff in NY, CA, HI, NJ or RI are required to provide statutory disability benefits insurance for their employees unless they are considered exempt. Disability benefits are temporary cash benefits that employers pay if an employee gets disabled by an injury or illness, including injuries received outside of the workplace.
Optional Insurance
“Optional Insurance” refers to insurance that is not mandated by the state. This includes General Liability Insurance and Directors and Officers (D&O) Insurance. While not mandated by state law, both of these insurances may be required by a landlord or mortgage banker, and both need to be seriously considered for your organization. In addition, if you rent space from a hotel or other venue for an event or meeting, the venue typically requires proof of liability insurance.
1. General Liability Insurance
The general liability insurance protects you against the classic slip-and-fall activities, including claims for:
- bodily injury (someone suffered an injury),
- property damage (someone’s property was damaged),
- personal injury (offenses for libel, slander, defamation, or malicious prosecution), and
- advertising injury (libel, slander, or copyright infringement due to advertising activities).
2. Directors and Officers Liability Insurance
Directors and officers liability insurance is a common and highly recommended insurance for those in the non-profit community. It not only provides coverage for a settlement of suit against the board and its members but also the legal expenses incurred.
Persons who are directors, trustees, and officers of nonprofit organizations are subject to personal liability and lawsuits due to failure to properly perform their duties. Nonprofit directors and officers liability insurance is an excellent way to insure against these risks. By mitigating these exposures the directors, trustees, and officers insure that their personal assets are kept safe.
Typical suits that a Directors and Officers Liability insurance policy will cover you for are as follows:
- Beneficiaries who feel they were either denied benefits or received less than they were entitled to receive
- Donors, who allege their donations are being wasted or are not being used to advance the purposes of the organization that it has stated in its charter
- Outside parties who claim libel, slander or plagiarism due to the content of a presentation or publication by the organization
Non-profit directors and officers liability insurance is an excellent way to insure against these risks and to prevent personal assets from entering into the conversation.
In addition to the above-listed examples, we will now provide you with some real life claim scenarios, which we compiled from several insurance carriers and brokers:
Breach of By-Laws
Members of an association filed a lawsuit alleging the recent election of a new Executive Director did not follow the correct procedures outlined in the association’s bylaws. Members argued that the majority vote required was not obtained and the by-laws were modified to suit the self-interest of the board. Defense costs and settlement exceeded $75,000.
Misrepresentation
A non-profit cooperative was attempting to merge with another because of financial difficulties. The surviving co-op requested membership information and the most recent balance sheet and income statement from the distressed co-op. Soon after the merger it became apparent that the acquired co-op overstated their sales and membership enrollment. The board of the newly formed co-op felt misled and immediately sued the former treasurer alleging misrepresentation.
Misappropriation of Funds
A grant-making foundation receiving private donations alleged to have used those funds for purposes not associated with the foundation's underlying mission. A group of supporters sued the foundation’s board alleging misappropriation of funds and breach of duty. Defense Costs Exceeded $65,000.
3. Car Coverage
If your nonprofit owns a car or requires employees or volunteers to drive their own car for organizational purposes, you may want to have a Business Automobile Policy. This coverage protects your organization against costs resulting from an employee or volunteer driving on behalf of your organization and being involved in an accident. It is important to note that even if an employee or volunteer is driving his/her own car, if they are involved in an accident while completing work or service on behalf of the organization, the organization is at risk of covering the amount of loss not covered by the individual’s personal car insurance.
How to Determine Your Overall Coverage Needs
Before you consider purchasing any insurance policy or conducting a review of your current insurance portfolio, it is important that you consult a licensed insurance professional to assist you.
As we have indicated through this resource, we encourage you to search for a licensed insurance professional that can assist you with finding the type of insurance required for your organization, taking in account variables as your total budget, location, and number of employees.
Articles for Further Reading
- Five Tips for Buying Insurance. Confused about where to start? Take a look at the Small Business Association’s Five Tips for Buying Business Insurance, which includes tips on assessing your risk, obtaining insurance proposals, and maintaining your policy. http://www.sba.gov/community/blogs/community-blogs/business-law-advisor/general-business-liability-insurance-%E2%80%93-how-it-w
- Risk Management for Nonprofits. The Council of Nonprofits provides a comprehensive list of resources for staff and board members of nonprofits that focus on ways organizations can manage their risk. http://www.councilofnonprofits.org/resources/resources-topic/risk-management-and-insurance
