Do You Need Nonprofit Insurance?Insurance Explained
Nonprofit insurance can protect you from accidents, oversights, or misunderstandings that may trigger liability lawsuits. Nonprofits can face lawsuits from volunteers, donors, employees, and government regulators.
Nonprofit leadership is also often a common target for litigation. According to a Towers Watson Directors & Officers (D&O) Liability Survey, 63 percent of nonprofit organizations reported a D&O claim in the past 10 years. Proper coverage will cover legal costs or damage awards in such instances.
The risk of injury to volunteers and third parties within the nonprofit sector can vary depending on the type of operation the organization is running. Nonprofits that do hands-on work, or have an office space are at risk of being held liable if an accident or an injury results from their operations or on their property.
Any nonprofit organization that engages in counseling, vocational training, and other kinds of instruction has significant professional liability exposure. This includes organizations like:
- Churches and religious organizations
- Volunteer health organizations and charities
- Educational organizations and charities
Additionally, nonprofits have a high risk of data breaches and cyber attacks as they commonly maintain donor financial files, employee records, volunteer, and client data online.
Beyond financial costs, lawsuits and data breaches can damage a nonprofit’s reputation and lead to a significant decrease in access to both donations and volunteers.
What Nonprofit Insurance Policies Do You Need?
While every organization has unique nonprofit insurance needs, there are core nonprofit insurance policies that most organizations should obtain in order to mitigate and transfer risk:
General Liability Insurance:
A general liability insurance policy protects nonprofits from injury claims, advertising claims, and property damage claims. It will also cover defense costs, including court costs, witness fees, and attorney fees, in addition to judgment or settlement monies.
Every nonprofit that does hands-on work or utilizes an office space should purchase general liability insurance.
Commercial Property Insurance:
This policy protects property owned and operated by your organization such as buildings, contents, equipment, and personal property used in your operation from perils of fire, theft, and natural disasters.
Business interruption coverage can either be purchased independently or included with a property insurance policy. This is another crucial coverage for nonprofits as they typically operate on a limited budget and even the shortest of interruptions can be financially devastating.
If you are running your nonprofit from your home, it might be a good idea to purchase homeowners’ or renters’ insurance to cover various exposures. It would be wise to speak to an expert broker regarding the best course of action for protecting your business property if you are running the organization from your home office.
Business Owners Policy (BOP):
If there is nothing out of the ordinary about your general liability and property exposures, the best course of action for your nonprofit might be to purchase a business owners policy or BOP.
A BOP is an insurance bundle that includes general liability, commercial liability, and business interruption insurance. BOPs are popular for small nonprofits because they provide more than adequate coverage while costing significantly less than it would cost to purchase those three coverages separately.
Workers Compensation Insurance:
Injuries within the nonprofit sector can vary depending on your specific industry and the type of operation you run. If someone on your staff is injured in the workplace, workers compensation insurance will pay for medical care and lost wages. It’s important to note that workers comp covers volunteers and isn’t reserved exclusively for paid members of your staff.
Professional Liability Insurance:
Also known as professional indemnity or errors & omissions (E&O) insurance, this insurance policy keeps you and your organization protected from civil lawsuits for negligence, common mistakes, misrepresentation claims, and more.
Directors & Officers Insurance:
D&O insurance covers defense costs and damages (awards and settlements) from wrongful acts, allegations, and lawsuits brought against your company’s board of directors and/or officers. It’s a type of insurance that was designed for the purpose of protecting your organization’s leaders (both current and past) from lawsuits and litigation.
Board members are exposed to a number of personal liabilities even if they’re volunteering their time for a nonprofit organization. Convincing qualified candidates to sit on a nonprofit’s board can be a matter of whether or not they are protected by D&O insurance.
Employment Practices Liability Insurance (EPLI):
EPLI provides protection against employee claims related to issues such as wrongful termination, harassment, and discrimination. As with all of the other employee-related policies, EPLI coverage can also extend to covering claims involving volunteers, not just paid workers.
Most nonprofits keep detailed records of their donor, client, and volunteer personal information. They are legally liable to protect this data and the right cyber insurance policies can help transfer the risk of being hacked and compromised in any way.
Commercial Auto Insurance:
If your nonprofit uses cars, trucks, and vans in your daily operations, they will not be covered by a personal auto insurance policy.
A commercial auto insurance policy provides liability coverage that will pay for damages to third-party property or injuries resulting from accidents involving your vehicles. You’ll also be able to add coverage for any medical bills of your own and damages that your vehicles may incur.
Common Claims Against Nonprofits
Even though nonprofits do not create revenue like typical businesses, they do operate in a very similar corporate structure. Because of this, nonprofits often face many of the liabilities that regular corporations face. Likewise, they are just as likely to be sued by a variety of parties.
And no matter whether the claims are warranted or not, it takes time and money to either dismiss or settle them in court. To better understand the liabilities that nonprofits commonly face, let’s take a look at some of the most typical examples of claims that are commonly filed against nonprofit organizations.
Nonprofits often operate in an ad hoc style and reach agreements on cooperation with third parties via the phone or in-person without ever signing a contract. While some of these arrangements do end up working out, there is always a chance that something will go wrong. And if you don’t have a clear contract that stipulates the terms of the agreement, lawsuits are bound to occur after disputes arise.
In these types of situations, a professional liability policy would help to pay legal costs associated with such contractual disputes.
Just like regular employees, volunteers that work for nonprofits run the risk of being injured while they are working for the organization. It doesn’t matter if the injuries are accidental or intentional, the nonprofit will be held liable for them if they occurred while the volunteer was performing services for the organization.
That’s why nonprofits need to have workers compensation insurance, even if they are not paying the people who are volunteering for them.
Nonprofits are funded by people who believe in the cause of the organization. If donors, especially ones who have given a serious amount of money to the organization, are dissatisfied with how their money is being spent, they could sue the organization.
And while it’s hard for a disgruntled donor to win this type of case based on their subjective opinion of how your organization is being run, the legal costs for such a lawsuit could add up quickly.
Sometimes, nonprofits can divulge the identity of a donor who might have wanted to remain anonymous, which could also lead to legal issues.
Again, these cases are fairly hard to win for the plaintiff, because no one forced them to donate to your organization, but it’s best to have the right insurance policies in place to pay the legal costs associated with such claims.
Nonprofits are, in some ways, are even more prone to experiencing employment practices claims, since a clear employer/employee relationship is hard to establish when the people working for the organization are volunteers.
Also, it’s not uncommon for nonprofits to experience wage-and-hour claims from the workers that they do employ regularly since charity and nonprofit groups often run on limited financial resources. Some nonprofit employees might want to work extra hours without being paid, but whether they want to do so or not, your organization is still violating labor laws by allowing them to do so.
Claims of harassment, discrimination, wrongful termination, failure to promote, and other similar employee-related issues are also fairly common in the nonprofit sector. This is why any nonprofit that has employees or volunteers should always purchase employment practices liability insurance.
Regardless of their status as nonprofits, charitable organizations have to follow federal and state laws and regulations related to financial reporting or run the risk of being penalized or even accused of fraudulent activities.
First and foremost, make sure that your organization’s directors are aware of these obligations. If they don’t have anyone within the organization capable of this work, nonprofit leaders should hire a financial professional to make sure that the organization is in accordance and compliance with all financial reporting requirements.
Having a directors & officers policy in place will help protect your nonprofit’s leaders in the case of possible negligence claims in such situations. If you run the risk of your employees or volunteers stealing from your organization in any way, be it money, property, or other assets, a crime policy should also be considered.
How Much Does Nonprofit Insurance Cost?
Every organization is different and so are their nonprofit insurance needs and costs.
The most common cost drivers for nonprofit insurance tend to be the number of volunteers and employees working for the organization, the size of the NPO’s property, the services they offer, and whether or not they depend on any special equipment to perform their work.
Essentially, what they do, how they do it, and to whom they offer their services are all aspects that affect the cost of insurance.
Because all nonprofits are inherently different, it’s important to work with a broker that understands nonprofit and charitable organizations, how they work, and the exposures they face.
An experienced broker will also benchmark all of your policies against similar organizations in your vertical and cross-reference your costs with nonprofits of comparable size, policy limits, claims history, and risk tolerance to make sure that you are getting the best possible coverage at the best possible price.
Choosing Your Deductible
If you’re looking to save money on your nonprofit insurance premium, it’s important to be aware of your deductible. The high your deductible is for an insurance policy, the lower your premium will be. The deductible is the amount that you will have to pay before your nonprofit insurance policy kicks in to cover the costs of a claim.
Before you commit to a deductible, be sure to evaluate your premium costs at several different deductible amounts in order to try and find a sweet spot. No matter your deductible, the best way to keep your insurance costs down is by doing everything you can to limit claims.
The bottom line is that nonprofit organizations come in all shapes and sizes, and whether or not you are in complete control of you business operations, accidents do happen. Being adequately protected from risk by nonprofit insurance can save you from costly legal fees.
Tyler Chalk, Senior Account Executive, has been part of the Aviation & Aerospace Insurance Practice since 2015. Tyler sat down with the Embroker Team to share how he helps companies manage risk and customize insurance policies to fit their needs. Read on to learn more about Tyler.
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