Do Nonprofits Need Liability Insurance?
The answer to the question about whether nonprofits need liability insurance is more than a simple “yes” or “no.” When a group or individual considers purchasing any type of insurance policy, it’s important to think about the reason they need it, and the potential for them to cause harm to someone else, either intentionally or unintentionally. There’s also the matter of whether a nonprofit could afford to pay an expensive claim out of their own funds, as well as covering defense costs to hire an attorney.
The reality is that claims against nonprofit organizations can and do happen – and more often than you might think. Payouts can be high, and claims come with additional risk to the nonprofit’s reputation.
What Types of Claims Could Be Brought Against a Nonprofit?
Millions of different circumstances might bring a claim to the door of a nonprofit organization. Our society is becoming increasingly litigious. People and groups can, and do, sue nonprofits. Let’s look at a few examples of nonprofit lawsuits.
Harvard University got sued by a group of Asian-American applicants who alleged the college discriminated against them by favoring other minority groups. The group lost their case on appeal, and the Supreme Court is now weighing the question.
In another case, Sutter Health System faced allegations of antitrust violations. This suit gained class-action status. This suit ultimately settled out of court without Sutter admitting any wrongdoing. The monetary award could reach $575 million, and Sutter may be subject to monitoring of its business operations for up to 10 years.
Mayo Clinic was also sued for failure to pay taxes on Unrelated Business Income (UBI). The question the court was asked to solve was whether the income was related to the clinic’s medical facilities or educational organization. The court ruled that Mayo Clinic was an educational organization and was responsible for the UBI taxes.
These cases provide clarity over the importance of obtaining sufficient types and amounts of liability insurance in the nonprofit realm.
What Kinds of Nonprofit Claims Are Prevalent?
It’s hard to imagine nonprofits could file more claims than corporations, but that’s what a Towers Watson Directors & Officers Liability Survey indicates. The survey shows that nonprofits file twice as many D&O claims as private or public companies.
What were some of the most common claims affecting nonprofit organizations? Cyber risk ranked number one. Responses from CFOs and legal compliance staff at nonprofits also indicated top concerns over employee claims. Other top issues fall into the categories of regulatory and enforcement risks and multinational (cross-border) risks.
What Types of Insurance Policies Do Nonprofit Organizations Need?
There’s no master list of the types of insurance policies that nonprofit organizations should purchase or what amounts of coverage they should buy. Instead, nonprofits must rely on the expertise of licensed, experienced insurance experts to help them find the best insurance policies for their needs.
Following is a shortlist of some of the more common types of policies about which nonprofit organizations should ask their insurance agents. They may need fewer policies and they may need different policies to cover different types of losses.
General Liability- All nonprofit organizations should purchase general liability insurance. It covers against claims made by third parties for bodily injury and property damage that occurs in the course of the nonprofit’s operations.
Property Insurance- Property insurance is pretty self-explanatory. It covers damage or loss to buildings, office equipment, inventory, and any other property the nonprofit owns. Fire and theft are common claims. Boards should be aware that not all insurance policies cover floods and earthquakes.
Auto Insurance-Nonprofits may buy auto insurance if their boards or employees use autos for nonprofit business. Nonprofits may purchase liability coverage to cover others and physical damage coverage for autos. Nonprofits may also consider non-owned auto insurance coverage for volunteers who use their own vehicles for nonprofit volunteering.
Workers’ Compensation- Workers’ compensation will provide coverage for employees who get injured on the job. This type of insurance is mandatory in every state except Texas. This coverage will provide for medical expenses and wages if an employee gets injured while working for the nonprofit.
Directors and Officers Liability- This is another type of insurance that nonprofits should not be without. It provides coverage for management decisions that board directors and officers make. D&O insurance protects the organization and individual board members. D&O insurance policies often include insurance coverage for employment practices liability, which extends to volunteers as well as employees. This coverage protects against claims for harassment, discrimination, and wrongful termination.
Professional Liability-Boards of directors can forget to tell people things or make mistakes. Professional liability insurance is also referred to as errors and omissions insurance. It protects against claims made as a result of a board director’s action or inaction.
Beyond the basic insurance coverages, the board may also consider the following types of insurance coverages for further protection:
Crime Coverage- It would be nice to think that your volunteers or employees would never steal from your nonprofit or be dishonest, but there are no guarantees. Crime coverage will pay for such losses. You can limit the coverage to the premises or extend it to cover losses off the premises. You can also cover your clients’ assets that are in your possession. Premium costs are typically based on the number of employees and volunteers working at your nonprofit.
Cyber Liability- Hackers are more likely to attack small nonprofits that lack high-security measures. Your nonprofit could have a cyber liability exposure if you collect personal or confidential data of any kind. Your employees or volunteers could also release confidential or personally identifiable information accidentally or intentionally. The more information you collect, the higher your risk grows. Cyber liability insurance pays for expenses your nonprofit incurs in the event of a data breach.
Employment Practices Liability Insurance (EPLI)- Nonprofits are not immune from claims of sexual harassment, discrimination, wrongful termination, negligent evaluations, infliction of employee duress, and similar claims. Employment practices liability insurance protects your nonprofit from claims where employees alleged your nonprofit is responsible for violating their legal rights as employees. Some insurance providers allow you to add this coverage onto your D&O insurance policy at a slightly higher premium.
The Importance of Choosing the Right Deductible
To be affordable, most policies include a deductible in some amount. Usually, the higher the deductible, the lower the premium will be. Nonprofit boards should evaluate the premium costs at various deductible amounts to get the best value on their insurance policy. Having higher deductibles will prevent smaller claims. Nonprofit organizations that file a claim and have a payout can expect their premiums to increase by possibly double or triple. It’s best not to file claims unless it’s necessary.
Understanding the Wording in Insurance Policies
Insurance policies are written much like legal language, making them difficult for ordinary people to read and understand. All insurance policies include additions, conditions, and exclusions. Board members should review the wording in their insurance policies carefully with a licensed insurance agent, so they have a good understanding of what is – and isn’t – covered.
In most policies, the definition of an insured is any person who was, is, or becomes a director, trustee, officer, employee, committee member, or volunteer of the nonprofit as well as the nonprofit itself.
Some board members believe that their personal home insurance covers them as board directors. The reality is that many insurance policies exclude volunteer board service. It’s also important to consider that all board members may not be homeowners and may not have home insurance at all.
Without question, nonprofit organizations need liability insurance. Failing to get the right insurance policies with the right coverage limits and deductibles places board members unnecessarily at risk.