A Board Member's Guide to Nonprofit Insurance

Many board members don't think about the organization's insurance until something adverse happens. As one Blue Avocado reader commented: "Insurance isn't sexy, but it's as essential as a roof over your head." In these tight times, it's tempting to make insurance a low priority, but this strategy can be penny wise and pound foolish. Blue Avocado asked Pamela Davis, president and CEO of the Nonprofits Insurance Alliance Group (and a Blue Avocado Steering Committee member) to give us the low-down on liability.

Q: Pamela, what are the most common insurance claims against nonprofits? How much do they end up costing?

Pamela: Almost all of the claims -- 90 percent-- reported by nonprofit organizations are accidents and injuries related to automobiles or slips, trips and falls at nonprofit locations and special events. Interestingly, though,these 90 percent of incidents actually result in only 65 percent of dollars paid out in claims because while auto claims and slip-and-falls tend to be fairly common, they are usually not large claims involving prolonged litigation. The other 10 percent of claims result from allegations of improper employment practices (such as wrongful termination), professional errors and omissions, and sexual abuse. While less frequent, these tend to be more difficult and expensive claims to resolve and account for 35 percent of claims dollars paid.

Q: So given that, what types of insurance do we need?

Pamela: There are just a couple of types that every organization needs, and other types that depend on the kind of work you do. All organizations should purchase general liability, typically thought of as "slip and fall" insurance, which comes into play when someone is hurt or their property is damaged in your office, theatre, clinic or other area. Even organizations that don't have offices are subject to claims for damages such as a slip and fall at a program, or damage to an antique rug at a home where a fundraiser was held.

You should also purchase "non-owned/hired" auto insurance, in case an employee or volunteer is involved in an auto accident and their personal insurance is inadequate. Organizations that have any employees, even just one, need to be fully covered with directors and officers liability insurance (see below).

Other types to consider include:

  • Property insurance for damage to property (including computer and other records) owned or leased by the nonprofit
  • Fidelity insurance for possible embezzlement
  • Social services professional coverage for errors and omissions that could arise in the course of carrying out the missions, providing counseling, advice in support groups, and so forth
  • Accident insurance in case a volunteer, program participant, or gallery patron is injured on the premises
  • Improper sexual conduct insurance, particularly if the organization works with vulnerable clients.

If you want to purchase limits of more than $1 million in coverage, consider an umbrella policy that would provide extra limits over many different coverages at the same time. The above list is not exhaustive of insurances purchased by nonprofits, but it does represent the most common types.

Q: One thing that confuses a lot of us is how much insurance to get. Some people say $1 million, some say $5 million, some say we don't need most of it. How much insurance does a nonprofit really need?

Pamela: I wish there were an easy answer to this question. If an organization could tell me what accidents or injuries will occur in their future, I could say how much insurance that organization should buy. For most nonprofits, the amount of insurance they buy relates to their specific situation, their insurance broker's assessment of their risk and the risk tolerance of their board of directors.

In practice, the majority of community-based nonprofits purchase $1 million in coverage, and that has been sufficent to cover 99 percent of the claims we have seen in our 20 years.

However, organizations with significant assets should consider purchasing higher limits. For example, an organization with assets of $500,000 may consider purchasing an umbrella policy with $1 million or $2 million in limits to go over their basic $1 million policy. Those with fleets of vehicles or many-passenger vehicles should definitely consider higher limits. Some organizations are required by a government funder to have higher limits as part of contract requirements. But, absent a contract requirement, there is no rule of thumb for the right amount.

Q: What is Directors and Officers (D&) insurance, and do we need it?

Pamela: With the predominance of wrongful termination lawsuits, if the organization has even one employee, D&O insurance with employment practices coverage is probably essential.

Typically, lawsuits are filed when someone is hurt by some sort of accident and that person believes that someone, or some organization, is responsible for that accident. For example, a person tripped because the stairs were not properly lit or a person was injured in a car accident because someone else ran a red light.

In contrast, a different type of claim is one made not because of the accident itself, but because someone believes that the board took an intentional and improper action. The most common lawsuit of this type would be one alleging that the board of directors allowed an improper termination of an employee. Insurance for these types of claims against nonprofits is typically found in the D&O policy.

In terms of D&O insurance, almost 95 percent of claims against D&O policies are employment-related, including harassment, discrimination, and wrongful termination. According to our data at the Nonprofits Insurance Alliance Group, in any given year approximately one in 25 nonprofits will have a D&O claim against them, nearly all of them employment-related. The average D&O claim will cost $35,000 to resolve -- a combination of legal defense costs and in a few cases, settlement payments. However, one out of ten claims will cost more than $100,000 to resolve.

If an organization has no employees, its risk of claims against board members is low, but so is the premium for such coverage. It makes sense to buy it, if for no other reason than to give board members peace of mind.

D&O insurance typically protects individual board members as well as employees, volunteers and the organization itself in the instance of a civil suit. But since each policy is different, sometimes with different features even at the same insurance company, it is important to confirm with your broker that both individuals and the organization are covered, and that coverage for employment practices is included.

Q: How much does D&O insurance typically cost?

Pamela: Organizations with no employees can purchase $1 million in D&O limits for around $600 per year. Organizations with employees can expect to pay anywhere from about $1,200 for those with just a few employees, to around $4,000 to $5,000 for 50 employees. The cost of D&O insurance varies widely depending on the insurer, the breadth of coverage provided, prior claims, and the quality of employment practices at your organization. Remember that D&O insurance covers both the legal costs of defending your nonprofit, as well as any settlements that might arise. Remember, too, that D&O cannot cover board members for responsibility for payroll taxes and retirement payments that were withheld from employee paychecks but not submitted to the proper institutions. (If insurance could cover us for not paying taxes, we might all buy insurance and then not pay taxes!)

Q: I don't understand the difference between a broker and the insurance company. Do we need both?

Pamela: Brokers are professional advisors/consultants who are intermediaries between nonprofits and insurance carriers. This is somewhat similar to how a financial advisor might work with you to help you understand what type of savings strategy or retirement program might be best for you, and who would then purchase the stocks or bonds on your behalf. In most cases, organizations must go through a broker to obtain insurance from an insurance company. [For more on choosing a broker, see previous Blue Avocado article here.]

Brokers work with nonprofits to determine:

  • Types of coverage needed (do we need social services professional insurance? sexual abuse coverage?)
  • Coverage limits (should our vehicle liability be at $1 million? $3 million?)
  • Services needed (assistance with personnel policies? training for volunteer drivers?)

Based on these guidelines, the broker approaches various insurance companies for price quotes, from the all-purpose firms such as Aetna or Hartford, to insurance companies that specialize in nonprofits such as NIAC and ANI-RRG.  The insurance companies determine the premium (cost) at which they will offer a certain policy, and if selected by the nonprofit, then issue the insurance policy and become responsible for adjusting and paying covered claims. In addition to the above criteria, nonprofits will want to know about an insurance company's track record in prompt, hassle-free, and fair payment of claims.

Insurance companies pay commissions to brokers. This can lead to a situation where brokers might be tempted to recommend an insurance company or a type of insurance that gives them a larger commission rather than the company that is best for the nonprofit. For instance, some companies give brokers extra commissions at the end of the year if they establish and then meet a commitment to a level of premiums sold from that insurance company.

Q: What simple steps can the board take on risk management and insurance oversight?

Pamela: Every member of a board of directors needs to realize that there are risks to operating any nonprofit, and that through appropriate policies and procedures and staff training, these risks can be reduced. Insurance is there to cover those things that happen when the risk mitigation strategies are not completely successful. I suggest some board steps for insurance oversight. These steps include close monitoring of any accidents and suits; keeping up with organizational risks and regular review of your group's relationship with its insurance broker.

Q: Just one more question: What's different, if anything, about insurance for nonprofits compared to for-profits?

Pamela: It pays to work with insurance brokers and insurance carriers who understand how to make sure that the insurance policies purchased are sufficient to cover a nonprofit's risk exposure, which can be more complex than a f0r-profit's risks.

It is not necessarily being nonprofit that makes our sector's insurance needs so different, but rather the fact that we work so intensively with clients and provide services to some of the most vulnerable and the most troubled in our communities. A nonprofit daycare, for example, may not have risk exposures all that different from a for-profit daycare, but a nonprofit residential program for troubled teens certainly is a much different risk than an assisted living center for seniors. Nevertheless, the standard insurance industry rates classify both of these living arrangements simply as residential risks.

Nonprofits -- and but not for-profits -- need to have insurance for injury caused by and to volunteers. And because nonprofits often serve as the hubs of their communities, they frequently conduct many different programs while for-profits tend to have more of a single focus. For example, a nonprofit may run a school, a daycare, a senior residential center, and a food bank all under the umbrella of one organization. A for-profit firm would typically operate just one of those.

Key differences also include medical malpractice risk and social service professional risks such as counseling and providing other professional and quasi-professional services to vulnerable populations. And most nonprofits who work with children, the developmentally disabled, and fragile seniors, need to have protection for allegations of sexual or other abuse.

Pamela Davis is president and CEO of two nonprofit insurance companies: Nonprofits' Insurance Alliance of California (NIAC) and Alliance for Nonprofit Insurance, Risk Retention Group (ANI-RRG). She is passionate about nonprofit insurance "because I'm passionate about the work that nonprofits do."

See also in Blue Avocado:

We are pleased that A Board Member's Guide to Nonprofit Insurance is being simultaneously published by Charity Channel, an online resource for nonprofits. 

Share this > Read more

Comments

I find this article on insurance really timely, unfortunately hardly any of the links work. I would love to get more of the information - but I can't. Arggg!
Help me!
Heather

I just re-checked all the links and they seem to be working for me . . . checked on both Mozilla Firefox and Internet Explorer. Please try again, perhaps going directly to the website at www.blueavocado.org and trying them from there. I'm so sorry! Jan

Your article about the majority of insurance claims being related to auto and liability is interesting. Anecdotally--lawyers and insurers tell me the most significant insurance claims are related to employment disputes so I was surprised. Maybe your info is based on formal rather than informal data. Maybe they were talking about $ amounts and payouts vs. # of claims. Warmest Regards, Francine

Francine,
Thanks for your comment. Just to be clear, the largest number of claims are related to auto and general liability, but they tend not to be large in terms of dollars paid in damages, except in extreme cases where there is a very serious auto accident or someone is seriously injured at the nonprofit facility. Most auto claims, for example, are fender-bumpers caused by improper backing.
However, while employment-related claims are relatively much less frequent, when they occur they tend to be proportionately much more expensive to defend and settle than the average auto claim.
I hope this clarification makes sense.
Thanks again for your comment.
Pamela Davis

I am the Executive Director of a small non profit that does three special Cultural Tourism events. We have a beer garden at two of them. In our small town in New Mexico, it has been impossible to find a license holder/vendor to run the beer garden who has liquor liability insurance. We have therefore secured our own, but it is terribly expensive. We have had people tell us that we are not technically liable since we aren't the license holder, however I am afraid that in a lawsuit, that wouldn't matter.
Can you shed any light on this situation?
Also- is there any price range that you think is realistic in securing general liability and D&O insurance for a small non profit organization?
Thanks, Faye

Faye, You have asked two distinct questions about liquor liability - can I be held liable and am I covered? Most states impose a duty on persons furnishing alcoholic beverages that may make them liable if they cause or contribute to the intoxication of any person and that results in injury to that person or to others. This can apply to establishments that are licensed to sell or serve alcohol, to a backyard barbecue, and even to an occasional nonprofit's fundraising event.The Comprehensive General Liability (CGL) policy that we sell to our member-insureds at ANI-RRG and NIAC includes the standard liquor liability exclusion, but that only applies to organizations in the business of manufacturing, distributing, selling, serving or furnishing alcoholic beverages. Our Claims Vice President tells me that we would not interpret two beer garden events as being in the "business" of serving alcohol. Many of our member-insureds occasionally provide alcoholic beverages at fundraising events and we do not consider them as being in the alcoholic beverage business. But - just to ease everyone's mind about this exposure - we attach the standard Liquor Liability Coverage Form to all the CGL policies we sell - and at no extra charge!This answer applies to our coverage and how we would handle this sort of claim. I can't vouch for how other insurance companies would do it.As for the price range for general liability and D&O, our minimum premium for general liability is $700 and for D&O it is $600, if you don't have employees. Both of those would be $1 million annual policies. If you do have employees, the minimum on the D&O jumps to $1200 because the largest risk on the D&O is employment claims and that exists even if there is only one employee. Again, these are minimum premiums, but it gives you an idea.Please let me know if I can be of further help. Sorry it took me so long to get you this reply. Pamela

Thank you, Blue Avocado. This was the exact information I was looking for --it was simple, easy to understand, and direct.
I'm the Operations Officer at my small non-profit --it's a new position for me and for my organization so I'm making things up all the time. I wonder how many other Operations people are confused at making up this position....

We are a very small (operating budget <$25,000) nonprofit that provides educational services to transitional housing organizations. Our programs include a curriculum for children, and we understand this is a risk area; however, we have been unable to obtain "Improper sexual conduct insurance" because (as we were told) we do not have our own facility and are not a licensed day care provider. So, my question is, are you aware of an insurance company who would provide such coverage for us, or other alternatives to reduce the risk? We have documented policies and procedures for working with children and we conduct background and fingerprint checks on our volunteers.
Thanks,
Sandie

Sandie,
We (the member companies in the Nonprofits Insurance Alliance Group) do not require organizations to own their facilites or be licensed day care providers to obtain improper sexual conduct insurance. We do require that organizations conduct background checks on employees and volunteers. To help with these, we have negotiated a low rate for this with a large online company that provides this service. It looks like you already do this. If you would like to contact me at 831 621 6018, I will see whether we can assist your organization.
All the best, Pamela

I was very impressed by the Blue Avocado article on insurance issues to be considered and addressed by not-for-profit organizations. Well written in plain English. I sit on a number of civic, charitable and academic boards and intend to share the article with them. Again, thank you. Frederick F. Thornburg

Thank you for this fabulous article. It is very well-written & concise - we like. The organization I work with has an "ultimate" goal of providing funds to facilitate breast reconstruction surgery after mastectomy to those without resources to do so themselves. This is done thru pricing agreements with plastic surgeons and medical facilities. We do not have any employees at this time, and operations take place in a virtual office. Sources of income are donations, fund-raising events, membership, and RFP's (with a future goal of purchasing an online travel business to generate funds, too). Our volunteers seek funds; seek media exposure; "counsel" clients by talking with them upon submittal of an application - sometimes at length & sometimes not, depending on the client's wants & needs; organize events, etc. At this time we are in the process of developing procedure manuals for this start-up org.
The laundry list of "what-if's" runs thru my head continually, and I want to ensure that we are adequately covered.
Any and all advice in regard to what type/s of insurance to purchase as well as items to consider in regard to p&p is GREATLY appreciated.
Sincerely,
Victoria Crowe, Hernando Assisted Living

Victoria,
It is difficult answering these sort of questions without knowing more about the details of what you do. However, at a minimum, I think you would need General Liability insurance, even in your "start-up" mode. Also, I think it would be worth trying to get some pro bono help from an attorney to draft up an agreement with your clients, outlining what your responsibilities are and aren't. For example, if one of the reconstruction operations does not go well, your organization could be named in the lawsuit, even if all you do it provide funding and counseling.
I might also suggest that you go to one of our websites, either at www.niac.org or www.ani-rrg.org and look at the Resources section. As a non-member, you won't be able to get access to everything we have, but there are several booklets we have written just for nonprofits on insurance topics. You can either download a copy or request one copy from us free of charge. We have been told they are very useful little booklets with just the right amount of information to get folks thinking about these issues.
Also, please feel free to call me at 800 359 6422 x 18. I may be able to point you to other sources of information.
Pamela

Pamela, Thanks for your explanation on insurance needed by nonprofit organizations and the common insurance claims reported. This info is very helpful.

I am a very small non profit just in the process of setting up and organizing a board. I requested help from a leadership organization who informed me that they will not recommend anyone unless the board has D & O insurance. I just heard about it when I turned the application for referrals in this week and I am baffled. There are no employees. I do not foresee that we will have any employees in the near future (all volunteers, down the road). Why would I need to pay as little as $600 annually for $1 million dollars of insurance when at present not only do we have no employees or operations but why would it even be atleast $500K when chances are virtually no one would be suing for that amount at any given time? If possible could we buy as little as let's say $100k of insurance?

Pamela,
We just started a new non-profit (501(c)3 pending) to support a missionary in Belize. We are incorporated in North Carolina and have a 9 member board of directors. The missionary is our sole employee. Do we need both general liability and D&O libility, or can we depend only on the general liability. As for auto related insurance, the missionary will carrying that on his own, but we may re-imburse his for it.
Al

Is the title 'Nonprofit Insurance for Boards' a book? If so, where can I purchase it?

It's not a real book. We just used a book cover as a graphic element. But this article, which covers an amazing amount of territory, really is the book on nonprofits and insurance. Be sure you also see the article on What Boards Should Know About Insurance Brokers.  --Editor

What's the difference between accident insurance and liability?
Our non-profit doesn't occupy its own space and an accident occurred at the theater we are renting. It was a consequence of faulty equipment that the rental theater provided. We do not have liability insurance, is this covered by our accident insurance?

Hi I work for the San Diego chapter of non-profit organization which is over 10 years old and is working on funding rural development work in India. We would like to have a fundraiser where we will serve food that is prepared by the volunteers. Could you please let me know what the liability insurance for say $500 K would cost?
Thanks
Jay

While claims against nonprofit insurance boards remain rare — most nonprofits will never be sued in their institutional lifetimes — the fear of liability continues to grow. This fear is fueled, in part, by widespread publicity surrounding celebrated cases.You should also purchase "non-owned/hired" auto insurance, in case an employee or volunteer is involved in an auto accident and their personal insurance is inadequate. I would like to say thanks for sharing this update.

Identify ways that the insurance professional could be supportive of the organization without serving on the board or other governing body. For example, perhaps he or she can serve on the risk management committee, or another committee involving nonboard members.

Hello, Pamela. I wonder is it true that men file more insurance claims than women?

How much should liability insurance with a minimum of $500,000 of general liability cist for a non-profit organization that sponsors only "low risk" events (i.e. antique car and tractor shows, folk festivals without re-enactments)?

We are a non-profit social club that elects members each year to keep the membership at 100 members. We also conduct four social events a year where we serve food and alcohol. We have about $30,000 in cash at any given point in time, rotate the Treasurer's job every year, have an "opinion" expressed about the "books" every year and we have no employees. We have twelve Board members and the Board membership changes every year. We have a general liability insurance policy. I'm wondering if we need an Errors & Omissions Liability policy as well?

I'm not sure if you have gotten your answer yet, but one policy you may consider getting is a directors and officers policy. This will protect your board from any frivolous law suits brought about because of the decisions of the board. The D&O insurance shouldn't cost more than $1K-$2k and it would most likely make board members feel much more comfortable because their personal assets would be better protected. Feel free to contact me if you have any more questions. My name is Joe Erle and my email is Joe@5thaveins.com

I am on the board of a small environmental non-profit that files lawsuits. A few questions about D&O insurance (which this org does not carry):

1) The article states that D&O insurance covers claims made by people based on board decisions that they believe were harmful. Could this include responses to program-oriented litigation, such as SLAPP suits?

2) The article notes that wrongful dismissal is a common case. Can board members be held accountable for an employee fired by the executive director?

2) A fellow board member told me that most homeowners' insurance policies will cover claims that D&O insurance normally covers. Is that so?

Many thanks!

Thanks for sharing this.  This is great.  I love it. Keep up the good work and working.

Pamela, Thanks for your explanation on insurance needed by nonprofit organizations and the common insurance claims reported. This info is very helpful.

Are non-profit organizations OBLIGATED to buy health insurance for their management?

Are members of the board of directors of nonprofits expected to buy board insurance or should this be paid for by the organization ?

With the new Health care law, are non-profits organizations obligated to
provide health insurance to their employees?

We are a small non-profit organization and we have a few volunteers. What kind of insurance do we need? What is the minimum/maximum amount requirement to avoid additional risk.

The answer to your question is, it depends. 

Do you have volunteers that ever drive their cars on errands or to attend events for your organization?  Do you hold special events or have activities that may include children, seniors or those who are considered vulnerable populations? Do you pay anyone via a contract?  Are your activities high profile such that you could invite allegations of slander or defamation?  Is there any chance that material on your website could violate copyright rules? Do you own businsess equipment or property?

These are just a few questions to give you a sense that even the smallest nonprofit typically has some liability exposure and may also have property concerns.  At a minumum, we recommend the purchase of General Liability and Non-owned/Hired Auto, if you have no employees. 

 

Although I would not serve on a  board without it, some small orgnaiszations without employees feel OK going without Directors and Officers insurance.  Typical limits for these coverages, even for  small nonprofits are $1 million.  The premium is usually a minimum  premium simply to issue the policy, so most carriers don't offer commercial policies with limits of less than $1 million. The exception on that would be Improper Sexual Conduct Liability.  That sometimes comes with limits of less than $1 million and should be purchased if there is an exposire created by your operations to vulnerable populations.

The best advice is to speak with a knowledgeable insurance broker.  I can refer one to you if you'd like.   

 

After reading your post, I have become very clear about the differences and similarities between the insurance of for-profit and nonprofit. Thanks for proving this valuable information.

Pamela, Does an organization have to have tax exempt status to qualify for insurance? Cynthia

 

Cynthia, 

To become a member-insured of NIAC or ANI, an organization must have 501(c)(3) status.  That is because of the special nature of NIAC and ANI. However, to obtain insurance from a commercial insurance company, an organization does not have to have tax exempt status.

We are a small not for profit historical society in Washington State. We want to occasionally have small invitation only events and serve or sell liquor (having obtained either a banquet or a special occasion license). We have two part time employees but liquor might be served by them or by volunteers.
What liability do we have for serving alcohol and what kind of insurance coverage should we carry? Thank you.

Post new comment

CAPTCHA
This question is for testing whether you are a human visitor and to prevent automated spam submissions.