It is estimated there are approximately 2.3 million nonprofit organizations operating in the U.S., and more than 1.6 million of them are registered with the IRS. Not nearly that many have the proper liability insurance coverage they need, leaving those organizations and the people who run them one event away from a potential financial disaster.
Virtually anyone associated with a nonprofit – officers, directors, employees and even volunteers – can be subject to liability. Nonprofits have unique exposures and therefore unique and varied insurance needs, typically encompassing coverages such as Directors & Operators insurance (D&O), Employment Practices Liability insurance (EPLI) and Fiduciary Liability insurance, which they normally procure with the guidance and expertise of independent agents and brokers.
A relatively small number of insurance companies provide coverage for nonprofits and even fewer specialize in underwriting this sector, meaning agents and brokers wishing to break into this niche market need to do their homework first.
Non-profits often view management liability coverages as luxuries, but they’re very important in protecting the balance sheet,” says Steve Cohen, management liability senior underwriting manager at Victor O. Schinnerer & Co., Inc. in Chevy Chase, Md. “Trade groups that set industry standards or provide credentialing or accreditation can find themselves as the defendant in anti-trust lawsuits, as well as professional liability or errors & omissions claims.
Cohen says membership organizations in particular should be focused on buying Privacy and Security coverages to address their exposure in handling large amounts of personal identifiable information. He also cautions that all organizations, of all sizes, can be the target of employment-related lawsuits – even by volunteers.
“Typically, smaller charities and foundations simply don’t view these exposures as meaningful, as they feel their charitable nature creates goodwill internally and externally; this simply isn’t the case,” Cohen says. “Everyone is a potential target, and brokers should be well-versed in the spectrum of exposures to discuss with their clients.”
Riley Binford, CIC, executive vice president at Charity First Insurance Services in San Francisco, says his company specializes in dealing with smaller- to mid-size nonprofits that are not necessarily sophisticated when it comes to their insurance needs.
“Probably the biggest misconception we see is nonprofits not fully understanding the difference between Directors & Officers Liability and General Liability. Agents and brokers have an opportunity to sell both if they would clearly differentiate between the two,” Binford says. “Years ago, the best way I’ve heard D&O explained is that it is basically ‘hurt feelings’ insurance. Someone has been offended or angered or has had their feelings hurt from something the board of directors or its officers did. And of course, D&O for nonprofits is now much more than that with the inclusion of Employers Practice Liability.”
Binford also advises agents and brokers to simply keep in touch with nonprofit clients on a regular basis.
“Right now, nonprofits are getting very creative on how to increase their revenue/funding flow. Unfortunately, this can inspire some very risky enterprises that the nonprofits should probably never consider,” Binford says. “As the nonprofit’s risk manager, the agent or broker can give great advice on whether or not the nonprofit should venture into a new area.”
Agents and brokers also need to keep an eye on their clients’ existing coverages, as carriers seek rate increases or look to restrict terms and conditions of coverage. “Testing the market is very reasonable due diligence to validate the incumbent carrier’s position. If there are material increases in employees or revenues or other new exposures, the organization should be sure to evaluate both the amount and scope of its coverage in order to ensure it is appropriate,” Cohen says.
And then you have those organizations that aren’t yet covered at all. “Some industry experts feel that the nonprofit marketplace is competitive due to the large proportion of uninsured organizations, making it an opportunity for brokers and potential policyholders to seek multiple, very competitive bids,” Cohen says. “And it is very important. The premiums are well worth the protection against an employment-related lawsuit, which are not uncommon for nonprofits.”
Cohen adds that many people take directorships on small nonprofit boards without considering that doing so exposes their personal assets to liability. Directors and officers can be sued for a wide range of issues including fiduciary duty breaches, failure to fulfill the organization’s nonprofit mission, misuse of funds, or improper conduct of volunteers or employees. Legal fees and damages resulting from nonprofit directors and officer claims often exceed the organization’s liquid net assets, which may prevent the organization from indemnifying them. If the nonprofit doesn’t have a decent D&O policy, a director may be put into the unenviable position on having to rely on their homeowner’s insurance, which probably wouldn’t provide much if any coverage in the event of a lawsuit.
While the insurance marketplace has actually expanded for the nonprofit segment in recent years, providing more choice amongst carriers with broader coverages, this development has not led to softer pricing. “Nonprofits, like any other industry segment, are not insulated from the insurance industry’s overall results from the mini-CATs and other weather-related events that have hammered the insurance industry over the past few years,” Binford says. “While there might be more choice among carriers, pricing has not necessarily come down. What is available now are more carriers to choose from in the event a nonprofit is dissatisfied with their current carrier.”