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Liability insurance is a critical component of your nonprofit's financial risk management plan. Liability insurance covers the cost of accidents, injuries, losses or abuses that other risk-mitigation efforts simply don't catch — ideally sparing your organization from irreparable financial harm in case of such an event.
Types of liability insurance
In the U.S., there are many specific types of liability insurance. Some of the most common for nonprofits include:
General liability insurance
At minimum, nonprofits must carry a general liability policy. Sometimes called CGL for "commercial general liability," general liability insurance offers coverage for accidents identified as negligent acts — such as a "slip and fall" scenario in which a client or patron is injured at one of your sites or events or property is damaged during a fundraising event hosted at a key donor's residence.
Directors and officers insurance and employment practices liability coverage
Directors and officers insurance (commonly known as D&O) covers board members if a claim could result in board members being held personally liable as a result of their board service. D&O can also cover claims of harassment, abuse or wrongful termination by board members, staff and volunteers. D&O premiums are typically low for small nonprofits, making it a cost-effective risk-mitigation option. Depending on the policy, purchase of separate employment practices liability coverage may be required.
Pamela Davis, president and CEO of the Nonprofits Insurance Alliance Group, notes that the largest settlement costs may come not necessarily from accidents but from the relatively infrequent claims of improper employment practices, errors or abuse. If you have even one employee, Davis says, insurance with employment practices coverage is probably essential.
A typical property policy offers coverage for structures and facilities owned or leased by your nonprofit, including offices and event spaces. You'll also want a policy that covers property and possessions — such as office equipment, computers and the data saved on those computers.
"Non-owned/hired" auto insurance offers coverage beyond the scope of a driver's personal car insurance. This type of insurance is a must if driving is required of any staff members or volunteers. Also, note that in the U.S., some states require organizations to purchase auto liability coverage or a minimum amount of coverage.
Workers' compensation and unemployment insurance
Workers' compensation insurance covers medical expenses for employees who are injured on the job for any reason, while unemployment insurance is an option for funding unemployment claims. (Alternatively, nonprofits may choose to pay state unemployment tax or pay into a trust that can be accessed in the event of an unemployment claim.)
Professional liability insurance
If your nonprofit provides medical or social services, professional liability (malpractice) insurance offers coverage in case of professional errors or omissions. Note that there's some degree of overlap between professional liability and D&O insurance — so make sure your policies cover the bases but that you don't pay for extra unnecessary coverage.
Fidelity and crime insurance
Fidelity and crime insurance provides coverage against embezzlement by employees or theft by means of fraud or scam. If your organization has large endowments or deals with expensive or valuable goods, you might consider investing in this type of policy.
Working with an insurance broker
An insurance broker or agent acts as an intermediary between you and the insurance company, helping you identify insurance providers with nonprofit experience and select an appropriate amount of coverage. This support can be essential for nonprofits, since budgets tend to be tight and insurance needs complex.
To find an experienced and reliable broker, collect word-of-mouth recommendations from nonprofits within your community. Expect the broker to represent your interests and anticipate the ways in which your needs for coverage will grow and change. A good broker will communicate regularly about the state of the insurance landscape, such as new laws or regulations. He or she should be accessible, accountable and responsive to your questions and concerns.
Brokers are typically paid a commission by insurance companies. It's entirely appropriate to ask what a broker has been paid by a particular company, or whether a broker receives a bonus at the end of the year for bringing in a certain number of new clients. Ask potential brokers to share specific examples of insurance claims by nonprofits and how they were resolved.
Selecting the right amount of coverage
The Nonprofits Insurance Alliance Group recommends $1 million in liability coverage for community-based nonprofits. This is, of course, a give-or-take number, and may be reduced or supplemented based on the allocation of your organization's resources. In the end, your coverage should reflect your needs — and should change as your nonprofit grows.
This article draws on the expertise of Grace Davies, a Minneapolis-based attorney with special interest in product liability, medical malpractice and employment discrimination.
Pamela Davis: A board member's guide to nonprofit insurance
Blue Avocado: What should boards know about insurance brokers?
Nolo: What types of insurance should a nonprofit buy? by Peri Pakroo
Nonprofit Risk Management Center: Frequently asked questions: Insurance