From working with an insurance broker to the kinds of insurance you need
No matter how heartfelt your mission, impressive your impact or exceptional your nonprofit services, in some operational areas, you and for-profit businesses share a common and critical responsibility: the need to select and maintain certain key types of insurance. The good news is you can find helpful and informed assistance in the form of the right insurance brokers. The better news is, in certain insurance areas, such as Workers Compensation Insurance, you may be missing ways to save real money.
Your first nonprofit insurance decision: Find the right insurance broker
No matter what your nonprofit insurance needs may be, at some point you'll likely need an insurance broker to assist you with plan selection and purchase. To find an experienced and reliable broker, you might collect word-of-mouth recommendations from nonprofits within your community. Look for a broker who specializes in working with nonprofits. One excellent resource in finding the right broker is the Nonprofits Insurance Alliance Group. The Nonprofit Insurance Alliance Group is a nonprofit and was founded by Pamela Davis, who is dedicated to the work of nonprofits. They offer unique insurance liability packages and provide free consultation on finding nonprofit-centric brokers. The Nonprofits Insurance Alliance Group also offers free legal advice regarding minimizing potential insurance risk.
A broker should represent your interests and anticipate the ways in which your nonprofit 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.
Broker qualifications and licenses
Brokers who sell and/or provide property and casualty insurance coverage must obtain property and casualty insurance licensure. Personal lines licensure is required for brokers who sell automobile insurance plans.
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.
Brokers are typically paid a commission by insurance companies. It's entirely appropriate to ask what a broker has been paid by a 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.
The six types of "must have" nonprofit insurance policies
Here are the top six insurance “must haves” in order to mitigate risk to your nonprofit, your board members, staff, volunteers and consumers. From the standpoint of insurance coverage, the three core elements of any organization are people, places and things. To protect places and things, you need property insurance.
#1: Nonprofit property insurance
“Places” and “things” are big categories. They include buildings, equipment, furniture, inventory, supplies and other materials. Property insurance will reimburse you for the cost of replacing or repairing these if they’re damaged or destroyed by events such as:
Remember: your nonprofit needs property insurance even if the organization doesn’t own its buildings. All the things inside those buildings are still vulnerable to unpredictable disasters. In fact, your leases and rental agreements often require your organization to carry property insurance.
Ways to save money on property insurance
Surprisingly, nonprofits are sometimes over-insured when it comes to covering their property. For instance, if you are paying for insurance to cover the loss or theft of laptop computers, read the fine print in your policy. The coverage you are paying for will sometimes only cover the vastly decreased value of an item, for example, a used laptop, and not the actual cost of replacing the laptop. On the other hand, you may not be covering property that would have a high replacement value should it be lost, stolen or destroyed. There is only one way to understand what you need to cover and what savings if any, you can identify:
First, complete an insurance inventory
The first step in getting property insurance is carrying out an inventory of all the things that are used and/or owned by your organization.
Prioritize making a digital equipment list. Such equipment is often some of the most expensive property in a nonprofit office. This includes anything that has the capacity to store or transmit data, such as:
- Desktop and laptop computers
- External hard drives
- “LAN” line phones
- Mobile phones and tablets
Next, walk through the places where your work happens — offices, garages, warehouses, rented facilities and residences. List everything that you see. Add the stuff that’s tucked away in drawers, closets and other storage spaces. Then estimate what it would cost to replace each item. Take a photo of each item. Download your list and photos on a thumb drive or on the cloud. If you don’t use a file storage tool or cloud storage backup, then store your list and photos in a safe place outside of your office.
The goal is to have ready access to your list and photos in the case of a property damaging emergency. Many New Orleans-based nonprofit staff who endured Hurricane Katrina returned to work to find that the contents of their offices were under water or, in some cases, completely wiped away by flooding. For those groups that did not have off-site inventory lists, it was next to impossible to recover damages on most, if not all, of their property.
Don’t forget to broaden your definition of “things” to include data. Data can be difficult to inventory because it’s not tangible. It can also be damaged by events — such as power surges and outages — that don’t harm other property.
Think about all the things you’d have to replace after losing data. Include software — bought at a store or downloaded — and storage media such disks or tapes. Then consider what it would cost to restore lost data, including information about your finances, employees, programs, services and constituents.
Second, choose the right property insurance coverage for your organization
When you are choosing your property insurance coverage, remember that the lower the deductible, the more expensive the premiums. It might be wise to put aside a dollar amount representing an emergency deductible fund and increase your deductible to reduce the overall cost of your insurance. Talk to your board about this option.
When you have an accurate property inventory, an estimate of replacement costs and an idea of the deductible level your nonprofit can manage, you’re ready to meet with your selected insurance agent or broker.
Nonprofits vary widely in their risks and needs for property insurance, and there are too many options to fully cover here — that’s why you need to speak to an insurance specialist. Among the options are:
- Building coverage for offices, meeting spaces, warehouses and other structures
- Business personal property (contents) coverage for office equipment, materials and furnishings
- Business income policies to cover revenue lost and expenses incurred after property damage
- Cash, funds and securities coverage to reimburse your organization for money that’s lost or stolen
- Coverage for accounts payable, valuable papers, signs and other valuable items not listed above
- Coverage for equipment breakdown
- Coverage for data processing equipment
Before you sign a property insurance policy and pay the first premium, understand exactly what you’re buying. Carefully review the coverage clauses in your policies. If you are unsure of the protection you are purchasing, your broker can help answer your questions. If your broker isn’t clear about your policies, get another broker! Don’t go it alone. Insurance policies are hard to read, hard to understand and highly detailed. Brokers or attorneys specializing in insurance are essential to understanding the complexities.
Always read the following sections of the contract carefully:
- What’s covered? Make sure that the key items from your property inventory are specifically included.
- What’s not covered? A standard policy might exclude a coverage that your organization needs. Avoid policies with a “failure to provide insurance” exclusion, which denies indemnity if you do not have enough coverage in place. “Enough” can be defined in vague or arbitrary ways.
- Replacement cost versus cash value. Property can be insured for replacement cost or for cash value (which accounts for depreciation). Look for any coinsurance clause that requires your organization to carry a specific amount of coverage. If your limits fall below the minimum, you might have to pay a penalty.
- Deductibles. Again, you can often get lower premium payments by choosing a higher deductible. Just be sure that you have enough in an emergency fund to cover the deductible.
To get the protection your organization needs, you might need to amend a standard property insurance policy with endorsements. These are documents that add or subtract specific coverage — and often change your premium payments as well. An example is building ordinance coverage, which covers increases in construction costs due to changes in local building codes. Again, your broker should help you navigate the options and possibilities.
Property risks will change as your organization grows and matures. Keep your coverage current. Review your nonprofit’s insurance whenever the organization buys new equipment, relocates or opens a new office.
Third, put a risk management plan in place for your property protection
Risk management is acting to prevent property damage. For instance:
- Install and update sprinkler systems and fire alarms
- Get maintenance contracts for equipment and schedule annual checkups
- Back up data — and then back up those back-ups to the “cloud” and off-site storage areas
Managing risks can save you from headaches in the future — and it may lower your property insurance premiums as well.
#2. Liability insurance
To handle allegations of incompetence or wrongdoing by people, you need liability insurance.
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 don't catch and/or prevent — 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 a 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.
Employment practices liability coverage
Pamela Davis 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. The Nonprofit Alliance Insurance Group has some unique and extremely affordable employment practices liability coverage options and will also provide you with the names of other carriers of similar insurance products.
#3: 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.)
Most businesses are required to pay for unemployment claims. But unlike for-profit businesses, 501(c)(3) nonprofits have options to help strategically manage these payouts and reduce the cost of unemployment insurance in nonprofit budgets.
If a nonprofit decides to reimburse, they can end up paying substantially less than if they paid the state tax.
How the nonprofit unemployment insurance tax advantage works
Each state maintains an unemployment pool that employers pay into on a per-employee basis based on their state’s taxable wage base and their individual tax rate (based on claims history and other factors). Money in the pool is combined and used to pay all employer unemployment claims in the state. Nonprofit employers generally have lower staff turnover, so we end up subsidizing the higher cost of for-profit employers in the pool.
Traditionally, it is estimated that nonprofits pay $2 into the unemployment pool for every $1 we end up paying in unemployment claims and as a result lose tens of thousands of dollars from our budgets every year.
In 1972 a new section (Section 3309a) was added to the Federal Unemployment Tax Act as contained in the Internal Revenue Code. It states that state unemployment programs must allow 501(c)(3)s to elect whether (a) to contribute to the state program in accordance with state law or (b) to pay into the state program annually an amount equal to the actual unemployment benefits paid out by the state program because of employment services previously provided to the organization.
In short, nonprofits have the option to only pay the unemployment claims for which we are liable — dollar for dollar.
What does an organization providing nonprofit unemployment insurance tax advantage plans do for your nonprofit?
Simply, such organizations help 501(c)(3)s handle the practice of not paying the state unemployment tax and only reimbursing for claims.
Technically, these organizations are a grantor trust governed by a board of trustees made up of participating nonprofits that provide the legal, financial and administrative resources necessary to manage unemployment claims process.
They provide the assistance nonprofit organizations need to:
- Opt-out of the state unemployment insurance tax system and become reimbursing employers.
- Manage, audit and protest any unemployment claims they may face.
- Reduce layoffs and unemployment costs – thereby saving money.
Can nonprofit unemployment insurance tax advantage save your organization money?
According to industry research, this program can typically save organizations with over $1 million in gross annual payroll up to 40 percent on their state unemployment insurance. Savings are dependent upon an organization’s state tax rate and unemployment claims history.
#4: 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.
Selecting the right amount of liability 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.
#5. Directors and Officers insurance
Be sure your nonprofit is covered by Directors and Officers (D&O) insurance
Directors and officers insurance protects a nonprofit and its leaders against lawsuits for “wrongful acts.” While these suits are not common, even a single occurrence can sink an organization’s budget.
Consider these alarming statistics from Susan Bradshaw, former vice president of marketing at the Nonprofits Insurance Alliance Group:
- Each year, about one in 100 nonprofits file a claim under D&O insurance
- The average cost of settling a D&O claim without going to court is $28,000
- The average cost of defending a claim is $35,000
- About 10 percent of these claims cost more than $100,000
Mistakes that leaders make
“Wrongful act” is a broad term. It’s defined in a variety of ways by state laws and the Internal Revenue Service.
In general, a wrongful act is any breach of fiduciary duty. Nonprofit board members have many such duties, including acting with reasonable care when making decisions and making sure that their organizations operate legally.
More specifically, D&O suits often involve claims related to:
- Unfair or excessive compensation packages
- Conflicts of interest
- Employee harassment and hostile work environments
- Failure to hire or promote
- Improper termination
- Discrimination based on race, gender, ethnicity, or national origin
- Misleading or inaccurate statements
- Mismanagement of an organization’s funds or other assets
Remember that both you and your nonprofit can be sued for such claims even if you’re innocent. A frivolous accusation is enough to land you in court — leading to legal costs and possible loss of reputation.
D&O claims can also be messy. Consider a disgruntled employee who claims that he or she was fired without reason. Key incidents in such cases can often be interpreted in different ways. And the people involved have incentives to be less than candid.
No executive should take a leadership role in any nonprofit – whether paid or unpaid, without first confirming that the nonprofit has D&O insurance. The risks are too great to you as an individual, as in some cases leadership can be personally held financially liable for a wrongful act finding.
More reasons to carry nonprofit D&O coverage
In short, D&O claims can lead to a substantial loss of time and money. That’s reason enough to own D&O insurance. But there are other reasons as well:
- General liability insurance does not apply to D&O claims. A general liability policy applies only to negligence — acts that are not intentional. For instance, you’d turn to general liability insurance if someone falls on a stairway in your office and sues for physical injury. In contrast, D&O claims result when someone claims an intentional breach of duty.
- Individual insurance coverage might not cover D&O claims. Do not assume that a board member’s personal liability insurance will apply. Such policies often exclude activities related to board membership.
- Strong D&O coverage makes it easier to attract qualified board members. If you do not have this coverage, your board members could be personally responsible for the cost of a D&O lawsuit. That’s a huge disincentive to work with your organization.
- D&O lawsuits can lead to tax penalties. Possibilities include fines, audits, and loss of tax-exempt status.
- Your organization can be sued even if you have no employees. For example, a vendor or landlord might sue for breach of contract.
Understand exactly what you’re buying
D&O insurance is challenging to buy. Unlike general liability policies — which often include standard language — D&O policies vary substantially from insurer to insurer.
Find an agent or broker who specializes in D&O insurance for nonprofits. Then ask the following questions:
- What does the policy cover? Make a complete list of your possible exposures to D&O claims and get coverage for each one. In addition to D&O insurance, you might need an employment practices policy to cover the risks.
- What is not covered? Look carefully at what’s included — and excluded — under the definition of “wrongful acts.” Avoid policies with a “failure to provide insurance” exclusion, which denies coverage if your organization does not have enough coverage in place. “Enough” can be defined in vague or arbitrary ways.
- Who is covered? Find out whether the policy covers employees and volunteers as well as executives and board members. Ensure that the entire organization is covered.
- How will your organization be reimbursed? Make sure that the insurer will pay the costs of a lawsuit as they arise. Avoid contracts that require your organization to pay first and offer reimbursement.
Make sure that your insurance coverage is there when you need it
D&O insurance is sold on a “claims-made” basis: it applies only to incidents that occur while your policy is in force. The problem is that lawsuits can take many years to emerge. Your nonprofit could get sued for an incident that took place before you ever bought D&O coverage.
There are two ways to prevent this problem. First, get a D&O policy early on and keep it in force with adequate coverage limits. Second, look for a policy with coverage for prior acts.
Put risk management in place
The Nonprofits Insurance Alliance Group recommends that you prevent D&O claims by:
- Updating your policies, procedures, and employee handbook to comply with current laws — and following these documents to the letter
- Conducting thorough and candid performance reviews
- Clearly and promptly documenting any decision to discipline or warn an employee
- Stating in contracts that your organization and anyone it hires can terminate employment for any legal reason
- Revising your contracts and handbooks to remove any reference to a “permanent” employee
- Clearly and promptly investigating any claim of harassment or discrimination
- Getting legal advice before terminating any employee
Also review your D&O coverage regularly — especially when you want to recruit new board members. Approach this type of insurance as a key way to keep your organization alive and thriving for years to come.
#6. Automobile insurance coverage
Does your nonprofit have the auto insurance coverage it needs? In the U.S., some states require organizations to purchase auto liability coverage or a minimum amount of coverage.
Does your nonprofit depend on volunteers or employees who drive as part of their duties? Then your organization needs auto insurance coverage. Without it, a single accident that involves a volunteer or staff member could lead to expenses that could close your organization.
When it comes to auto insurance, nonprofits face unique challenges. For example, volunteers might be called on to transport children, older adults and other vulnerable clients. In addition, volunteer drivers might have to navigate unfamiliar neighborhoods while driving cars they don’t own. These factors create a set of risks that can only be managed with adequate insurance coverage.
To gain peace of mind, work with an insurance agent or broker who specializes in underwriting nonprofit organizations. While every nonprofit has its own set of needs, here are some essential points to cover when you discuss auto insurance.
Get hired auto and non-owned auto liability
If you ever ask volunteers to drive rented or leased cars on behalf of your organization, you need coverage for hired auto liability. If volunteers drive their own cars, then non-owned auto liability is also essential. These two coverages are often packaged together in a single policy, or as an endorsement of a general liability policy.
Some nonprofit managers skip hired and non-owned policies. They assume that a volunteer’s personal auto liability insurance will pick up the tab for driving accidents. Unfortunately, that’s not true. Personal coverage does not apply if an accident victim chooses to sue your organization.
In addition, you might discover that volunteers have no personal auto insurance — or that they don’t have enough to cover the costs of an accident. Hired and non-owned coverages are designed to fill these gaps.
Ask your broker if your policy requires criminal or DWI/DUI background checks before allowing a volunteer or staff to drive on behalf of your nonprofit. Not understanding that this might be a requirement, or ignoring such requirements, can result in your insurance carrier declining to pay for damages associated with an accident that involves staff or volunteers with such histories.
Consider commercial auto coverage
If your nonprofit owns vehicles, then you need a commercial (or business) automobile policy. This provides coverage when an employee, volunteer or anyone else has an accident while driving one of the organization's vehicles.
Costs for this coverage vary depending on location and type of vehicle. Premiums are higher for vehicles that are garaged in larger cities. Trucks and vans usually cost more than cars.
Get adequate coverage for your nonprofit
Many brokers recommend that nonprofits buy at least $1,000,000 of auto liability coverage. Some nonprofits get extra protection with an umbrella policy that provides coverage above the limits of their primary insurance policies.
Consider endorsements to extend your auto coverage
An endorsement is an amendment to a standard insurance policy that adds or removes coverage. Endorsements allow you to fine tune coverages to meet your organization’s needs. You might find two endorsements to your auto insurance to be especially useful:
- One is an endorsement to cover physical damage to volunteer and employee-owned vehicles.
- The other is volunteer excess auto liability, which provides up to $500,000 of coverage beyond the liability limits of a volunteer’s personal auto insurance. This offers extra protection for volunteers whose personal assets would otherwise be drained by the cost of a serious accident.
Read policies carefully
Okay, so reading insurance policies isn’t your idea of a good time. Fair enough. But what if you discover a gap in coverage that could cost your organization thousands of dollars in the future? In that case, the time you devote to reviewing your policies is well spent.
Look for any language in your auto insurance policies that’s vague or confusing. List your questions and take them to your organization’s agent or broker.
Of concern to nonprofits is a “failure to provide insurance” exclusion. This clause allows an insurer to deny coverage by arguing that your organization does not have enough coverage in place. What constitutes “enough”? That might be buried in fine print or left to the insurer to decide. Avoid this exclusion.
Put risk management in place
Having adequate auto insurance makes it easier for your nonprofit to recruit employees and volunteers whose job descriptions include driving. And yet insurance is only part of the solution. The other major piece is risk management — taking steps to prevent accidents from ever happening in the first place. For example:
- Check driver safety records by ordering motoring vehicle reports for your staff and volunteers who drive as part of their assignments.
- Ask staff and volunteers to provide proof of personal insurance coverage with liability limits of at least $100,000/$300,000 — up to $100,000 for losses by one person and up to $300,000 for losses by additional people.
- Train volunteers and employees in basic car safety, including no use of a cell phone while driving.
Review your coverage annually
As your programs and services change over time, so will your insurance needs. Meet with your agent or broker at least once a year to review your organization’s auto policies. Think about all the different ways that people drive vehicles on behalf of your nonprofit and make sure that your bases are covered.