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| Insurance Considerations for Nonprofit Organizations |
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Category: |
Legal Updates |
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Subject: |
Insurance for Nonprofits |
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Abstract: |
There was a time when nonprofit organizations were seldom, if ever, sued, but those days, unfortunately, are long gone. |
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Date: |
04/28/08 |
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There was a time when nonprofit organizations were seldom, if ever, sued, but those days, unfortunately, are long gone. As a result, it is important for every nonprofit to maintain adequate insurance coverage to provide it not only with indemnification in the event a suit or claim is successful but also with a defense, since the cost of the defense can run into the tens or even hundreds of thousands of dollars, even if the suit or claim is successfully defended. Such defense costs alone could destroy a smaller organization.
Although, like any other corporation, a nonprofit should maintain adequate insurance coverage, the risks against which a nonprofit needs to maintain insurance coverage are often different. For example, among other matters unique to a nonprofit, the insurance maintained by a nonprofit may need to include coverage for volunteer activities, the solicitation and management of donated funds, counseling and pastoral care and sexual misconduct. To ensure that adequate coverage is obtained, a nonprofit should seek the advice of an insurance broker or agent experienced in writing insurance for nonprofits. If possible, the nonprofit should obtain insurance from a carrier that writes insurance coverage specifically tailored for nonprofit organizations and that is written on a form specifically intended for that purpose, and not just a standard commercial policy.
There are at least five kinds of insurance coverage that a nonprofit may need to maintain: general liability coverage, automobile coverage (which may be included in a general liability policy), property coverage, directors and officers insurance (which may include employment practices coverage and educators legal liability coverage) and workers compensation coverage.
Most insurance coverage can be written on either an “occurrence” or a “claims made” basis. Under an occurrence based policy, the right to coverage arises upon the occurrence of the event giving rise to liability. Under a claims made policy, coverage is only available if (i) the insurance is in place at the time a claim is made (which could be several years after the occurrence) and (ii) the policy has a “retro date” that extends back to the date of the occurrence. As a result, insurance written on a claims made basis not only makes it more difficult to change insurance carriers but could leave past liabilities uninsured if the policy is terminated or cancelled before the claim is made. For these reasons, occurrence based coverage is generally preferable. With the exception of professional liability coverage (i.e., malpractice insurance for medical and nursing care, legal services, etc.) and directors and officers liability coverage, most insurance coverages should be available on an occurrence basis, and before accepting claims made coverage the agent/broker should be questioned on the availability of occurrence based coverage.
In order to be sure that your organization has the insurance coverage it expects and that meets its specific needs, before actually purchasing a policy of insurance it is important that you obtain copies of the policy evidencing the insurance you are purchasing and read the policy carefully. In this review, particular attention should be paid to the definitions (to make sure they fit the operation of your organization) and to the exclusions and endorsements. It is important to assure that the definitions in the endorsement section are consistent with those in the policy and that the endorsements do not limit the coverage provided in this policy beyond your expectations. It is also important to assure that the company that will issue your insurance has the financial strength to pay any claims that may arise. The company issuing the insurance should, at a minimum, be rated “A” by Standard and Poor’s and “BB+” by A. M. Best, and the agent or broker should be asked to provide written evidence of these ratings alo |
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