December 19, 2011

Simple Lessons in Nonprofit Insurance

Nonprofit leaders are all too familiar with Murphy's Law: If anything can go wrong, it probably will.

That's why nonprofits need liability and property insurance, which are critical tools for protecting assets and preserving financial health when the unexpected happens.

However, the insurance trade is a complicated, regulated industry. So I’ve enlisted the help of two seasoned insurance professionals to explain how it works: Pamela Davis, chief executive of Nonprofits Insurance Alliance Group, which insures 10,000 nonprofits across the country, and Valissa Naganashe, an agent at Brownrigg, which insures nonprofits and businesses..

Q: What is general-liability insurance?

Ms. Naganashe: General liability is the most basic form of business insurance. This is the protection you have whenever you or your business will be held responsible for causing damage to a property or injury to a person. General liability covers both on- and off-site services—programs, special events, and meetings—that board, staff, contract workers, and volunteers may be involved in.

Q: Once a nonprofit has purchased insurance, does it have further obligations to the insurer?

Ms. Naganashe: Nonprofits need to regularly communicate with their insurance agent and their board or finance committee about the status of financial, program, and funding obligations. Changes in operations, for example, managing funds for others, adding or abandoning locations, hiring new staff, or undergoing a merger can have a huge impact on both the validity and cost of an insurance policy.

Ms. Davis: Organizations need to report claims--or issues that could become claims--to their insurer as soon as they become aware of them. Private settlements should be avoided for two key reasons:

* The insurance company is not obligated to reimburse any cost.

* The resolution may not be legally binding or might have unintended consequences.

Q: Why do some grant makers ask the nonprofit to name them as an “additional insured” entity on the nonprofit’s insurance policy?

Ms. Davis: If someone is injured doing work funded by a city or foundation, a claim could be made against both the funder and the nonprofit. When the funder is named as an additional insured, the insurance company will (with some exceptions) defend them. These endorsements can often be obtained at no charge.

Q: How can a nonprofit protect itself from theft, fraud, or other bad acts?

Ms. Davis: Good oversight of people and resources is a nonprofit’s first line of defense against bad acts. Nonprofits can also obtain fidelity insurance as a part of their property insurance, which covers the theft of cash or goods.  Make sure that the fidelity insurance covers both employees and volunteers. Separately, every nonprofit with employees should have directors’ and officers’ liability insurance, which includes coverage for “employment practices” (acts directed toward or committed by an employee, such as sexual harassment).

Q: Are there special considerations for nonprofits that own autos or whose employees use their personal cars for work-related business?

Ms. Naganashe: The financial and emotional cost of an auto accident can be devastating, so it is important to maintain insurance coverage. Organizations can get broad coverage for any auto that is owned, hired, borrowed (including employee-owned vehicles), or otherwise used by the named insured. If a nonprofit doesn’t own vehicles, then more limited coverage is available.

Ms. Davis: While some nonprofits may feel that they can’t afford adequate insurance in these tough economic times, the experts caution that nonprofits can’t afford to let policies lapse. Organizations that are experiencing cash-flow problems should contact their insurer to discuss possible cost-saving adjustments to their policies or revised payment plans.