Matching the potential risks faced by a nonprofit organization
with its insurance policies can challenge even seasoned executives.
Policies often employ arcane, confusing language. The diversity of
nonprofit organizations defies a one-size-fits-all mentality.
Significant shifts in priorities, as well as new programs and
activities, may require shifts in insurance coverage. And let's
be honest—few people start or go to work for a nonprofit
because they yearn to monitor insurance issues.
Based on our experience counseling nonprofit organizations, we have
identified the following five fundamental steps that can maximize
the effectiveness of insurance policies without diverting too many
resources. If missed, however, these steps can result in
uncertainty and uninsured risk.
Step 1: Understand the Options That a Nonprofit Has.
Although every insurance policy is different, there are some
principal types of policies from which a nonprofit can
choose:
- Automobile – Even a nonprofit that does not own its own automobiles can sometimes purchase an automobile liability policy that provides better coverage at better rates for rental cars than the coverage purchased at a car rental desk.
- Commercial General Liability – Known colloquially as the "CGL," this policy remains something of a blanket policy for unexpected accidents that injure attendees, customers, visitors, and others generally unaffiliated with the nonprofit.
- Directors & Officers – Often described as the "D&O," this policy typically protects directors, officers, and employees facing personal liability for alleged wrongdoing that occurs within the scope of their work and results in financial losses (including employment-related liabilities), as well as protects the nonprofit itself for such claims.
- Errors & Omissions – This policy focuses more on negligence that occurs as part of a nonprofit's activities. As errors & omissions coverage may intersect with D&O coverage, a nonprofit must take care to understand the potential risks that may be left uninsured if it forgoes an "E&O" policy.
- Employee Dishonesty/Fidelity – This policy can cover the losses that may result from an employee misusing a nonprofit's property or assets for personal use.
- ERISA/Fiduciary – This policy generally protects a nonprofit from certain liabilities related to retirement, profit-sharing, and health insurance plans.
- Property Damage – This policy can cover physical damage to a nonprofit's office space and employee property.
- Special Events – This hybrid policy generally provides coverage focused on risks associated with conventions, meetings, and the like.
- Umbrella – This policy is triggered once catastrophic events exhaust the limits of underlying policies, such as a CGL.
- Workers' Compensation – This policy may protect a nonprofit from litigation involving workplace injuries to its employees.
Selecting which policies to purchase requires a careful
examination of a nonprofit's programs and activities, its
environment, governing law, the size of a nonprofit's potential
liabilities, and the ability and willingness of a nonprofit to
weather those liabilities without insurance coverage.
By no means is this a complete list, as insurance companies offer
specialty policies and endorsements to cover unique risks. While
they may result from outside-the-box thinking, the terms in
specialty policies may not be as well known as those in traditional
policies. Pointed inquiries about claims made under those policies,
the risks that they do (and do not) cover, and additional resources
for guidance are necessary to make sure that these policies warrant
the investment.
Step 2: Understand the Options that a Nonprofit Has Chosen.
A nonprofit can encounter problems if it tries to use
traditional policies to cover unique risks or risks typically
covered by other policies. Some insurers offer "association
professional liability" or "nonprofit organization"
policies, which sometimes combine certain aspects of D&O
coverage, E&O coverage, and coverage against certain
employment-related liabilities. Such policies do not insure all of
a nonprofit's expected risks. For instance, they generally do
not protect a nonprofit sued by unhappy customers for personal
injury damages. Nor do they generally cover personal injuries from
automobile accidents, damage to the lobby caused by a flood, or
breach of contract claims.
Policy decisions also should follow from critical thinking about
the role that insurers will play. Some policies permit
organizations to select their own defense attorneys; others give
that choice, in whole or in part, to the insurer. Some insurance
policies will reimburse certain expenses, such as certain lost
employee time and expenses incurred by responding to subpoenas or
investigative requests, whereas other policies will not. If
organizations start thinking about these issues after a subpoena or
claim has been served, it is often too late to do anything about
them.
Those decisions also should acknowledge the fact that some risks
cannot be insured. Even to the extent not excluded by insurance
policies, state law can limit the circumstances in which anyone or
any organization can receive insurance benefits for certain
activities, such as intentional misconduct, certain illegal
conduct, or actions resulting in punitive damage awards.
Step 3: Make Clear Who Will Benefit from the Policies.
Not identifying the right "insured
persons"—those who should benefit from any coverage
purchased—can lead to unwanted surprises. Insurance
policies often misidentify the nonprofit that purchased them,
include the wrong address for the nonprofit, or fail to extend
coverage to all of the organizations that should receive insurance
benefits, such as subsidiary or affiliated organizations. These are
easily correctable issues that, if left uncorrected, can have
potentially serious repercussions.
Nonprofits sometimes overlook the importance of ensuring that their
policies extend coverage to all of the people who perform their
work. This issue frequently arises with regard to volunteers, who
are not always among the classes of people to whom coverage is
extended. Even in states that protect volunteers for certain
nonprofits against personal lawsuits, extending coverage to
volunteers may benefit the organization; proving that a volunteer
is immune from suit may require an attorney retained and paid by an
insurer. Moreover, state volunteer protection statutes generally do
not extend to all types of nonprofits.
Step 4: Protect What the Nonprofit Has Purchased.
Simply purchasing policies does not guarantee coverage, even
during the policy period. Some nonprofits do not even keep copies
of their policies—a practice that can impede
determinations of whether they should submit a claim and the
insurers to which a claim should be submitted.
A nonprofit also can encounter problems if it does not report new
locations or activities that impact the risks insured by their
policies. If an insurer prices its D&O coverage based on an
understanding that a nonprofit engages in certain activities, but
would have issued a materially different policy had it known that
the nonprofit engages in other activities, it may be able to avoid
its coverage obligations. Such unintentional misrepresentations can
occur when, during a policy period, a nonprofit enters a new line
of activity without advising its insurance companies. Adding a
nonprofit's insurers and broker to the list of those that must
be advised of such developments or making that notice part of any
due diligence process may protect the insurance coverage
purchased.
Similar problems can occur if an insurer does not receive prompt
notice of a potential claim. Policies often require that insurers
receive notice about a claim promptly or within a certain number of
days. If a claim falls through the cracks, some states will not
excuse an insurer's obligations unless it can prove prejudice
resulting from the delayed claim. Avoiding that argument altogether
by submitting a timely claim is the preferred course.
Step 5: Insist on Ongoing, Effective Communication.
To some extent, a nonprofit can (and should) rely on its
insurance broker to identify the right policies to purchase and
advise insurers about material developments. Identifying the
appropriate times, manners, and messages to send is one of many
reasons why a nonprofit should maintain an active relationship with
a qualified insurance broker, particularly one who understands the
unique challenges of securing adequate insurance for a nonprofit.
The critical importance of this relationship cannot be
overstated.
A nonprofit's emphasis nonetheless should be on delegation, not
abdication. Even if a broker will report a claim or other
significant development to an insurer, the nonprofit should insist
that the communication be in writing, receive a copy, and follow up
to make sure that the message was delivered. Calendaring the end of
all policy periods, including six-week to one-month reminders, so
that new terms and conditions can be negotiated, is another way to
make sure that the nonprofit and broker are on the same page.
This participation cannot be passive. A nonprofit that fails to
understand and ask its insurers, broker, and/or insurance coverage
counsel about materials related to its policies is ill positioned
to complain about a missed development. A nonprofit should remain
diligent even when "renewing" insurance policies, which
sometimes include new exclusions and new limitations. These
developments also may escape notice because many insureds and
brokers may find them inconsequential; inserting a new endorsement
that precludes coverage for lobbying activities may not affect most
insureds, but it would radically affect the desirability of a
policy if a nonprofit has an active federal or state lobbying
program.
Conclusion
When faced with a multi-million-dollar claim, the aftermath of a
natural disaster, or other potential catastrophe, adding a dispute
with its insurance company is hardly the way to protect a
nonprofit. Although no silver bullets exist, these steps are
intended to help protect nonprofits and their leadership from the
misunderstandings that can result in such disputes. Taking these
small steps should help put the nonprofit in a favorable position;
not taking them may just add to the worries that it hoped to avoid
by purchasing insurance in the first place.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.