February 21, 2017

Insurance and Liability: What Nonprofits Need to Protect Themselves

While nonprofit organizations enjoy certain exemptions, they still have liability risks and, as with any business, liability concerns are going to be industry-specific. A nonprofit construction company like Habitat for Humanity, for example, will have liability risks associated with bodily injury for its own workers and volunteers, while a nonprofit legal organization like the ACLU will need to carry insurance that protects the company against erroneous legal advice or even slander and libel.

Common Nonprofit Risks

What risks will impact your nonprofit are highly industry-specific. That said, however, most businesses in general, including nonprofits, will have commonalities among their liability concerns. Nonprofits should be concerned with:

  • Bodily injury claims from customers or clients
  • Physical property loss or damage
  • Management and directorial board decisions
  • Cybersecurity

The types of insurance that fall under these categories may include general liability, business owners policies, commercial property, management liability insurance policies such as directors and officers and employment practices liability, and especially cyber liability insurance. Let’s review how these different policies may provide necessary coverage for your nonprofit.

Core Liability Coverages: General Liability, Commercial Property, and Business Owners Policies

The two categories of risk that most businesses share are third-party claims dealing with bodily injury or property damage, and the loss of the business’s own property as a result of a loss, such as a fire or theft.

Commercial property insurance will help provide needed funds should you lose any property that’s directly tied to the business. All commercial property policies will cover loss related to theft, such as the what might occur after a break-in, while policies sometimes vary in terms of what is covered in the case of other types of loss events, such as natural disasters. Computer equipment and other forms of technology, in general, are going to be a primary target for thieves during break-ins, while such equipment is also very susceptible to breakage during a natural disaster. Nonprofits that have offices or space in areas that are prone to floods or earthquakes may want to consider additional coverage, as these are regularly not considered to be covered events.

Perhaps one mistake many nonprofit organizations make is mistakenly assuming that, if an accident occurs, individuals will not seek recompense from them. Lawsuits of this nature can and do happen against nonprofits, making general liability a consideration.

Slip-and-fall lawsuits are common general liability concerns, while a general liability policy also covers instances where your nonprofit may be responsible for damaging someone else’s property. However, a general liability policy is just one alternative available to nonprofits. This is where a business owners policy (BOP) may be a worthwhile venture. A BOP combines the benefits of a commercial property policy and a general liability policy.

Management Liability: Directors and Officers and Employment Practices Liability Insurance

Your board of directors serves an important function in your nonprofit, but they are not infallible or exempt from investigation. Directors can make mistakes with managing money or with general decisions in the direction of the nonprofit, while managers can make mistakes related to hiring, firing, and other employment-related issues.

Given this, a directors and officers (D&O) policy is valuable to help mitigate the risks associated with nonprofit boards. As boards meet and make decisions, it’s important to remember that those decisions are often held under greater scrutiny because of your nonprofit status. Tax-exemption affords a nonprofit a lot of leeway toward using resources to give back to the community, but how your nonprofit chooses to funnel donation money can result in litigation and claims of mismanagement of funds. As noted by Nonprofit Quarterly, the benefits of purchasing a D&O policy tend to outweigh the costs.

Meanwhile, all nonprofits are still held responsible for their hiring, firing, and promotion decisions. This can be partially covered under a D&O policy, but your nonprofit should also consider employment practices liability insurance, which covers all aspects of employment practices to a much greater degree, including issues related to wrongful termination, sexual harassment, other forms of workplace harassment, and retaliation claims.

Cyber Liability

Every business, nonprofit or otherwise, needs to be concerned with issues such as data breaches, hacks, malware and/or spyware, ransomware, and general data loss. Your data is valuable, and for tech-based industry nonprofits, your valuable data can make or break your operations. Cyber liability insurance is designed to help mitigate the risks associated with all forms of data loss that involve cyber attacks.

For example, if you operate a nonprofit that digitally collects and maintain donors’ personal and payment information, that data is at significant risk. According to a recent article, 60% of small businesses never recover after a cyber attack. The costs associated can be more than many businesses can absorb, with the cost—and the threat—growing every year.
It’s incredibly important for nonprofits to maintain adequate liability coverage, especially for cyber security threats. With cyber criminals growing more sophisticated in their methods, the risks are too great to ignore.

 

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Maxime Rieman