What Every New Nonprofit Should Know About Insurance

When you launch a new nonprofit, you expect to make a difference in your community – not to be burdened with litigation and losses. The reality is that nonprofits face a multitude of risks, and if you don’t manage them, they can interfere with your ability to carry out your mission. A carefully designed nonprofit insurance program can help your organization stay focused on its goals.

Is your nonprofit insurance up to the job? Before you assess your coverage, make sure you know six critical facts about insurance for nonprofits.

Key Takeaways

• Nonprofits face litigation risk from donors, regulators, clients, volunteers, and employees alike, making general liability coverage a baseline need, not an afterthought.
• Standard general liability policies typically exclude abuse claims, so nonprofits serving children or vulnerable populations need a separate endorsement or stand-alone policy.
• Board members can be held personally and financially liable for claims like negligence or breach of fiduciary duty, which is what nonprofit D&O insurance is designed to cover.
• Workers’ compensation usually doesn’t extend to volunteers, so a volunteer injured while helping your organization may need separate volunteer accident coverage.
• Hired and non-owned auto (HNOA) insurance protects your nonprofit if a volunteer causes a crash while running errands in their own vehicle.
• Rising “nuclear verdicts” and social inflation have pushed many nonprofits toward carrying umbrella liability coverage as an added layer of protection.

1. Yes, Nonprofits Need Liability Coverage

Who would sue a nonprofit? Well… a lot of people. Litigation can come from donors, regulators, clients, volunteers, employees, vendors and any other party with a stake in operations or potential exposures to losses.

The reality is that nonprofits are held to high standards, and they’re under constant scrutiny. Litigation isn’t just possible. It’s common.

2. Abuse Exclusions Are Common

Some of the most expensive lawsuits against nonprofits involve allegations of sexual abuse.

In recent years, states have enacted new rules that allow victims to pursue claims after the statute of limitations would have normally passed, either by extending the statute of limitations or by giving victims an additional window during which claims are possible. The FBI says that changes to the statute of limitations in civil cases may be applied retroactively, depending on the details of the amended statute.

These changes have exposed many organizations to claims stemming from abuses that occurred years or even decades ago. The impact on the insurance market has been significant. Standard commercial general liability insurance typically excludes abuse claims, so nonprofits need to secure coverage through an endorsement or stand-alone policy, and this has become more challenging as insurers raise rates or decrease capacity. According to Insurance Journal, an insurer of New York hospitals has declared bankruptcy, citing child sexual abuse claims as the reason.

In light of these challenges, nonprofits that work with children and other vulnerable populations should brace for high rates and plan on working with a knowledgeable insurance broker to secure adequate coverage.

3. Your Board Members Face Personal Liability

Nonprofit board members have some protections, but they can still be sued if they are accused of certain things, such as negligence or breaches of fiduciary duty. If they are named in a lawsuit, they can be held personally and financially liable.

Nonprofit D&O insurance provides protection for the leaders of a nonprofit organization, including the board members, and leaders who understand the risks may want to confirm coverage before agreeing to serve. In our experience, this is the coverage board candidates ask about most — and the answer often determines whether someone agrees to serve.

4. Volunteers May Require Special Coverage

Many nonprofits rely on both employees and volunteers, often acting side by side and in similar roles. This can lead to coverage gaps if your insurance policies only cover employees and not volunteers.

For example, workers’ compensation often does not cover volunteers. If a volunteer is injured, the nonprofit may be expected to pay for the medical costs and any other damages, but without insurance, this could jeopardize the nonprofit’s financial strength. Volunteer accident insurance provides no-fault coverage.

5. Your Organization Could Be Sued After a Crash

If a volunteer is involved in a crash while using their personal vehicle to run errands for your nonprofit, who is liable? If the volunteer is found to be at fault, you may expect their insurance to pay for the damages. However, your nonprofit may also be named in the lawsuit, and the volunteer’s personal insurance likely won’t cover your organization.

Hired and non-owned auto (HNOA) insurance was designed for this type of situation. You can add it to your nonprofit’s commercial auto insurance. Employees and volunteers will still need to maintain personal car insurance, but if your organization is named in a lawsuit, your HNOA insurance can cover you.

6. Litigation Costs Are on the Rise

If you spend much time reading about the insurance sector, you’ll probably see something about social inflation and the increase in nuclear verdicts. Social inflation refers to the general increase in liability costs above and beyond normal inflation, while nuclear verdicts refer to especially large jury verdicts, usually defined as at least $10 million.

These trends have put pressure on organizations, some of which can be bankrupted by a single lawsuit, and on the insurers that cover them. Although liability coverage has become more expensive as a result, many organizations find it’s prudent to carry high limits, including an umbrella liability insurance policy that adds an extra layer of coverage. This is also where umbrella liability and D&O coverage need to be reviewed together, since a single large verdict can spill across both policies.

Is Your Nonprofit Insurance Keeping Up?

Knowing these six things will help you secure the coverage you need to protect your mission, but there are many other details to consider. Heffernan’s nonprofit insurance program can help you build a policy that fits your organization — reach out to get started.