It was not too long ago that the Barnes Foundation, a very prestigious but small nonprofit with an impressive collection of art, was mired in massive litigations relating to the tour of parts of its collection and the subsequent relocation of its collection into downtown Philadelphia. These litigations incurred millions of dollars in litigation costs, with just the most recent (and presumably final) challenge to the move to Center City Philadelphia costing the foundation more than $64,000 in defense costs. These expenses are precisely the types of costs an institution buys insurance to protect against, so that the institution’s primary assets, whatever they may be, are not drawn down to pay litigation costs or liabilities.
One of the primary tasks for the principals of any business, nonprofit, charity or otherwise, is determining the best allocation of assets to ensure the business’ survival and success. What many business operators fail to consider when allocating assets is the existence and availability of various insurance vehicles whose purpose is to protect those very assets, allowing the assets to be used to foster the company’s development and operations and not to pay for first- or third-party liability losses. This can be especially important for charities so that an unexpected loss doesn’t trigger the demise of their mission of service.
The primary reason for this failure is a lack of knowledge about the existence and purposes of such insurance coverages. Further, charities and nonprofits generally no longer benefit from tort liability protection, thus it is more important than ever to obtain adequate liability insurance. This article is not intended to provide a complete education about these issues but is merely intended as a primer: to allow you to know what questions to ask your insurance professionals to ensure that your nonprofit organization is as well-protected as possible given its unique needs.
This article is divided into two sections. The first section discusses the common types of insurance covering third-party claims against businesses. The second section discusses the common types of insurance covering claims made by the business itself.
Common Types of Insurance Covering Third-Party Claims Against Charities and Nonprofits
Every business should ask – what insurance policies do we have that might protect the business from claims that might be filed by third parties? To answer this question, the business needs to look carefully at all of the policies that cover businesses for third-party liability. Some examples to be considered are:
Common Types of Insurance for First-Party Liability
- Comprehensive General Liability Insurance. Comprehensive General Liability (CGL) Insurance commonly provides coverage for personal injuries or property damage resulting from an accidental occurrence. For example, something as basic as a slip and fall on the premises at a fundraising event may be covered under a CGL policy. This is generally the core insurance that a nonprofit organization will have. Most CGL policies will provide a wide range of coverage for negligent acts that result in bodily injury, property damage, personal injury or advertising injury to a third party. However, this insurance does not usually cover damages resulting from an alleged breach of contract. Nonetheless, it is always worth reviewing the policy to determine whether it would provide coverage for damages allegedly resulting when a contract was breached. CGL insurance is typically an “occurrence”-based policy, such that coverage is triggered when an accident occurs, as opposed to a “claims-made” policy, where coverage is triggered when a claim is first made.
- Workers’ Compensation Insurance. This insurance provides the employer with coverage for claims filed by employees. The most common coverage is for an employee’s personal injuries suffered on the job. Workers’ compensation insurance may also cover “employment practices liability.” In the usual situation, this could provide protection in the event of employee lawsuits involving discrimination or harassment claims.
- Directors and Officers Liability Insurance. Directors and Officers (D&O) Liability Insurance is meant to provide coverage for suits by stakeholders who are complaining that actions by the directors and officers were improper and not in the company’s interests. D&O insurance generally affords coverage for claims against directors and officers resulting from any wrongful act or omission committed by the directors and officers, unless the wrongdoing is specifically excluded from coverage. As discussed above, the Barnes Foundation lawsuit is a perfect example of why any charity or nonprofit needs to have D&O insurance. Unlike other types of insurance, such as CGL insurance policies, which specifically enumerate risks covered, D&O insurance provides coverage for “all risks.”
D&O policies may also include coverage for employment-related actions, including wrongful termination, harassment, discrimination and failure to hire. D&O policies are often claims-made policies. Coverage under a claims-made policy is triggered when a claim is first made (i.e., when a claim for damages is first asserted or when a lawsuit is filed) as opposed to an occurrence-based policy, where coverage is triggered when the “wrongful act” took place.
- Errors and Omissions Liability Insurance. This coverage is like a general professional liability policy for errors or omissions by the business. For some kinds of businesses, this kind of coverage is specialized by the type of profession involved and is commonly known as “malpractice insurance” (such as for doctors, lawyers and pharmacists). For a general, nonprofit business, this is also very important coverage to consider if the nonprofit organization employs any professionals working for or on behalf of the nonprofit, such as nonprofits that offer counseling services, foster homes or residential programs. For example, a charity or nonprofit could face potential liability related to an error or omission in its provision of social services, and an errors and omissions policy might cover that claim.
Once again, any business, nonprofit or otherwise, should ask – what insurance policies do we have that might cover property damage? To answer this question, the business should look carefully at all of the policies that cover the business for first-party liability. Some examples might be:
- Auto Insurance. Volunteers and employees frequently use their own cars on nonprofit business. For example, employees who get into an auto accident on their way to a meeting regarding fundraising efforts or a staff educational program may be surprised to learn that their personal auto insurance will not insure them, because they were on nonprofit business. If the nonprofit does not own any vehicles, the nonprofit organization can in most circumstances obtain an endorsement for coverage under its CGL policy for claims made against the nonprofit organization by a third party alleging damage by an employee’s or volunteer’s automobile.
Churches and other service organizations often own vehicles or transport individuals. If the nonprofit organization finds itself in that situation, it should have commercial auto insurance. Commercial auto insurance usually covers personal injuries and car repairs due to employee accidents. Commercial auto insurance may also provide additional coverage, such as repairs resulting from flood damage (flood plain rider).
- Property and Fire Insurance. Property insurance typically covers a building and contents damaged by fire. It is very important to check the terms of the policy. After a natural disaster, it is worth reviewing a fire policy to ask whether it would provide coverage where a fire or other damage was caused by the disaster. For example, damage from earthquakes is normally excluded and coverage is provided only by a separate rider.
- Flood Insurance. The majority of flood insurance is provided and administered by insurance companies participating in the federal government’s National Flood Insurance Program. The Standard Flood Insurance Policy (SFIP) is a “single risk” policy that provides coverage for “direct physical loss by or from a flood,” subject to certain conditions and exclusions. The SFIP and all disputes arising from claims under the policy are governed by federal law.
If your business has this coverage, DON’T DELAY in submitting your claims for flood damage. From the date of loss, there is a strict time limit of 60 days to submit claims under the National Flood Insurance Program. Insurance under this program provides limited coverage for flood damage to your building. It may also have additional coverage for the building’s contents, if your business obtained the additional rider. A limited amount of flood insurance is offered by insurance companies outside the context of the National Flood Insurance Program.
- Business Interruption Insurance. This specialized form of first-party insurance is designed to cover lost income arising from the inability to continue the normal operation and functions of a given business. For example, a power outage may cause computer servers to overheat, resulting in a computer system shutdown. If the servers take several days to repair, the inability to continue the normal operation and functions of a given charity or nonprofit may be covered by business interruption insurance. To trigger business interruption coverage, a claimed loss generally must result directly from a specified peril that causes damage to specified property at a particular location. Business interruption insurance’s limited purpose is to protect the earnings that the insured entity would have enjoyed had the event insured against not taken place. It is not designed to place the insured in a better position than it would have been in had no business interruption occurred.
Under a business interruption policy, the insurer must provide coverage for the duration of the reasonable period of time needed for the insured to re-enter the business, plus any delay attributable to the insurer’s failure to perform its duties under the policy. Business interruption policies do not provide coverage for the actual loss of or damage to physical property. A typical policy requires that the loss result directly from a specified peril, which must cause damage or destruction to specified property at a particular location. Further, the interruption must be reasonably limited in duration and must occur within a particular time frame. As goes almost without saying, virtually all policies require that the interruption of business be necessary.
All businesses need to best allocate their assets to ensure the business’ survival and success. An additional challenge for nonprofit organizations oftentimes is budgetary constraints. That is why nonprofit organizations need to consider having an appropriate portfolio of insurance to manage the risks they face, while still accomplishing their mission.
But insurance coverage is just one part of the risk management equation. A loss-control mindset should apply to all aspects of the nonprofit organization’s operations to manage liability and property exposures. For example, a fire-detection system can reduce the threat of property damage and protect visitors and employees. Further, regular grounds surveys can reduce occurrences of bodily injury on the property. Insurers can provide nonprofit organizations of all sizes with the tools to minimize these risks. Lean operating budgets oftentimes mean that few facilities can afford internal risk management staff or outside consultants.
Nonprofit organizations’ limited ability to budget emergency funds magnifies the need for comprehensive emergency response and disaster planning, a need that insurers can help meet by making loss control services part of their nonprofits programs. Despite the time and effort it takes to develop a plan, the payoff can be enormous. As risk and disaster planning grows more complex, nonprofit organizations will require assistance from insurers, agents and brokers, risk management services and trade associations in developing practical plans. Thus, a combination of insurance coverage and a comprehensive emergency response and disaster plan will enable a nonprofit organization to protect its assets and allow them to be used to foster the organization’s development and operations and not to pay for first- or third-party liability losses.
When is the last time you or someone else at your organization reviewed your insurance policies and overall program? When did you last ask your insurance professional about whether you have the best coverage terms available for the policies you have purchased and whether there are other coverages that you should consider? Has your organization undergone any recent expansion of programs or services or acquisition of other organizations or programs, and if so, have you considered the effect of that expansion or acquisition on your risk exposures and your insurance coverage? Our team of nonprofit and insurance lawyers at Stradley Ronon may be able to assist you in understanding what coverages you have, what coverages are available and what coverages you might consider.
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