Over the past several years, I have had an opportunity to work exclusively with nonprofit organizations and help them research a myriad of insurance options. Many of these newly formed nonprofits were looking for insurance for the first time. Hundreds of newly appointed executive directors and unfortunate board members saddled with this task always ended at the same place: "I need insurance, but I have absolutely no idea where to begin."
If this sounds at all familiar to you, please read on to learn how to organize a plan that is easy to understand and that can help you decide the difference between the "need" and "want" for insurance.
Let's set aside three categories for the basis of our discussion:
- Statutory Insurance—Insurance that is required by law.
- Contractual Insurance—Insurance that may not be required by law but may be required because of a contract.
- Optional Insurance—Insurance that is important for the organization based on staff and operations but is discretionary.
Statutory InsuranceThis is the kind of insurance that should go to the top of everyone's list. Many states require organizations to have certain types of insurance, and if you do not have it, you are in trouble with the law. Types of insurance that fall into this category are various mandated employee benefits such as worker's compensation, statutory disability, and unemployment benefits. If your nonprofit is an all-volunteer organization, you may not have this obligation. There may be other types of organizational insurance that apply, however, such as coverage for any vehicles the organization owns.
New nonprofits that have no employees or own no vehicles may have no statutory requirement for insurance.
Contractual InsuranceThis is the type of insurance that, although not mandated by statute, may be required by some contract to which your organization is obligated. For example, many grant contracts have an insurance clause that must be satisfied in order for funding to flow. Another example may be insurance required by a lease that your organization signs to rent office space. We are also seeing many more instances where facilities are requiring proof of liability insurance before an organization can hold its meetings or events. Make sure that you know (or at least can estimate) your contractual requirements, as the lack of insurance in this instance may actually prevent your organization from moving forward with its mission or operations.
Optional InsuranceThis is the hardest type of insurance to determine if you need (or even want). You may want to consult with an insurance professional to determine if you have risk in a certain area (such as professional liability, non-owned auto liability, or crime/employee dishonesty) and, if so, what type of coverage you need and how much it might cost. Since there are no guidelines or requirements to base your starting point, as there are with statutory or contractual insurance, you are left on your own to decide if you need it or how much you should buy.
Here's a tip: if you must choose between directors and officers insurance (D&O) and general liability insurance (GL), it's usually preferable to pick the general liability insurance.
Many times a new organization will use its very limited insurance budget to purchase a D&O policy, which defends the board against allegations of poor management. Shortly after purchasing this coverage, however, many organizations find that they need general liability insurance if they want to hold a fundraiser, rent an office, or apply for a grant. A GL policy addresses negligent acts that result in bodily injury; D&O insurance does not satisfy this contractual obligation. Because the organization has already diverted dollars to a D&O policy, it cannot afford GL insurance and cannot hold that event, rent that space, or land that grant. Although it is preferable to have both types of insurance, the lack of GL becomes a barrier to operations before the lack of D&O does. If you cannot afford both, please be aware of what insurance you want versus what insurance you need and buy accordingly.
By Peter Andrew, Council Services Plus
© 2006, Council Services Plus
Peter Andrew is president and CEO of Council Services Plus (CS Plus), an insurance brokerage headquartered in New York State. Dedicated to providing insurance and risk management services to nonprofit and nonprofit-related organizations, CS Plus is recognized by the Council of Community Services of New York State and the Louisiana Association of Nonprofit Organizations and is a supporting member of the National Council of Nonprofit Associations and the Alliance for Nonprofit Management. For more information, contact Peter Andrew at firstname.lastname@example.org or (877) 501-4277, ext. 125.