Introduction to Nonprofit Risks and Insurance
Whether your nonprofit organization specializes in camps, afterschool programs, elderly care, healthcare centers, or other services, you face situations each day that could cause your organization to be sued:
- A patron slips on the floor of a museum.
- A child breaks her arm during an afterschool fitness camp.
- At a free clinic, a patient accuses his doctor of malpractice.
- A nonprofit’s employee claims her employer discriminated against her.
It only takes one accident, oversight, or misunderstanding to trigger liability lawsuits. And the costs of a lawsuit are often so high that they force a nonprofit out of business. For instance, a report by Insurance Journal states the typical cost of a lawsuit against a nonprofit’s board of directors is around $500,000. What small nonprofit can afford to pay half a million dollars out of pocket?
$500,000 = average cost of a D&O lawsuit for a nonprofit.
40% of small businesses never reopen after a disaster.
It’s not only lawsuits you have to worry about, either. Consider the damages a storm or other destructive event could cause. If a windstorm wrecked your building, you’d be on the hook for construction expenses and other property damage — a bill steep enough to ensure 40 percent of businesses never reopen after a disaster, according to Insurance Journal’s article “How to Help Small Businesses Avoid Underinsurance and Anticipate the Unexpected .”
The good news is adequate nonprofit insurance can help your organization survive unforeseen lawsuits and disasters. How does it work? When you buy small business insurance, you’re signing a contract with your provider. In exchange for a fee (your premium), your provider agrees to pay for lawsuits, property damage, and other expenses that result from covered situations. We’ll go over these potential situations in more detail, but for now, be aware that no single policy will cover all the potential losses you could face. But with several key plans in place, you can get pretty darn close.
Before we get into the nitty-gritty, let’s go over some basic insurance terms that we’ll use throughout this guide:
- Policy. An agreement between you and the insurance company. It lists the situations your insurance covers and how much coverage you receive.
- Premium. The amount you pay on a yearly or monthly basis for your insurance.
- Claim. An official statement you file with your insurance provider to collect benefits. Claims are triggered by lawsuits or covered losses. They require you to call your insurance agent and / or submit documentation about the situation. The term “claim” can refer to both the process of receiving money from the insurance company and the actual event covered by your insurance.
- Policy limit. Policies have a maximum yearly limit, which caps the amount of money you can receive from your insurer. For instance, your General Liability Insurance may have a $2 million limit, which means it will pay for lawsuits until the total cost of all claims reaches $2 million for that year. Some policies also have a per-occurrence limit. This limits the amount of money you can collect for any one claim. A General Liability Insurance policy may have a $1 million per-occurrence limit, but a $2 million yearly (or aggregate) limit. This policy pays for lawsuits that cost up to $1 million dollars and pays for multiple lawsuits until the total cost reaches $2 million.
- Deductible. The amount you have to pay for covered events before receiving insurance benefits. For instance, say a Property Insurance policy has a $5,000 deductible. That means you’d pay for any stolen or damaged property out of pocket until the cost was greater than $5,000. At that point, your insurance would kick in.
Because navigating the world of risks and insurance can be tricky, let’s approach it in a practical way. In this guide, you’ll find out how to…
- Identify risks your non-profit may face.
- Choose insurance policies that make sense for your organization.
- Manage your risks with prevention strategies and adequate insurance coverage.
Read on for tips that help you anticipate risks and protect your nonprofit (and your finances!).
Next: Chapter 1: Understanding Your Nonprofit’s Risks