Chapter 4: Practical Tips for Purchasing Insurance
What You Need to Know Before You Buy Nonprofit Insurance
If you Google “nonprofit insurance,” you’ll find dozens of companies offering different policies. And even if they offer the same kind of policy (e.g., General Liability), chances are the two contracts will vary wildly in terms of coverage and exclusions. To ensure you find insurance you can count on, you’ll need to do your homework.
Too often, nonprofits will sign up for a policy and not really know what it covers. For many people, insurance is too complicated. Overwhelmed, they throw their hands up, buy a policy that sounds good, and hope they never get sued. But who says you have to settle? After all, buying insurance is an investment in the future of your nonprofit.
You may want to team up with an insurance broker so that you can make informed decisions and find a policy that fits your needs. We’ll talk about the differences between buying through a broker and buying directly from an insurance company in the next section. But for now, let’s look at the common insurance pitfalls you’ll want to avoid so you don’t waste time and money on an ill-fitting insurance plan.
Buyer Beware: Insurance Coverage Red Flags
Watch out for these telltale signs that you shouldn’t do business with a provider or purchase a policy:
The insurer cancels your policy after a claim.
This is a little like the insurer breaking up with your NPO. If you have to file a claim, some insurers will drop your organization after your annual policy is up. They’ll cover that year and pay for your claim, but after that you’re on your own. It will be a hassle to find new insurance all over again and can be problematic for “claims-made” policies (such as Directors and Officers Insurance or E&O Insurance).
Because E & O and D&O Insurance coverage work best when you have the same policy continually, it can be frustrating to lose coverage. When you buy a new policy, you’ll have to find one with “prior acts coverage,” which can be difficult and / or more expensive now that you’ve had to file a claim. New insurers may look at your organization’s history and decide that it’s not worth the risk.
Your policy contains a “failure to provide insurance” exclusion.
According the nonprofit ranking and resource center Guidestar , nearly a quarter of nonprofit insurance policies contain this exception. A policy with this exclusion allows an insurer to refuse to cover you for a claim if they can argue that you didn’t buy “enough” insurance. That’s exactly the kind of thing you don’t want in your insurance policy: vague language that an insurance company can use to avoid paying for a major lawsuit.
Roughly 25% of nonprofit insurance policies have a “failure to provide insurance” exclusion.
Your D&O coverage is too limited.
Some insurance companies will not include employment practices coverage with their D&O Insurance. Employment Practices Liability Insurance (EPLI) can be purchased on its own but is often bundled with Directors and Officers Insurance (and less commonly with an E&O policy). EPLI covers lawsuits over harassment and wrongful termination.
The insurance company may tell you that your D&O policy has “employment practices” coverage, but likely, it’s a limited version of EPLI. For example, that page in your policy may only cover sexual harassment issues and not improper termination.
Your insurance company sells you everything online and you never get a chance to talk with someone about your policy.
Online insurance has helped and hurt the industry. On the one hand, you have access to tons of information and providers. That’s fantastic. On the other hand, you may end up with a provider that doesn’t offer you the strongest coverage. Given how confusing the language of insurance can be, it’s easy for nonprofit owners to misinterpret information they find online.
The key to buying insurance online is to find a company whose agents can talk you through policy options. This is important for two reasons. First, your agent can clear up any confusion you have about your policy. Second, you’ll want to work with a company that you can talk to when you need to expand your coverage. If you buy E&O coverage with a $1 million limit and find out that a contract you’re about to sign requires $2 million in coverage, it’s helpful to have an agent’s number to call so you can sort it out quickly.
Bottom line: To make sure you have adequate protection for your nonprofit, work with a knowledgeable insurance agent who has experience finding coverage for businesses in your industry.
Buying from an Insurance Broker vs. an Insurance Company
We’ve established that insurance can be confusing, but you probably already knew that. One way to simplify the process is to buy insurance through a broker, who will act as your translator and guide.
A broker is an independent agent who has an agreement with a variety of insurance companies. They sell policies from these companies, but are not employed by them. When they make a sale, they get paid. That gives them the incentive to find insurance that fits the nonprofit they’re serving.
Agents employed by an insurance company can only sell their company’s insurance and have less incentive to help you find deals or to tailor an insurance policy to meet your needs.
Buying Non-Profit Insurance With an Independent Agent
Here are some other ways brokers can make your life easier:
- Independent insurance agents specialize in certain areas of insurance. You may find brokers who work exclusively with car dealerships or restaurants or nonprofits. You’ll want to work with a company that has agents trained in the needs of nonprofit insurance. Think of it this way: before you buy a used car, one of the things everyone tells you to do is to take it to your mechanic. A mechanic’s eye will notice things you don’t and help you determine whether you’re getting a good deal. A broker works the same way. They can use their expertise to tell you what you’re getting from a policy. They’ll check for the pitfalls we mentioned in the previous section and can confidently let you know if the insurance you’re buying makes sense for your organization.
- Your insurance agent is a living, breathing human. When you need your policy changed or you have questions, you won’t have to number-punch your way through a phone tree. You can call your very own insurance agent who will explain your policy in plain English.
- Your broker has connections. For example, insureon works with top-rated insurance carriers that are known for their reliable coverage, quick payouts, and industry-tailored products. Because we are an independent agency, our agents can find multiple policies from different providers so our clients have options.
Insurance agents who specialize in nonprofit coverage can help you find tailored policies at competitive rates.
Buying Nonprofit Insurance On Your Own
Though an independent broker can simplify and streamline the insurance-buying process, let’s say you want to buy insurance on your own. Here’s what you’ll have to do to make sure you receive adequate coverage from a reliable carrier:
- Identify which insurance companies you’ll consider. Make a list of potential providers, and check out how well these companies rank on A.M. Best’s site. A.M. Best’s ratings grade insurance companies on the strength of their long-term financial outlook. Financials are especially important to insurance companies because, like banks, insurance companies build up a reserve of money so they can pay for claims. If a company has good credit, they receive an “A” rating. Here’s the scale of A.M. Best’s rating system [PDF] .
A++, A (Superior)
B, B- (Fair)
A, A- (Excellent)
C++, C+ (Marginal)
B++, B+ (Good)
C, C- (Weak)
E (Under Regulatory Supervision)
F (In Liquidation)
Remember, any company can have a professional-looking website, but if it doesn’t offer A-rated insurance, be wary.
- Request quotes from the insurance companies you’ve identified. Usually, this involves filling out some online forms and / or talking with captive agents over the phone. Because you’re comparison-shopping, you’ll need to go through this process with a few different insurance companies. Rinse and repeat. Be sure to get quotes from at least three different companies. Bonus: use the various quotes you receive as negotiation tools when you talk with agents.
- Compare the benefits and exclusions of your prospective policies. One way to do this is to make a list of the coverage you want, and check that each insurance policy you consider provides those benefits. As we’ve discussed, insurance policies can vary tremendously. Two Directors and Officers Insurance policies can offer different coverage for lawsuits, employment practices, and other financial mismanagement claims. In other words, before you even call the insurance company, know exactly what kinds of coverage you want and need. Otherwise, it will be hard to compare policies. The reality, of course, is that every policy is slightly different. Aim to find a policy that offers the best combination of coverage and price.
Bottom line: Buying insurance through a broker saves you time and provides you with a guide to coverage for your company.
Buying nonprofit insurance through a broker can save you time, stress, and money.
How the ACA / Obamacare Healthcare Requirements Affect Small Nonprofits
The Affordable Care Act (aka “Obamacare”) took effect January 2014. Here are some frequently asked questions (and answers) about this healthcare law that many small nonprofits may have:
- Do I need to insure my employees? Only if you have more than 50 fulltime-equivalent employees. If you don’t, you won’t need to provide health insurance for them.
- Where can I find more information about coverage options for my employees? If you want to cover your employees, you can visit the small-business section of the government’s healthcare site , which will help you sort through your options.
- If I don’t have coverage now, will I need to buy insurance for myself? Yes. As of January 2014, all individuals without insurance are required to purchase health insurance for themselves and their family.
- How much will my new personal insurance cost? The cost of your healthcare coverage will depend on how many people you need to insure, the plan you choose, where you live, and your income. You can use the Kaiser Family Foundation’s subsidy calculator to get an idea of the potential premium and any subsidies you may be eligible for.
- What’s the minimum amount of coverage I have to purchase? Plans are tiered into four groups: bronze, silver, gold, and platinum. Bronze is the lowest acceptable coverage level and pays at least 60% of the average person’s healthcare costs. Plans you purchase through your state’s Marketplace will all meet the minimum requirements.
- What happens if I don’t purchase personal health insurance? If you don’t have insurance, you’ll have to pay a fee: 1% of your yearly income or $95 per person (whichever is higher). You will also have to pay $47.50 dollars per uninsured child. After paying the fine, you still won’t have insurance. Fees will increase substantially in 2016.
- What if I have a lapse in coverage? The ACA law allows people to have a lapse in their healthcare coverage and will not require people to pay a fine for brief interruptions (up to three months).
The cost of your health insurance depends on the number of people on your plan, your coverage level, your income, and your state’s Marketplace exchanges.
When Should a Nonprofit Purchase / Update Insurance Policies?
As your non-profit grows, its insurance needs will change. The following stages signal that it may be time to purchase or reevaluate your coverages:
- You just founded your organization. It may not be financially feasible to buy insurance immediately, but ideally you should. As we’ve seen, Errors and Omissions Insurance and D&O coverage work best when they’re in place from the beginning. Buying insurance at the start ensures that there are no gaps in your claims-made coverage.
- You want to attract new board members. When you pursue new board members, you’ll want to purchase D&O Insurance to cover their liabilities. After all, no one wants to take a job that could endanger their personal assets. Adequate D & O coverage ensures if board members are sued for decisions they made on behalf of your organization, you’ll have the funds to pay for their legal defense and litigation costs.
- You hire employees. Many organizations start as volunteer-only, but as they grow, they hire some support staff. If your organization adds employees, you may need to purchase Workers’ Compensation Insurance in order to comply with your state regulations. If you already have a policy and you hire additional employees, be sure to let your agent know. They will need to update your policy to cover the new hires.
- You’ve just signed a significant contract. A rental agreement, lease, or other contract might specify that you need to purchase insurance. This is particularly common if you sign a long-term services agreement. Let’s say a nursing home signs a contract with a nonprofit to run exercise activities with the patients. The contract may require the NPO carry a specific amount of Errors and Omissions Insurance.
- Your NPO buys property, relocates, or opens an office. If your business acquires new property or relocates, it will need to reevaluate its Property Insurance coverage. This is also true if you purchase new equipment or other expensive items. If you open up an office space, museum, storefront, or other physical space that’s open to the public, you’ll also want to purchase General Liability Insurance (or increase your current coverage).
- Your nonprofit changes its services. You’ll have to adapt your insurance to any changes you make in the services you offer. Let’s say you run a soup kitchen, but then decide to add an additional “meals-on-wheels” service. While this is great for your community, you should be aware that it changes your liabilities. Because your organization will now be driving across town and making deliveries, you’ll have additional liability concerns. If you didn’t have Commercial Auto Insurance before, you’ll need it now (and you can add it to your General Liability Insurance).
When your nonprofit makes a significant change, your coverage needs may change, too.
Next: Chapter 5: Resources for Nonprofits