With a still-shaky economy limiting donations to social-serviceorganizations, many of these groups are being forced to radicallyreduce spending or to branch out into new and untestedrevenue-raising waters—a move which can pose unexpected and evencatastrophic risks.

Philadelphia Insurance Cos. isone of the largest carriers in this specialty-insurance line, with46 offices in 13 regions writing more than $750 million of “humanservices” premium per year. And many of its more than 26,000social-services clients are feeling increased pressure “tosignificantly cut costs” and “find alternative sources of revenue,”says Paul Siragusa, vice president, Commercial LinesUnderwriting.

This situation is creating a double-barreled loss danger. On theone hand, less money is being spent on risk-mitigation processessuch as employee training, updates to an insured's facilities,general housekeeping and vehicle maintenance. And on the otherhand, exploring alternative income avenues carries heightenedexposures.

Examples of these new opportunities that carry additional riskscan be found in states that are putting formerly government-runprograms, such as adoption, foster care and other children'sservices, into the hands of social-service organizations.

“Social-service providers are lured in by the prospect of asignificant increase in revenue, but oftentimes they lack therequisite experience to avoid catastrophic losses and unflatteringmedia coverage,” Siragusa says.

Some other social-service insureds are trying to increaserevenues in ways that go far beyond normal fundraising activitieslike golf outings, bake sales and benefit dinners—replacing theseinnocuous events with more hazardous activities. “We have seenrequests for events allowing attendees to participate in everythingfrom bulldozer races to NASCAR-style pit crew tire-changingcompetitions,” Siragusa says. 

Such ventures into unknown territory may be a liability that'snot really worth taking on, says Riley Binford, executive vicepresident at Charity First Insurance Services Inc. of SanFrancisco. Charity First has been an MGU program manager forTravelers' social-services business for 25 years.

“Is it jeopardizing your current insurance program?” Binfordasks, describing the question social-service providers need to askbefore embarking down this path. “Because if you love yourinsurance program, you don't want your carrier telling you, 'We'regoing to cancel your insurance because you're getting into a[dangerous] operation.'”

Charity First recently had to turn down a children's group homethat wanted to raise funds by farming out its youth clients—aged 15years and up—to work at for-profit construction and janitorialcompanies.

“They were essentially becoming a construction and janitorialemployment agency,” Binford says. Morality issues aside, it wasjust an unacceptable risk. “From an insurance standpoint, they wereno longer eligible for coverage.” 

Coverage Cutbacks
Some nonprofits aredropping or reducing coverages, or cutting salaried positions tosave money—and as a result are increasing exposures dramatically,says Doug Tobin, assistant vice president for E&O, D&O andEPLI at 5 Star Specialty Programs in Chicago, a division of CrumpInsurance Services. 5 Star has exclusively managed Liberty Mutual'sNonprofit Executive Advantage program for the past 18 months.

“Organizations are really looking at financials,” Tobin says.Losing an executive director or similar high-ranking position canfree up a lot of money. But it also opens the organization up toEPLI claims, which can run as much as six figures to defend andsettle.

“We've seen a little trend of claims along those [lines], andthey tend to be the costlier claims: employment practice orwrongful termination, or if they're a contracted employee,contractual violation,” Tobin says.

Most nonprofits have to provide evidence of insurance forgeneral liability and personal liability to receive governmentfunding, but some are looking at dropping D&O and EPLI orreducing their limits in these areas, says Pam Eudowe, vicepresident at Mercator Risk Services, a wholesale excess-and-surplusbroker arm of New York-based underwriter Preferred Concepts.

“People get a little nuts; they feel desperate and do things outof desperate need,” Eudowe says. “It can cause a loss for thatsocial-services organization.”

Without D&O and EPLI, these organizations are actuallyputting personal assets on the line, she says: “It is concerning tous that they can't pay this small $1,000-a-year premium.”

EXPERIENCE COUNTS
Nonprofits can get intosome complicated risks—especially the larger groups, which can haveseveral different types of activities or operations—which is whyagents and small brokers need to turn to experienced carriers. ”Youneed to be working with somebody that understands nonprofits,”Binford says. 

NORWESCAP, the Northwest New Jersey Community Action Program inPhillipsburg, N.J., has covered a multitude of needs for low-incomeindividuals and families for more than 45 years, in six counties,making its insurance needs complicated and highly specific.

“If we were just a food bank, it would be very easy tounderwrite because it's one risk,” says Associate Director PatrickGrogan. “But we also have a child-care center, residential housingand job-training programs; it really changes the appearance of yourorganization to the point where the carriers don't understand.”

NORWESCAP looked into switching insurance companies but decidedthe competition was not better than its current program withlongtime insurer Philadelphia Insurance Cos. 

“Nonprofits are very complex organizations; the risks are notthe same in any two organizations,” notes Melanie Herman, executivedirector of the Nonprofit Risk Management Center in Leesburg, Va.The Center has been advising social-services clients for more than20 years, serving such organizations as Big Brothers Big Sisters ofAmerica, Care for the Homeless of New York City, Girl Scouts of theUSA and The Salvation Army.

DESIRABLE CLASS
Yet despite all thecomplications and emerging risks, nonprofits are also a verydesirable class of business with carriers, Herman says. “Fifteenyears ago, it was 'social-services organizations are very risky.'Now, all of the major players would tell you it is a verydesirable, profitable class of business to write. The competitionis fierce,” she says.

Insurers see nonprofits as great risks because their leaders“are almost innately conscientious,” Herman says. Nonprofits arealso seen as clients whose premiums are likely more than theirpotential claims.

“People tend to think twice about suing a nonprofit,” Tobinpoints out. There are very few lawsuits against nonprofits forfinancial claims, with nine out of 10 lawsuits against a nonprofitemployee-related. 

Growth areas in social services include home healthcare and, toa lesser degree, the hospice and substance-abuse sectors, Siragusasays.

Others are seeing growth in areas affecting the aging BabyBoomers: adult day care and in-home care, says Jim Henry, anunderwriting manager with the Social Services team of Markel Corp.in Glen Allen, Va.

“We are seeing some merging and consolidation of entities and,in general, insureds are adding programs and services in order tomaintain or expand their pool of clients,” Henry says. “This couldmean more large-account opportunities for agents, but fewerprospects.”

PRICING PICTURE
Pricing for social-serviceaccounts has been soft for many years. Yet, there are signs thatthis niche is firming.

“Recently, there has been some leveling in price,” Henry says.“And in some instances, for accounts with poor loss experience orunusual exposures, we are seeing some price increases.”

A market hardening may also be happening in small pockets wherecatastrophes—like the damaging tornadoes earlier this year inTexas, Oklahoma and Missouri—have hit hard.

“The current trend is to try to get 3 percent to 5 percentpricing increases on smaller nonprofits,” Binford says. “We'reseeing that with most carriers across the country. But while mostof us are trying to get a little increase, it's not happening;we're just beating each other back down. There's a lot of wishfulthinking going on at this point [in regards to rateincreases].”

In his view of the market, Jason Tharpe, a vice president at AonAffinity, a managing general agent doing exclusive underwriting forThe Hartford's nonprofit D&O products, says, “Cover keepsgetting better; we're seeing pricing starting to get up a littlebit.” 

Aon Affinity has been offering D&O to nonprofits for 30years and now wants to break into the package business, offeringcombined property, general liability and professionalliability.