Nonprofit organizations and charities have distinct needscompared with other sectors of the economy. To get perspectives onthe risk management and insurance problems that nonprofit managersface, I turned to several independent insurance agents and brokerswho are experienced in the nonprofit market.

Read related: “Nonprofit/Charitable Organizations: Big Business, BigRisk.”

It's a small world, and budgets are no exception. Despite thelarge combined size of nonprofit organizations, most nonprofitentities and charities are small. Overall, about 75 percent ofcharities that are required to report to the Internal RevenueService showed yearly expenses of less than $500,000 in 2008. Justfour of 100 charities reported expenses of more than $10million.

Ronald Johnson of Western Dakota Insurors,Inc. in Rapid City, S.D., noted: “Nonprofit organizationsgenerally have low budgets and are tight on money.” The proof:Charitable giving fell 3.6 percent from 2008 to 2009, according tothe most recent data from the Center on Philanthropy atIndiana University as reported by the Independent Sector, anetwork for nonprofits.

One broker who works with a number of nonprofits commented thatin the face of these budget pressures, some nonprofits are seekingto cut insurance costs with too little regard for the consequences.“We have seen some not-for-profit clients cut the heart out oftheir coverage and have really had to fight them on somedecisions,” he said. He suggests that agents and brokers get acareful read on the board of directors. Does it seem to have a goodmix of community and business leaders? If so, that's a goodindicator that the long-term interest of the organization will beupheld even when the pressure is on to cut cost.

Mission is critical

“In any selling situation you have to understand the needs ofthe customer and be able to convince the potential customer thatyou do understand these needs and their business model,” said RalphM. Ricketson, Jr. of McNeary,Inc., based in Charlotte, N.C. “There are some fundamentaldifferences. Nonprofits rank nonfinancial objectives such ascompassion, safety, excellence, accountability, innovation, faith,respect, friendliness, etc. highly.”

Blind spots and misconceptions

Donna Haynes, CPCU, of Pilkey, Hopping & Ekberg,Inc., Tacoma, Wash., noted that charitable organizations andvolunteers often need information about the nature of variouscoverage forms and guidance on policy selection.

For example, they might mistakenly look to a personal linesumbrella liability policy for the coverage they are seeking.“Personal umbrellas do not provide the same level of protectionthat is included in a nonprofit D&O policy,” she said.“Personal umbrellas typically pay for bodily injury or propertydamage only.” They also often need guidance on D&O issues suchthe definition of who is insured, and the most appropriate extendedreporting period, she said.

The “event”-ual risk

Beware liquor liability. “A not-for-profit will have a fundraiser, selling tickets, which includes providing liquor,” saidCarole Hartman of AlperServices in Chicago. “In Illinois, this has been construed asselling liquor. Even though a not-for-profit has host liquor[coverage] it is wise to provide a separate liquor policy to ensurecoverage.”

Read related: “Social Services Profile: First Nonprofit InsuranceCo.”

Don't miss the miscellaneous

Hartman pointed out various out-of-the-ordinary risks:

• Travel accident and foreign liability is a must for entitiesthat offer aid or services overseas.
• Miscellaneous professional liability is needed for anyorganization that offers any type of hotline offering professionalhelp and/or referrals.

“Theft and embezzlement are hazards, but are often overlooked,”said Haynes of Pilkey, Hopping & Ekberg.

Special risks

The Corporation forNational and Community Service (CNCS) estimated that volunteertime for 2010 was valued at $21.36 per hour. But that time is notfree to nonprofits. Volunteers for nonprofit organizations andcharities might not get paid, but they do cost.

Bill Yaeger of McNeary Inc. explained: “Many nonprofits havevolunteers. The entity may not have considered how they want tocover them for general liability, workers compensation, medicalbenefits or other benefits. A general liability policy can easilybe adopted to include volunteers as insureds, much as it coversemployees.”

There's an option, though: For a client, Yaeger moved coveragefrom a self-insured workers comp fund to a volunteer insuranceprogram with medical and accidental death and dismembermentcoverage. “We thought it was cost effective and we were able toprovide a defined limit of coverage in lieu of broader WC coverageat a higher cost,” he said.

Nonprofits have additional layers of volunteerrisks

As employers, charities face the usual array of risks, but theirboard members and other volunteers present unusual risks.“Employment practices liability can include third-party coverage incase some board member or volunteer commits an act such as sexualharassment or discrimination against a third party,” said Johnsonof Western Dakota Insurors. “This usually comes with the directorsand officers coverage at a low premium.”

What's worse is that charity leaders may think they areprotected without insurance. “At times a lawyer has told nonprofitsthat they do not need D&O coverage as there are state statutesprotecting them. This is true but they generally only do part ofthe job,” Johnson said. “They do not cover gross negligence, fraudor dishonest acts. And who is going to defend them until adetermination is made? The directors are putting their personalassets on the line when acting in a voluntary capacity.”

Read related: “Increasing Reliance on Volunteers Complicates Insurance forChildcare.”

Johnson advised that, in addition to having a D&O policy,the charity's by-laws should include a hold-harmless agreement forthe directors and officers in accordance with state statutes.

Ricketson of McNeary said, “D&O coverage for nonprofits istypically broader than what is available to for-profits. Forexample, the entity itself is covered to a much broader extent.Entity coverage for for-profit corporations is usually limited tocoverage for securities claims.”

Nonprofit organizations, their boards and volunteers have riskexposures that are much different from those of for-profitorganizations. They also need the skillful guidance of an insuranceagent or broker to help them understand those exposures, give themthe same careful consideration they give all their other expensesin a world of tight budgets, and make the right choices to help theorganizations carry out their missions of doing good.