Why nonprofits need management liability coverage
By Katianne Barron, Assistant Vice President and Head of Management and Professional Liability Product Management and Development, Philadelphia Insurance Companies
Nonprofit organizations represent a diverse set of purpose-driven entities, with a correspondingly diverse set of liability exposures. Other than the main common characteristic of not distributing profits to individuals, nonprofits range widely in size and purpose. They represent many different fields, from education, to religious affiliations and social services, to foundations and public charities. The good news is nonprofits make a difference in communities everywhere, every day and during difficult times, such as the global pandemic. The bad news: nonprofits’ operating activities can expose them to liability from various sources, and COVID-19 is creating additional liability concerns.
Historically, claims against nonprofits have tended to come from donors, members, regulators, employees, consumers, and beneficiaries. Allegations generally involve one or more of the following categories: breach of fiduciary duty, mismanagement of funds, and employment practices. The pandemic is increasing nonprofits’ exposure to liability stemming from financial stability, funding sources, inability to deliver on their mission, and human resource issues.
If the pandemic leads to a repeat of the Great Recession of 2007-2008, nonprofits will face difficult challenges, including:
- Lower funding levels and continued financial pressure.
- Stronger nonprofits that take advantage of merger and acquisition opportunities may incur additional liability risks.
- Evolving employment practices in response to the pandemic, such as privacy, workplace policies, return to work issues, and furloughs, layoffs and reductions in work.
Even before COVID-19, many nonprofits faced challenges attracting funding and volunteers, paying staff and delivering on their mission. Another unpleasant reality they face is litigation. Class-action lawsuits can be financially ruinous for large organizations, but even individual lawsuits can be quite expensive. Defending litigation can compromise a nonprofit’s solvency, damage its reputation and ultimately threaten the organization’s ability to perform its mission.
Liability risks can also make recruiting directors for nonprofit boards difficult. Many nonprofits rely on volunteer directors who have business experience and expertise in specific fields, in addition to a passion for the organization’s purpose. Asking them to serve and put their personal assets at risk is a tall order.
Fortunately, nonprofits have a valuable resource available to help. Nonprofit management liability insurance can respond to claims including directors and officers liability (D&O), employment practices liability (EPL), fiduciary liability, workplace violence liability, crime insurance and even emerging exposures such as the risk associated with the collection of biometric data for identification and access to facilities. As it does in for-profit organizations, nonprofit management liability coverage can protect the personal assets of directors and senior leaders who are designated as officers.
Mitigating nonprofit D&O risks
One of the largest areas of exposure for nonprofits is employment claims. A common myth about nonprofits is they mainly have volunteers, not paid staff. According to the National Council of Nonprofits, U.S. nonprofit organizations before the pandemic employed more than 12 million people and spent more than $826 billion annually on salaries, benefits, and payroll taxes.
Just like other employers, nonprofits can face allegations including harassment, discrimination, wrongful termination, and retaliation. Because nonprofits often have highly visible positions in the communities they serve, an employment claim can inflict reputational damage.
Some ways that nonprofits can mitigate their management liability exposure include:
- Work with a risk adviser. Insurance agents and brokers can provide insights to an organization about its risks and exposures, as well as best practices for reducing the cost of risk.
- Implement consistent employment practice procedures. Applying consistent human resources policies and procedures through all phases of employment – from onboarding to everyday management, to return to work during and after the pandemic, to an employee’s departure – is a key to mitigating HR-related claims.
- Stay up to date on state, local, and federal laws. Regulations change, so nonprofits should strive to remain up to date and compliant with applicable laws on labor and employment, financial operations, and data privacy, among others. Several states, including Illinois, have evolving laws that require organizations to protect biometric data such as fingerprints, voiceprints and hand scans.
- Obtain adequate nonprofit management liability insurance coverage. Protecting a nonprofit’s assets is core to preserving its mission. Mitigating liability risks and backstopping those risks with adequate management liability coverage is a good way to keep nonprofits on a stable footing.
What to look for in nonprofit management liability insurance
Many insurance companies offer management liability policies, and nonprofits may find it difficult to identify the best options. Working with a knowledgeable agent or broker can help compare policy features. Here are some elements to look for in nonprofit management liability:
Broad coverage. A broad definition of who is covered is a critical part of good management liability coverage. Similarly, defense coverage outside the aggregate limits and coverage for third-party EPL claims enhance the policy’s value.
Specialized risk management services. Many agents and brokers offer their own risk management services, or in conjunction with insurance carriers. Management liability encompasses different types of losses, so expert risk management tailored to these loss types is an important way to reduce the cost of risk.
Flexibility in claims. Management liability insurance is designed as an indemnity form of coverage, meaning it can reimburse policyholders for defense costs and settlements. Seek coverage that lets a nonprofit organization work with a law firm or an attorney of its own choosing or use a defense firm or attorneys already vetted by the insurer. This flexibility can help secure a beneficial outcome for the nonprofit.
Commitment to nonprofits. Partner with an insurer that is committed to the nonprofit segment. Philadelphia Insurance has a deep understanding of nonprofits and has been underwriting nonprofit management liability insurance for more than 30 years.
To learn more about managing risk and resources for nonprofit organizations, please visit www.phly.com.
Katianne Barron is Assistant Vice President and Head of Management and Professional Liability Product Management and Development of Philadelphia Insurance Companies.
The information and suggestions presented by Philadelphia Indemnity Insurance Company is for your consideration in your loss prevention efforts. They are not intended to be complete or definitive in identifying all hazards associated with your business, preventing workplace accidents, or complying with any safety related, or other laws or regulations. You are encouraged to alter them to fit the specific hazards of your business and to have your legal counsel review all of your plans and company policies.