Serving those who serve

The challenges and the rewards of working with the nonprofit sector

By Dave Willis

One of the strengths of a nonprofit—its ability to engage volunteers—is, in some ways, its Achilles' heel. "Because many nonprofits lack financial resources to employ or consult experts, they rely heavily on volunteers," explains Elda Martocci, RPLU, underwriting director, Travelers Bond & Financial Products. "This often increases the likelihood of errors or breaches of oversight.

"If a lawsuit is filed," she adds, "defense costs can add up quickly. Even if the organization is ultimately exonerated, nonprofits are left with significant expenses." Good nonprofit D&O liability policies turn the defense and claims-handling obligations over to an insurer, so that management can focus on running the nonprofit.

Phillip Reese, CPCU, ASLI, AU, president of Gateway Specialty Insurance, concurs on the value of good D&O coverage. "Nonprofits face a number of exposures, everything from the board not following the organization's mission statement to having someone misappropriate funds and more," he says. "If nothing else, they need a D&O policy to defend the organization against the allegation and protect the personal assets of board members."

Nonprofits also face a number of other risks, too, he adds. "Exposures like off-premises events, abuse and molestation, liquor liability and others—while they're not necessarily unique to nonprofits, some policies may exclude the coverage," he explains.

Lack of specialized coverage is sometimes the least of nonprofits' worries. This is especially true for the smallest of organizations. "While the majority of nonprofits purchase general liability protection, there are plenty that do not buy any insurance," Reese notes. "Often, this is due to funding. Sometimes, there's a misconception that properly insuring themselves will cost more than it actually would. Some nonprofits may not feel they have an exposure to lawsuit, or even that they are immune to being sued."

Nothing could be further from the truth. "With so many parties involved, from contributors to permanent employees to volunteers, there are a number of exposures," explains Martocci. "Claims can be filed for employment-related matters, civil rights issues, fiduciary duty breaches, fund misappropriation and anti-trust for nonprofits including trade and professional associations.

"Claims can also be filed by states attorneys general or the federal government involving conflicts of interest or tax matters," she adds. "Nonprofits may also have exposures when forming for-profit subsidiaries to increase revenues. This can actually raise ethical questions, too, since nonprofits may be competing with for-profit companies that don't have the advantage of a tax-exempt status."

Like other organizations, nonprofits face new exposures. "One risk we are starting to talk more about is cyber liability because the Internet presents a whole new set of exposures," explains Lisa Prinz, J.D., CPCU, ARe, RPLU, vice president of Human Services at Harleysville Insurance. "Nonprofits also must be concerned about maintaining and protecting electronic client records and other data."

According to Prinz, breaches could involve a hacker or, worse yet, an employee or trusted volunteer gone bad. "Someone with access to the nonprofit's system could steal client banking information, Social Security numbers, private records or other data," she says. Several problems can arise from this.

First, Prinz notes, is reputational risk. Second, victims face potential financial loss, not to mention substantial inconvenience. Finally, she says, organizations whose systems were breached are required to pay for notification and, in many cases, other expenses. "The cost of compliance can be significant," Prinz says.

Expertise welcomed

Nonprofits are good candidates for professional insurance and risk management counsel. "Many nonprofits may not be aware of potential exposures that all nonprofits face, let alone specific risks they face," explains Martocci. "Often they assume there are laws protecting them from personal financial catastrophe. Typically, they learn their lesson the hard way.

"One of the most important things for nonprofits board members to understand is that, while they may view liability coverage as an unaffordable 'extra,' the security it provides makes it an absolute necessity," Martocci adds. "Overlooking these exposures is akin to building a beautiful new home and neglecting to put locks on the doors."

"Cyber liability—which we sometimes call the EPLI (employment practices liability insurance) of today, because a dozen years ago, few people bought it—is the next big thing nonprofits need to worry about," Prinz says. "So much of what we do is Internet-based, and intangible property is excluded under a GL policy."

The issue, of course, goes beyond coverage. "Nonprofits need to make sure computers are protected, staff is aware of risks, and access is managed properly, especially when an employee leaves," Prinz adds. Such diligence is particularly important with nonprofits because they tend to be more trusting people.

In addition to cyber liability being the EPLI of today, in some ways, EPLI is the EPLI of today. "Some people say, 'Oh, I have only volunteers; there are no employees, so I don't need that coverage,'" Reese notes. "They still need that coverage to address any type of third-party discrimination or harassment, and they need to be sure they have a good form that does cover these third-party exposures."

Off-premises is another coverage that most nonprofits need, and it is sometimes limited on their general liability policy," he adds. "Many of these organizations hold fundraising activities throughout the year, and oftentimes the events are held off site. Taking care of this exposure on their annual general liability policy is better and more efficient than pursuing one-day, special-event policies."

Abuse and molestation coverage is another must-have for many nonprofits. Churches and day care centers, of course, think about this. Others need to, as well. "We insure a domestic shelter where, during the day, women sometimes prepare to go to work," Prinz says. "The kids may be left with a babysitter, so the risk is there. Too often, shelters and other nonprofits with similar exposures use BOP policies, which may not include this coverage."

Given the intricacies, Reese has some overarching counsel: "Don't just expect a standard carrier to provide all of the appropriate coverages for a nonprofit," he advises. "Using a specialist carrier and/or intermediary can help." The specialist will help analyze coverage, even if it doesn't write the insurance.

Recently, Reese's firm came across a church that was renting space for its services. "They were paying $500 for a BOP policy that was limited to the premises they were renting, and it excluded abuse and molestation and professional liability," he explains. "We were able to get them a policy that covered them for all off-premises events and included pastoral professional liability and abuse and molestation, for only $600."

Even within the nonprofits arena, it's important to remember that one size doesn't fit all. "Agents and brokers cannot assume they know the exposures of a given client strictly based on their industry," says Martocci. "Agents and brokers should carefully look at the typical exposures and sit down with clients.Getting to know the business will help agents and brokers identify some not-so-obvious risks."

Prinz encourages agents and brokers, where possible, to use the same carrier for different coverages. "I would put all of the liability coverages together if I could," she explains. "Having general liability and human services professional liability with the same carrier can eliminate worries about who covers what." This is particularly important, she says, because the line between the two is sometimes a fine one.

According to Martocci, carrier selection is important. "As producers well know, not all providers are alike," she says. "Working with a highly rated carrier that offers a large breadth of quality products and risk management tools—things that that go beyond the basics—will help agents and brokers provide the best possible service to their nonprofit clients."

Reese concurs. "It's important to be aware of the unique characteristics of the nonprofit arena," he says. "If you aren't careful and don't use a carrier that specializes in the market, you may not get clients the coverage they need."

Ready to serve

According to Reese, experience is the best teacher for agents interested in serving nonprofits. While that's true, good education can provide a foundation for building experience. Reese's firm offers a 45-minute seminar on the important coverages for nonprofits.  "It goes through some basic principles of what is important and why, giving agents a foundation of knowledge to reach out to nonprofits and start selling coverage," he says. "We are happy to share this with agencies looking to focus on nonprofits." The firm's Web site offers other resources, too.

Travelers Bond & Financial Products offers a range of tools and resources online at its Risk Management Plus+ Online Web site. (rmplusonline.com) "Agents and brokers should also think of their insurance company partner as a resource," Martocci says. "They also need to spend time speaking with clients, to get a better understanding of their organization. This lets them bring appropriate insurance and risk management resources to the table."

In addition to Harleysville's own risk control resources, Prinz points agents and brokers to the Nonprofit Risk Management Center and its nonprofitrisk.org Web site. "They have a lot of articles there that provide great insight," says Prinz, who serves on the organization's board. She also suggests agents and brokers visit guidestar.org, a directory of nonprofits. "There, you can find out what the nonprofit does, its revenues and more."

According to Reese, the uniqueness of the nonprofit niche should not make it, "untouchable. It is the same insurance and risk management principles that would be applied to any other risk," he explains. Once agents get into it, they will be able to run with it.

"Nonprofits are a terrific market to get aligned with," he adds. "They are loyal, stable and they are quick to refer other similar businesses." Prinz agrees. "Once you get in with a nonprofit and serve them well, you have them for a long time," she says.