Insurance for social services and nonprofits is well established but the market faces growing risks
In the mid-1980s, nonprofit organizations and social service agencies saw their operations and very existence threatened by a crisis in the availability and affordability of liability insurance.
Thirty years on, there is a thriving, competitive market for coverage of nonprofits and social service agencies. Agents, brokers, and carriers in that market are being tested for their ability to adapt to emerging risks in this sector, some of them shared by for-profit companies, others unique to nonprofits.
Of immediate importance is the prospect of abrupt reductions in funding, especially by the federal government.
Nonprofits and social service agencies could be directly affected if funding cuts are enacted, as proposed in the 2017 federal budget outline developed by the Trump Administration, says Brad Storey, assistant vice president of the risk management division of the Irwin Siegel Agency, a provider of programs for human and social service organizations.
According to Storey, the Administration’s budget blueprint would cut funding for several programs administered through community action agencies, including the U.S. Interagency Council on Homelessness, the Low Income Home Energy Assistance Program, and the Weatherization Assistance Program.
“Nonprofits and for-profits both handle sensitive information, but nonprofits are less likely to have dedicated IT resources and robust firewalls, and more likely to have older software that is no longer patched.”
Cyber Liability Underwriter
Irwin Siegel Agency
“Training suffers when budgets tighten,” Storey says. “Will organizations be serving more people with less staff? That can lead to high levels of stress and greater loss exposure.”
Also, while Republican plans to repeal the Affordable Care Act (“Obamacare”) are on hold following withdrawal of a Republican alternative, Storey says that “full repeal of Obamacare’s Medicaid expansion would be a significant risk” to agencies serving Medicaid beneficiaries.
Expansion into healthcare
Indeed, moving into healthcare and related services brings with it a growing liability risk for nonprofits and their insurers.
“Many nonprofits have expanded their missions to include medical services as a complement to their traditional social, counseling and support services,” says Scott Grieco, president of middle market at The Hanover Insurance Group.
Grieco sees the emergence of “hybrid” nonprofits where, for example, “a community counseling center may be offering physicals, an early-intervention program may have added a dental clinic, a senior center may now offer home healthcare, or an organization serving the underprivileged may be opening a primary healthcare clinic.”
“The integration of primary healthcare [into agency operations] is an ongoing trend,” says Nicholas Bozzo, president of Negley Associates, an underwriting management firm serving behavioral healthcare agencies and related social services.
Increasingly, Bozzo finds, organizations are providing primary care themselves, contracting with or leasing space to a care provider, or seeking to become a “federally qualified health center” eligible for reimbursement by Medicare and Medicaid.
“In all cases, organizations are taking on tremendous additional risk that is not automatically covered in current policies,” Bozzo says. “Integrating primary healthcare programs typically requires policy endorsements that cover new and unique exposures.”
As nonprofits expand the range and reach of their services, they are seeing a corresponding increase in their auto liability exposures.
“Auto insurance has become an issue for nonprofit organizations, as their drivers log mileage and drive times comparable to those of trucking firms,” says Storey. “Auto liability, medical expense, and physical damage coverage are becoming more costly for them.”
As with all organizations, nonprofits are witnessing a growing exposure to risk of cyber loss through a breach of computer networks and data. The risk to nonprofits may be greater than for most for-profits, however, for two principal reasons:
Many nonprofits hold extremely sensitive data on individuals’ medical conditions, financial status, legal troubles, and struggles with addiction.
Many nonprofits do not have separate IT departments for maintaining safeguards against attacks through the Internet.
“Nonprofits and for-profits both handle sensitive information,” observes Colleen Boniface, cyber liability underwriter for Irwin Siegel Agency, “but nonprofits are less likely to have dedicated IT resources and robust firewalls, and more likely to have older software that is no longer patched.”
Beyond that, Boniface adds, nonprofits are prime targets for “social engineering” schemes, in which scammers impersonate the online persona of individuals to direct others to release funds or data.
“Nonprofits often don’t think they’re a target [for scammers],” says Dawn Martin, assistant vice president of underwriting in Irwin Siegel’s large accounts division. But, she adds, nonprofits may actually have a bigger stake than for-profits in avoiding data breaches and Internet fraud.
“Given their reliance on private donors, nonprofits must consider the costs of reputational harm,” Martin says. “A breach may make donors reluctant to give, if they perceive data is at risk.
“A cyber policy is imperative, as there is not enough coverage or sufficient limits in a standard policy.”
Much to their surprise and chagrin, more and more nonprofit board members are finding themselves the targets of regulatory inquiries and investigations.
Eric Berman, a partner in the Washington, D.C. law firm Venable LLP who represents numerous nonprofits, recently told a gathering of insurers that state governments are stepping up their scrutiny of nonprofit organizations. “Ten to 15 years ago, state attorneys general were understaffed for this sector,” he says. “It’s much less the case today, and they are coordinating investigations with each other.”
“Nonprofits benefit from the counsel of agents who take time to understand their missions and unique risks, and provide advice on coverages for common and industry-specific risks.”
President of Middle Market
The Hanover Insurance Group
Berman was speaking on a panel at the 2017 D&O and Professional Liability Symposium, sponsored by the Professional Liability Underwriting Society (PLUS), in Chicago in April.
He was joined by Barry Goldberg, an assistant bureau chief for the Illinois Attorney General, who cited the “Top 10” reasons (paraphrased here) that nonprofit board members may face regulatory scrutiny:
- Failure to file the necessary forms;
- Failure to adhere to the organization’s declared mission;
- Failure to review financial records and transactions;
- Failure to use restricted funds for their designated purposes;
- Failure to operate within the organizational structure;
- Failure to maintain sufficient books and records;
- Failure to make required information accessible to the public;
- Failure to disclose disputes over policy among officers and directors;
- Failure of board members to exercise sufficient oversight of officers; and
- Failure of board members to exercise sufficient oversight of solicitations.
Nonprofit board members should not think they are immune from regulatory or civil action because they are well-meaning volunteers, said Laura Zaroski, executive vice president of Socius Insurance Services in Chicago. Nor should they hesitate to contact their D&O carrier if there’s any hint of trouble.
“The number one reason [D&O] coverage gets denied is because the insured gave no notice (in time),” she explains. “If you bought the policy, use it. It’s better to trigger the coverage and have the expertise of the carrier supporting you early on. Nothing gets better with time.”
Agents and brokers
Insurance producers serve a very important role as risk advisers to thinly staffed nonprofit organizations and social service agencies.
“Nonprofits benefit from the counsel of agents who take time to understand their missions and unique risks, and provide advice on coverages for common and industry-specific risks,” says Grieco.
“Underwriters will err on the side
of caution,” he adds, “but having detailed information from agents will help underwriters price to the actual exposure, resulting in stable pricing over the long run—a key need of human
service organizations in setting budgets.”
Bozzo says that agents and brokers need to steer their nonprofit clients to insurers that understand the unique nature of the services they provide.
“Insurance generalists are just not equipped to understand the nuances,” he says. “Clients and their insurance agents must absolutely consult with a carrier that specializes in the types of risks they face.”
While nonprofits may prefer to not spend more money on insurance, there may be no better time than in today’s market, characterized by strong capacity and soft pricing.
“I’m surprised when I see what the pricing is, and for really good coverage,” said Zaroski, at the PLUS session. “I still see a broadening of coverage in a buyer’s market. There’s amazing coverage out there at great
For more information:
The Hanover Insurance Group
Irwin Siegel Agency
Professional Liability Underwriting Society
Joseph S. Harrington, CPCU, is an independent business writer specializing in property and casualty insurance
coverages and operations. For 21 years, Joe was the communications director for the American Association of Insurance Services (AAIS), a P-C advisory organization. Prior to that, Joe worked in journalism and as a reporter and editor in financial services.