Do Nonprofits Need Liability Insurance?

Does your nonprofit need liability insurance? The answer, unfortunately, isn’t as simple as “yes” or “no.” Liability insurance acts as a shield, protecting your organization from the potentially devastating financial fallout of unforeseen events.

These could be accidents that cause harm or even legal battles fueled by accusations of wrongdoing. While insurance might seem like an extra expense, the cost pales in comparison to the price of defending your organization against a lawsuit — especially if the judgment doesn’t fall in your favor.

Nonprofit organizations exist to serve a cause, not to generate profit. Because of this, they often operate on tight budgets. Yet, it’s essential to understand that dedicating yourself to the greater good doesn’t make you immune to the risks that all organizations face.

Considering the expenses tied to potential legal action, nonprofits need to weigh the cost of insurance against the far greater cost of being uninsured.

Why Are Nonprofits Vulnerable to Lawsuits?

Our society seems to grow more prone to litigation with each passing year. Individuals and groups have become more willing to take their grievances to court, regardless of the defendant’s status.

Nonprofits, sometimes mistakenly perceived as less “professional” or having deeper pockets than for-profit businesses, can often become targets.

Let’s look at a few high-profile examples:

Harvard University

A group of Asian-American applicants sued the university, claiming discrimination in the admissions process. Although the initial case was lost on appeal, the Supreme Court is now weighing the issue, demonstrating the length and cost such legal battles can incur.

Sutter Health System

This major healthcare network faced antitrust allegations, leading to a class-action lawsuit. The case ultimately settled out of court for a potential $575 million — a staggering sum that could cripple smaller nonprofits.

Mayo Clinic

This medical institution was sued for failing to pay taxes related to activities deemed unrelated to its educational mission. Courts had to determine where the line was drawn between healthcare and education, highlighting the complex legal issues nonprofits can encounter.

These examples make a key point: Lawsuits know no boundaries. The size of your nonprofit or the tightness of your budget won’t protect you if someone decides to file a claim against your organization.

The potential financial risk calls for serious consideration of how liability insurance can safeguard your mission.

What Are the Common Types of Nonprofit Claims?

You might be surprised to learn that nonprofits actually experience a greater number of certain types of claims compared to traditional corporations. Studies have shown that nonprofits file twice as many Directors and Officers (D&O) liability claims as their for-profit counterparts.

These statistics aren’t meant to scare you but rather to highlight the unique risks that your nonprofit organization might face.

Let’s discuss some of the most common types of claims:

Cyber Risk

We live in an online age. Nonprofits, just like any other organization, store sensitive data — donor information, employee records, or perhaps client details. Even with strong cybersecurity measures, the possibility of a data breach is never zero.

Hackers are sophisticated, and a successful cyberattack can lead to lawsuits alleging loss of privacy or even financial damage.

Employee Complaints

Employees are the lifeblood of your nonprofit, but dissatisfaction can arise. Discrimination allegations, claims of wrongful termination, or even disputes over wages can turn into full-blown lawsuits. The situation is even more complicated if your nonprofit heavily relies on the dedication of volunteers.

Regulatory and Enforcement Issues

Nonprofits must deal with complex regulations at the federal, state, and sometimes even local levels. Failing to file the right paperwork on time, misunderstanding tax rules, or running afoul of labor laws can result in fines, penalties, and potentially even legal challenges with severe consequences.

Cross-Border Risks

Maybe your nonprofit’s mission takes you beyond U.S. borders. International operations open you up to a whole new set of risks. Different nations have their own legal systems, labor regulations, and cultural norms.

Even with the best intentions, nonprofits can find themselves in legal hot water when operating abroad if they are not thoroughly prepared.

It’s important to understand that this list is certainly not exhaustive. Depending on the nature and scope of your nonprofit, you might face additional types of claims. For example, if your work involves direct contact with vulnerable populations, there may be potential liability stemming from issues related to their care or safety.

The diverse and often unpredictable nature of potential claims is precisely why working with a knowledgeable insurance professional is essential for any nonprofit. They can assess your activities, identify your risk areas, and help craft a tailored insurance plan to keep your organization and its mission protected.

What Are Essential Insurance Policies for Nonprofits?

Think of liability insurance as the safety gear for your nonprofit’s financial health. While no one wants to think about accidents or lawsuits, being prepared is important. Let’s break down the key types of insurance policies that any nonprofit, regardless of size or mission, should have on their radar:

General Liability

This is your foundational coverage, acting as a safeguard if someone outside of your organization sues for bodily injury or property damage that they claim your nonprofit caused. For example, a visitor slips and falls at your facility, or your fundraising event damages someone else’s property.

Property Insurance

Your buildings, equipment, inventory — these are tangible assets imperative to your mission. Property insurance protects them from unexpected events like fire, theft, or some types of natural disasters (note that floods and earthquakes often require separate coverage).

Auto Insurance

If your nonprofit owns vehicles or staff and volunteers use their personal cars for organization activities, auto insurance is essential. It covers liability for accidents and damage to the vehicles themselves.

Workers’ Compensation

Barring Texas, every state mandates workers’ compensation insurance. This covers medical treatment and lost wages if an employee is injured on the job, regardless of who’s at fault.

Directors and Officers (D&O)

This is protection for your leadership team. Board members make decisions, and sometimes, those decisions might not pan out as planned. D&O insurance can cover legal costs if someone sues your nonprofit’s leadership, alleging mismanagement or wrongdoing.

It’s important to point out that it also often includes employment practices liability, shielding your nonprofit against claims from employees or volunteers.

Professional Liability (Errors and Omissions)

Boards can make mistakes, like forgetting to file a form or misinterpreting a regulation. That doesn’t mean there’s malicious intent, but it could still lead to costly consequences. Professional liability insurance helps cover the defense costs and potential judgments in these scenarios.

Are There Additional Considerations for Nonprofits?

The above policies form a strong foundation, but your nonprofit may require further specialization. Here’s where tailoring your insurance plan really comes into play:

Crime Coverage

Sadly, even well-intentioned organizations can fall victim to theft or financial fraud, sometimes even from within. Crime coverage can offer reimbursement for such losses, up to certain limits and depending on the type of policy.

Cyber Liability

If you store client data, process donations online, or heavily rely on digital systems, cyber liability coverage is increasingly important. A data breach is disruptive and can lead to lawsuits and fines, which this type of insurance helps address.

Employment Practices Liability (EPLI)

Discrimination, harassment, or wrongful termination allegations are serious matters, and nonprofits are not immune. Some D&O policies might include EPLI coverage, or you may need a separate policy for comprehensive protection.

Trying to make sense of insurance can be daunting. Working with a knowledgeable agent specializing in nonprofits is the best way to ensure you’re getting the right types of coverage, and in the right amounts, to match your organization’s specific needs.

Choose Mosey To Ensure Your Compliance

Liability insurance isn’t a luxury for nonprofits — it’s about safeguarding your organization’s future. The cost of insurance pales in comparison to the price of defending a lawsuit or absorbing the financial blow of an unexpected event. Don’t leave your nonprofit’s mission vulnerable to chance.

Working with a qualified insurance agent who understands the unique needs of nonprofits is essential. They can assess your risks and help you build a custom insurance plan that provides the protection you need without breaking the bank. The risks of inadequate coverage are simply too high.

Let Mosey take some of the burdens off your shoulders when it comes to state compliance. Our platform automates compliance tasks and organizes all of your compliance needs in one place, freeing up your team to focus on what truly matters. Book a demo with us today to learn more about how we simplify your nonprofit’s path to success.

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