Is It Necessary for Charities & Not-for-Profits to Carry Insurance and Liability Coverage?

Is It Necessary for Charities & Not-for-Profits to Carry Insurance and Liability Coverage?

How insurance works

Insurance companies use the likelihood of a claim being filed on a policy to determine the premium amount for that policy. Even if your organization has never encountered a problem or filed a claim, the premiums you pay will be determined based on the statistical data for similar organizations that the insurer has on record at the national level.

Is insurance really necessary?

In Ontario, nonprofit organizations are not mandated to have insurance, except for volunteer driver vehicle insurance. Consider the potential risk of significant injury from an accident involving daily drivers. It's crucial to ask the following questions:

• What is the likelihood of such an incident occurring?
• How could such an incident impact the organization financially?
• Would legal assistance be required to defend a claim?

For most nonprofits, paying regular premiums to an insurance company is a better option than risking a severe financial loss that could impede their operations.

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‍Insurance policies for nonprofits

Insurance is typically designed to assist policyholders in dealing with the financial consequences of unforeseeable events that are deemed "sudden and accidental." However, not all insurance contracts cover every potential risk or problem that an organization may encounter. Generally, insurance policies for nonprofit organizations can be separated into two key categories:

1. Loss coverage: These policies provide coverage for items or locations that a nonprofit entity owns, such as buildings, vehicles, computers, desks, important documents, etc., in case they are damaged, stolen, or lost.
2. Lawsuit coverage: Also known as liability policies, these policies provide protection to the organization and its members from lawsuits.

Personal lines insurance, such as car insurance or home insurance, provides coverage for assets owned or leased by the insured individual, or for lawsuits against the individual. On the other hand, commercial lines insurance is intended for organizations and businesses, covering the assets owned or leased by them, or for lawsuits against them.

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Common Types of Insurance Policies for Nonprofit Organizations

1. Commercial General Liability (CGL) Coverage: This policy provides coverage bodily injury and property damage, personal injury, medical expenses without a lawsuit, tenants' legal responsibility, and additional endorsements like liability for non-owned vehicles.
2. Directors’ and Officers’ Liability: Nonprofit organization directors and officers are at risk of personal liability for their decisions and actions taken by other board members. This is known as Directors' & Officers' Liability, and it can lead to legal and financial implications. To safeguard against such risks, nonprofit organizations can obtain Directors' & Officers' Liability insurance that can help protect directors and officers from personal liability for their decisions and actions. This policy is crucial for protecting the interests of nonprofit organizations and their directors and officers.

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How to Interpret an Insurance Policy

When you receive your renewal policy in the mail, it's important to go beyond answering any questions you may have been asked and take the time to read the policy carefully. This will help you answer critical questions such as:

• What is covered and what is not (examine carefully the exclusions).
• Who is covered (review the named insureds and the groups of people defined as covered, such as volunteers).
• Which individuals or groups are not covered under the policy, such as volunteers or special committees?

In case of any confusion, do not hesitate to approach your insurance broker or agent for assistance. If you cannot find the answer in the policy, request a written confirmation of coverage for your records.

Although reviewing policy wording can be tedious and challenging, it can save you a lot of trouble in the event of a claim or dispute. For additional guidance on how to read an insurance policy, refer to the Nonprofit Risk Management Centre publication "How to Read an Insurance Policy" (2004).

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Dos and Don'ts When Purchasing Insurance

Do:

• Select an insurance agent or broker who has expertise in the area of non-profit organizations. Ask about the percentage of their business represented by premiums paid by nonprofits, the number of nonprofits they serve, and the types of nonprofits they insure. Request references from other nonprofit clients.
• Take the time to understand the insurance policy you are buying.
• Inquire about the option of getting a better deal. Don't assume that the cost of insurance cannot be negotiated.
• Keep yourself informed about the latest market conditions. During a "soft" insurance market, there may be more favorable coverage options available at a reasonable cost. A few months before your policy renewal date, contact your broker to discuss renewal premiums and coverage options. Inquire whether they intend to approach multiple insurers and, if so, how many.
• Seek independent advice if your insurance agent or broker also serves on your board. This conflict of interest should be addressed by either having the agent/broker step down from the board or finding a new agent/broker.

Don’t:

• Don’t assume that your nonprofit’s premiums will decrease over time simply because you have not made a claim. This is because premiums are only partly influenced by historical factors. Nevertheless, it would be prudent to inquire about the option of receiving a more favorable rate.
• Don’t presume that your insurer is dedicated to a long-term relationship. Insurers may opt not to renew policies, and this may be due to a decision to stop covering a specific sector within the nonprofit industry. After all, insurance is a business. Small and medium-sized nonprofits encounter similar circumstances as small and medium-sized enterprises in this regard.
• Don't be too trusting. As a leader of a nonprofit, it is essential not to be overly trusting. You have a duty to protect your organization's assets. Therefore, it is necessary to comprehend your insurance coverage thoroughly, rather than relying solely on vague assurances of being covered. If your broker or agent cannot explain the answer clearly, request written clarification.

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