Nonprofit liability insurance: Does your nonprofit need it?

Nonprofit leaders know that every dollar counts, and so does every decision. While you focus on delivering services that support your organization’s mission, you may overlook this question: Does your nonprofit need liability insurance?

The answer? Yes. Whether organizing community events, managing volunteers or engaged in a fundraising campaign, the unexpected can happen – lawsuits, property damage, accidents or a crisis involving staff, board members or critical data. Liability insurance from reputable companies is a vital safety net that protects your organization’s assets and reputation enabling you to continue that important day-to-day work.

What types of claims could be brought against a nonprofit?

A myriad of circumstances might trigger a claim or lawsuit against a nonprofit organization.

From fraud, funds mismanagement and embezzlement to discrimination, negligence or personal injury, nonprofits leaders and directors can find themselves in the trenches dealing with serious and potentially damaging issues. Without comprehensive liability insurance, these crises can destroy an organization’s reputation and ability to operate.

Our society is becoming increasingly litigious. People and groups can, and do, sue nonprofits. Let’s look at a few examples of nonprofit lawsuits.

Here are some recent cases:

• A former United Way executive filed a $12 million lawsuit against United Way for wrongful termination in retaliation for reporting workplace sexual harassment.
• Minnesota’s attorney general sued ThinkTechAct Foundation for fund misuse and governance violations.
• The American Alliance for Equal Rights alleged that a grant program administered by Fearless Foundation violates a federal statute of the Civil Rights Act of 1866 that prohibits discrimination. The lawsuit claims that the nonprofit violates 42 U.S.C. Section 1981, a federal statute enacted as part of the Civil Rights Act of 1866 that prohibits discrimination on the basis of race in the making or enforcement of contracts. This case was settled in September 2024 with the closing of the Fearless Fund grant program.

What types of insurance policies do nonprofit organizations need?

Liability insurance policies for nonprofits can cover the spectrum from general liability and directors and officers to highly targeted policies related to cybercrime or employment practices. To ensure you purchase the right policies for your organization, consult licensed, experienced insurance experts.

Lindsey Baker Bower, a nonprofit consultant, emphasizes the critical role of liability insurance:
“Nonprofit liability insurance helps protect your organization from a variety of issues common to the field. This is often the difference between a nonprofit closing its doors and one that continues to survive – and even thrive!”

“Nonprofit liability insurance helps protect your organization from a variety of issues common to the field. This is often the difference between a nonprofit closing its doors and one that continues to survive – and even thrive!” – Lindsey Baker Bower, nonprofit consultant

Following are some of the more common types of policies:

• General Liability: All nonprofit organizations should purchase general liability insurance. It protects against claims made by third parties for bodily injury and property damage that occurs in the course of the nonprofit’s operations.
• Property insurance: Property insurance covers damage or loss to buildings, office equipment, inventory and any other property the nonprofit owns. Fire and theft are common claims. Boards should be aware that not all insurance policies cover floods and earthquakes.
• Auto insurance: Nonprofits may buy auto insurance if their boards or employees use autos for nonprofit business. Nonprofits may purchase liability coverage to cover others and physical damage coverage for autos. Nonprofits may also consider non-owned auto insurance coverage for volunteers who use their own vehicles for nonprofit volunteering.
• Workers’ Compensation: Workers’ compensation provides coverage for employees who get injured on the job. This coverage provides for medical expenses and wages if an employee gets injured while working for the nonprofit. While required for most nonprofit organizations, there may be exceptions as every state has its own workers’ compensation requirements and regulations.
• Cyber Liability:  Hackers are more likely to attack small nonprofits that lack high-security measures. Your nonprofit could have a cyber liability exposure if you collect personal or confidential data of any kind. Your employees or volunteers could also release confidential or personally identifiable information accidentally or intentionally. The more information you collect, the higher your risk grows. Cyber liability insurance pays for expenses your nonprofit incurs in the event of a data breach.
• Directors and Officers Liability: This is a must-have policy. D&O insurance provides coverage for management decisions that board directors and officers make. It protects the organization and individual board members. D&O insurance policies often include insurance coverage for employment practices liability, which extends to volunteers as well as employees. This coverage protects against claims for harassment, discrimination and wrongful termination.
• Professional Liability: Boards of directors can make mistakes or forget to convey vital information. Professional liability insurance is also referred to as errors and omissions insurance. It protects against claims made as a result of a board director’s action or inaction.

When further protection is needed to protect the nonprofit’s operations and reputation, these specific policies can help:

• Crime Coverage: You never expect your volunteers or employees to steal from your nonprofit or be dishonest, but it can happen. Crime coverage will pay for such losses. You can limit the coverage to the premises or extend it to cover losses off the premises. You can also cover your clients’ assets that are in your possession. Premium costs are typically based on the number of employees and volunteers working at your nonprofit.
• Employment Practices Liability Insurance (EPLI): Nonprofits are not immune from claims of sexual harassment, discrimination, wrongful termination, negligent evaluations, infliction of employee duress and similar claims. Employment practices liability insurance protects your nonprofit from claims where employees alleged your nonprofit is responsible for violating their legal rights as employees. Some insurance providers allow you to add this coverage to your D&O insurance policy at a slightly higher premium.

A security breach or cyberattack damages stakeholder trust. It raises concerns in the minds of donors, beneficiaries, regulators, employees and volunteers that their data and your operations are no longer safe, and that they may no longer be able to depend on you to carry out your mission. Stay a step ahead of cyberthreats with a security assessment to check where your organization is vulnerable. Download our Security Assessment Checklist today with key questions to ask and next steps for moving your assessment — and overall security — forward. Spending time on this is worth every second and every penny.

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How to choose a nonprofit liability insurance policy

To ensure you select the best combination of liability insurance policies for your nonprofit, seek advice from trusted insurance experts. It’s also important to understand these factors:

The deductible

Most policies include a deductible in some amount. Usually, the higher the deductible, the lower the premium. Nonprofit leaders and boards should evaluate the premium costs at various deductible amounts to get the best value on their insurance policy. Having higher deductibles will prevent smaller claims. Nonprofit organizations that file a claim and have a payout can expect their premiums to increase by possibly double or triple. It’s best not to file claims unless it’s necessary.

Policy language

Insurance policies are written much like legal language, making them difficult for ordinary people to read and understand. All insurance policies include additions, conditions  and exclusions. Review the wording in your insurance policies carefully with a licensed insurance agent, so you fully understand what is – and is not – covered.

Definition of insured

In most policies, the definition of an insured is any person who was, is or becomes a director, trustee, officer, employee, committee member or volunteer of the nonprofit as well as the nonprofit itself. This may vary depending upon the policy or the nonprofit structure.

Board management software can help

Without question, nonprofit organizations need liability insurance to protect against unforeseen risks. BoardEffect, our board management solution, helps nonprofit directors and leaders stay abreast of liability insurance policies with its comprehensive, easy-to-access document management feature.

Customizable workflow management and secure workrooms allow board members to track and discuss topics related to potential risks and appropriate insurance coverage. Contact us today to find out how we can help your nonprofit.