All nonprofits should obtain sufficient insurance coverage for their organization’s activities, property, and other needs. The following article addresses liability coverage aspects for risk management purposes, such as warranted for children’s programs and other activities involving participants on the premises. It is published by permission from Brotherhood Mutual Insurance Company.
Brotherhood Mutual® is a national property and casualty insurance company that provides innovative coverages and risk management resources, specifically designed to help Christian ministries operate safely and effectively. The original article can be found online in the Brotherhood Mutual® Safety Library.
How Much Liability Insurance Do Nonprofits Need?
Accidents happen. Liability insurance can help protect organizations if someone is injured or suffers a loss connected to program activities — on or off their property. It can also help provide litigation defense for both the organization and its employees and volunteers, whether the suit arises out of injury to people or damage to property.
Coverage typically includes the cost of defending in court — and any court awards or settlements — up to the limits of the organization’s policy.
What are Coverage Limits?
Liability limits determine the maximum amount that an insurer will pay on behalf of a nonprofit and its covered individuals if a liability claim is made.
Here are four key factors when selecting liability limits:
- The likelihood of loss;
- The nonprofit’s assets;
- The likely damages a court would award for a loss; and
- The nonprofit’s “appetite for risk.”
Four Factors to Consider
Let’s look at these four factors, recognizing that determining proper liability insurance limits isn’t an exact science. The extent to which your liability limits are sufficient will depend on the details of a specific loss and whether a plaintiff's attorney seeks to recover more funds than your insurance policy provides.
1. The likelihood of loss
A nonprofit’s probability of getting sued depends on the scope of activities offered, the number of participants, and how well you manage risks. Let’s say that a nonprofit offers child, youth, and teen activities. The chance of facing a sexual abuse claim rises in proportion to the number of young people involved in the nonprofit and the extent of programming. Nonprofit leaders can reduce the likelihood of loss with a sound child protection policy and related protocols that include both worker screening and appropriate supervision. Even if such measures do not prevent a loss, they can significantly reduce its insurance claim value. Another safeguard that can decrease the likelihood of loss is regular safety inspections of your property. Keep in mind that even a low level of nonprofit activity and great risk management preparation doesn’t mean that all losses will be eliminated. It simply means that the odds of a loss are reduced.
2. The nonprofit’s assets
A plaintiff’s attorney typically won’t pursue a liability claim beyond insurance proceeds if the nonprofit has no significant assets. Attorneys typically look for easy money, even when a claim involves clear liability. There is an exception, however, to this general rule. If a claim involves clear liability, damages greater than the insurance limits, and the nonprofit holds relatively liquid assets, a plaintiff’s attorney might be motivated to go after these assets. The greater a nonprofit’s liquid assets, the more likely it is that an attorney will seek additional funds.
3. The likely damages a court would award for a loss
A number of factors can affect court awards. Juries typically award higher amounts when foreseeable losses lead to significant injury. In addition, juries in some cities or regions are more prone to award higher damages than in others. When selecting liability limits, it’s a good idea to check with a local attorney to gauge the “judicial environment” in the area. The less favorable the judicial environment, the more likely it is that higher awards will be granted, and the greater the need for higher liability limits. It’s also important that the nonprofit’s leaders take safety seriously. This ties closely to the first factor: likelihood of loss. Having a sound risk management program at your nonprofit will reduce not only losses but also their claim value.
4. The nonprofit’s “appetite for risk”
Everyone has a differing view of risk. If a nonprofit’s leaders seek a conservative approach, they may desire higher limits even though every precaution has been taken and the nonprofit has little in the way of liquid assets. Nonprofit leaders may simply sleep better at night knowing that higher liability limits are in place. Other organizations would rather pay less for liability insurance, maintain lower limits, and bear a greater risk that a claim will exceed the limit selected. Neither approach is right or wrong; it's just a matter of how decision-makers within the leaders’ view the risk of loss.
How to Decide?
It’s a good idea to discuss the available insurance options with an experienced insurance professional who has experience working with nonprofits. A qualified insurance agent can advise a nonprofit about the types of insurance required by law and how adjusting the liability limits can raise or lower costs. An agent can also explain the benefits of insurance coverage for such risks as employment practices liability, sexual acts liability, and directors’ and officers’ liability. Working with an experienced insurance agent can help leaders to determine the liability coverage and limits that are just right.
Disclaimer from Brotherhood Mutual®: The information provided in this article is intended to be helpful, but it does not constitute legal advice and is not a substitute for legal advice from a licensed attorney in your area. We strongly encourage you to regularly consult with a local attorney as part of your risk management program.