Nonprofit Genie (FAQs) | Insurance

There is a wide variety of policies available on the market today. Your insurance broker can help you evaluate which policy form is best for your organization. There are far too many variables to adequately evaluate the many differences FAQs of this nature. However, there are some important distinctions which make the coverage provided by some of these policies far superior to others. A few of the most desirable provisions of coverage for nonprofits include:

Broad definition of insured

With a broad definition, the named insured includes "any natural person who was, is or becomes a director, trustee, officer, employee, committee member, or volunteer" as well as the nonprofit organization itself. This is a major departure from for-profit policies which typically cover only the directors and officers.

To check if a nonprofit policy contains this broader coverage, look at the definition of insured. If the organization is not a named insured, and its only coverage from the policy is for reimbursement of monies paid to indemnify directors and officers for claims made against them, there are serious unaddressed exposures. Nonprofit managers should ask their insurance professionals to advise them of any potential gaps in coverage of this nature.

Requirement to advance defense costs

Unfortunately, deciphering the language which states the manner in which the insurer will pay for defense is often quite difficult. It might be reasonable to assume policy language stating that "the Company will pay on behalf of the Organization any Loss..." is a commitment to advancing defense costs. However, later in this policy, "Loss" is defined as "amount paid by the Insured or Organization." This reimbursement language is easily missed, but it can be disastrous to the nonprofit that is required to reach into its own funds to pay the bills.

Look for the language that requires the insurer to advance the costs of defense. Reimbursement language requires the nonprofit to pay all costs and attorney fees out-of-pocket and wait for repayment by the insurer. Since D&O cases are often expensive and lengthy, reimbursement policies can severely stretch a nonprofit's resources.

Broad coverage for employment practices liability

Employment practices liability coverage is not universally provided in nonprofit D&O policies. In those policies granting coverage, the language is not located in a consistent policy section. In some, it is within the "Exclusions," where employment contracts are exempt from the breach of contract exclusion. In others, coverage may be found in the body of the policy or in the endorsements.

In addition to contract causes of action, such as wrongful termination, nonprofit D&O policies also should address the exposures for employment-based discrimination and harassment. However, not all D&O policies cover these allegations. Those that do, accomplish this either by covering all employment-related suits or by listing specific exposures. If the policy includes a specific list, the reader must determine if all exposures are included. There should be coverage for cases arising under both state and federal laws; those specific to employment and those, such as the Americans with Disabilities Act (ADA), applicable in many contexts.

Of equal importance, and not so easily determined, is an insurer's interpretation of certain definitions. For example, if the insurer defines sexual harassment as sexual abuse, there may be no coverage under that D&O policy if it contains a sexual abuse exclusion. If there is a question on this matter, a nonprofit manager should ask his or her insurance broker to contact the D&O carrier to determine the insurer's interpretation of this, and similar terms and issues.

Most of the lawsuits against directors and officers will involve some form of employment practices liability. Insurers are becoming more keenly aware of this exposure and some have made subtle policy changes which restrict coverage in these areas. The nonprofit manager should request his or her insurance professional to make sure that all of the coverages listed in this section are included in a policy designed to cover the exposures which arise from corporate governance, and should check whether a separate deductible applies to employment-related allegations.

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Reprinted with permission from The Nonprofits' Insurance Alliance of California (NIAC), a charitable nonprofit insurance pool owned and operated by 501(c)(3) nonprofits in California. More information about the property and liability coverages and other services available through NIAC is available on their website at http://www.niac.org or by contacting them at P.O. Box 8507, Santa Cruz, CA 95061 or by phone at (800) 359-6422.

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