Is nonprofit insurance worth the cost?

New clients often ask whether they need to purchase nonprofit insurance. Money is tight, and thought to be better spent on programs than administrative costs like insurance. Is insurance a requirement to incorporate or obtain IRS tax-exempt status? How often are nonprofit organizations and their boards sued? These are just a few of the questions most often asked.  

In this post, we’ll explain the motivations behind obtaining nonprofit insurance and what kinds of insurance are available.

Insurance is not generally required — but you may still want it.

Nonprofit organizations are generally not required to have insurance. That is, there is no insurance requirement to incorporate a nonprofit or apply for federal tax-exempt status. Nonprofit organizations may be required by the state government to have workers compensation insurance if they have employees. Some convention centers and other meeting facilities require organizations that use their space to carry insurance. And, depending on the level of risk involved with the specific activities your organization undertakes, insurance may be a good idea.

Nonprofit organizations face risks.

The level and types of risks tax exempt organizations face vary widely. Organizations that work with vulnerable populations, like children and youth under age 18, the elderly, and disabled, face more risk than groups that only make cash grants, for example. The first step, therefore, in determining whether and what type of insurance a nonprofit organization needs is to look at the most common risks your organization may face.

RENOSI’s Risk Assessment Worksheet helps nonprofit organizations define, and limit, their risks.

The first step is to brainstorm and list all the significant activities of the organization. In the next column, list the types of risks or claims that may come up based on the activity. And in the last column, plan how to reduce the risks.

For example, school nonprofits often hold carnivals or festivals as fundraisers. During a school festival, trips and falls resulting in injuries may happen. People may get sick from the food served.  Money may be stolen from cash boxes. Each of these risks may be reduced or eliminated in several ways, including by insurance coverage.

Let’s look at this example using RENOSI's Risk Assessment Worksheet.

Activity	Risks	Controlling the Risks
School festival	Trips, falls, injuries	Eliminate activities most risky for injuries. Modify activities to make them less risky. Transfer the risk to a vendor – e.g., the contract with the pony ride vendor provides that the vendor shall indemnify and hold the school and its nonprofit harmless for liability related to the pony rides. Transfer the risk by purchasing general liability insurance with medical coverage for injuries.
	Food poisoning	Eliminate the risk by not serving food. Modify the risk by selling only prepackaged food. Transfer the risk by contracting with a local restaurant to provide the food, with the contract providing that the restaurant and not the school or nonprofit is liable for any illness or other claim relating to the food service. Transfer the risk by purchasing general liability insurance.
	Money stolen	Reduce the risk by going cashless, accepting only credit card payments. Reduce the risk by selling tickets at only one location, limiting the collection of cash to the one location. Transfer the risk by purchasing an insurance bond. Reduce the risk by implementing financial controls, including requiring at least two people to count cash at the beginning of each shift, and at the end of each shift, requiring that totals be written on a tally sheet signed by money handlers, and funds deposited each day.

There are many types of insurance.

Insurance doesn’t come in one-type-meets-all needs. Nonprofit organizations should base the types of insurance policies they purchase on the activities they conduct. The four most common types of insurance nonprofit organizations carry are:

• General liability — to cover accidents and injuries to individuals
  
• Directors and officers — to cover the personal liability of officers and directors for their legal responsibilities serving the organization
• Property — to cover loss of property/assets of the organization, such as damage to facilities, owned and rented equipment, and property/inventory related to fundraising programs (the wrapping paper, candy, or other products that the parent group receives before they are distributed and funds collected)
• Bonding — to cover loss of funds of the organization 

If an organization sells products to the public, it may carry product liability insurance. If a nonprofit publishes information, it may carry media liability insurance. And if an organization hosts meetings at hotels and convention centers, it may carry event cancellation insurance.

Event cancellation insurance was helpful for COVID-19.

Event cancellation insurance was a lifesaver for many nonprofit organizations that had to cancel meetings, trade shows, and other events due to the COVID-19 pandemic. Sometimes called "business interruption insurance," this type of insurance generally covers losses due to risks that are outside the meeting planners’ control, such as weather, strikes, and yes, outbreaks of disease. The insurance may cover economic losses or pay additional costs associated with something out of the control of the planner. Event cancellation insurance doesn’t cover losses due to poor marketing or planning efforts.  

Event cancellation insurance is becoming more expensive, and post-COVID-19 some policies are no longer covering cancellations due to pandemics. It’s always important to ready an insurance policy carefully. Reading what the policy excludes is just as important (or more important) than reading what the policy covers.

How do we find the right nonprofit insurance?

The availability, coverage, and cost of insurance varies widely. One good source for nonprofit coverage is a state association of nonprofits, such as the Maryland Nonprofits that offers several sources of insurance for its members. Parent Booster USA works with Association Insurance Management, Inc. (AIM, Inc.) to offer insurance specifically for needs of school Parent Teacher Organizations (PTOs) and booster clubs. We provide information about risks, liability, and insurance on the Resources page of our website. Our resources include COVID-19 waivers, informed consent forms, and more. You may also want to look at Parent Booster USA’s short 11-minute webinar, Schools and Liability.  

Should nonprofit organizations buy insurance?

All nonprofit organizations are not alike. Insurance also comes in many varieties, qualities, and prices. So, the answer? It all depends. It depends on the activities the organization conducts, the people the organization works with and serves, and whether the organization has sufficient reserves and resources to manage a liability without insurance if a case arises. There are no easy one-size-fits-all answers when it comes to nonprofits and insurance.