Non-profit organization insurance explained: a beginner's guide

A non-profit is a business with three extra exposures. Its board members serve without pay and can be sued personally for the decisions they make; its workforce is partly volunteers, who are neither employees nor members of the public; and its money belongs, in a real sense, to donors and grantors who can ask for it back if it is mishandled. The general liability and property policies a non-profit buys look like any small organisation's. The policies that make it a non-profit file are directors and officers, a fidelity bond, and the endorsements that treat volunteers correctly.

This guide explains each of those, then turns to the practical questions a food bank, a youth sports league, a church, an arts organisation or a community clinic actually brings to the desk: who is covered when a volunteer drives, what a grant agreement means by bonded, how a fundraising event is insured, and where abuse and molestation coverage sits. It is written for the executive director or board treasurer who has been handed the insurance file and asked whether it is right.

Directors and officers: the board's personal exposure

A board member who votes to close a programme, dismiss a director, merge with another organisation or spend a restricted fund can be sued by an employee, a donor, a member, a beneficiary or the state attorney general who oversees charities. The corporate form and the state's volunteer protection rules limit that exposure but do not remove it, and a suit still has to be defended. Directors and officers liability pays the defence and any settlement for claims alleging a wrongful act in managing the organisation: a breach of duty, a misstatement, a decision outside the bylaws, mismanagement of funds. It has three insuring parts: coverage for the individuals when the organisation cannot indemnify them, reimbursement to the organisation when it does, and coverage for the entity itself.

For a non-profit the important add-on is employment practices liability, which many non-profit D&O forms include or offer as an endorsement. Wrongful termination, discrimination and harassment claims from paid staff are the commonest claims against small organisations, and a board that has never been sued over a decision has often been sued over a dismissal. Non-profit D&O is written claims-made, so the retroactive date and the tail matter exactly as they do on a professional liability policy, and a change of carrier without carrying the date forward leaves past board decisions uninsured. Board recruitment is easier when a prospective member can be told, truthfully, that the organisation carries it.

Volunteers: insureds, drivers and claimants at once

Volunteers fall into three places in the file, and each needs a check.

• As insureds: a standard general liability form covers volunteers as insureds while performing duties for the organisation, so a claim by a member of the public against a volunteer is covered. Confirm the form says so, because older forms and some package policies do not.
• As claimants: a volunteer injured while working is not an employee and is not covered by workers' compensation in most cases. A volunteer accident policy, an inexpensive medical reimbursement policy that pays a volunteer's injury costs without a fault question, is the usual fix and removes the reason a volunteer would sue.
• As drivers: a volunteer delivering meals in their own car is covered first by their own auto policy, and the organisation's exposure is covered by hired and non-owned auto liability, which most non-profits lack until they are asked for it. Vans the organisation owns need a commercial auto policy and a driver list the carrier has seen.
• As decision-makers: committee members and officers who are not board members may or may not fall within the D&O definition of insured; ask.

The fidelity bond and what a grant means by bonded

A fidelity bond, sold as employee dishonesty or crime coverage, pays the organisation when an employee, an officer or, if endorsed, a volunteer steals its money or property. It is the coverage that responds when the bookkeeper of a small charity is found to have been writing cheques to herself for four years. Grant agreements from foundations and government agencies routinely require the grantee to be bonded for a stated amount, and a treasurer who reads that clause as a formality should read it as a condition precedent to the grant. An organisation with an employee benefit plan also needs a separate ERISA bond, required by federal law for anyone who handles plan funds, which is a different instrument and is not satisfied by the crime policy.

Suppose a community arts organisation with a $600,000 annual budget carries a $50,000 employee dishonesty limit because that is what the package included. An audit finds the part-time bookkeeper diverted $140,000 over three years through payroll adjustments. The crime policy pays $50,000 less the deductible; the rest is a loss to the organisation and, in practice, to its programmes. The figures are made up, but a limit that reflects the cash that one person can move in a year, rather than the package default, is the lesson, and the premium difference is modest.

Abuse and molestation: the coverage a youth organisation cannot skip

Any organisation that puts adults in contact with children, the elderly or vulnerable adults carries an exposure that general liability forms exclude or sublimit: claims that a volunteer, employee or contractor abused someone in the organisation's care, and that the organisation failed to screen, train or supervise. Abuse and molestation coverage is written as a separate policy or an endorsement with its own limit, and carriers will not offer it without evidence of a written screening policy, background checks, a two-adult rule and training. A youth sports league, a scout troop, a tutoring programme, a church with a nursery and a day camp all need it, and the carrier's underwriting questions are a useful checklist of the controls the organisation should have anyway.

Property, general liability and the building you do not own

The property side is ordinary and frequently wrong in one respect: a non-profit that uses a donated building, a church hall or a school gym under a use agreement often assumes the owner's policy covers its contents and its liability there. It does not. The organisation's own business personal property policy covers its equipment wherever it is used, if the policy is written to follow it, and its general liability responds to injuries at the borrowed premises. The owner will usually require a certificate naming them as additional insured, and the organisation should ask the owner for the same in return where the owner's staff or condition of the building could injure a participant. Special events, from a gala to a fun run, are covered under general liability if they are disclosed, and the venue's contract will state the limits and endorsements it needs; a one-day event policy can be bought for an activity the annual policy will not cover, such as fireworks or a liquor bar.

What the file commonly gets wrong

The same seven gaps appear in file after file, and each is a small correction rather than a new programme.

• D&O without employment practices, in an organisation with paid staff.
• A crime limit set by the package rather than by the money one person can move.
• No hired and non-owned auto, in an organisation whose volunteers drive constantly.
• No volunteer accident policy, so the first injured volunteer has only a lawsuit as a remedy.
• Abuse and molestation excluded or sublimited on a youth programme's general liability policy.
• A board that believes state volunteer immunity makes D&O unnecessary; immunity is a defence, and the defence is what the policy pays for.
• Fundraising events, raffles and liquor service not disclosed to the carrier, which turns a covered event into an argument.

Regional notes

All four states have volunteer protection statutes that limit a volunteer's personal liability for ordinary negligence when acting in good faith within the scope of their duties, alongside the federal act; none of them protect the organisation itself, none cover gross negligence or driving, and none pay for a lawyer, which is why the statutes reduce a volunteer's exposure without removing the need for the policies above. Charitable gaming, raffles and bingo are regulated separately in each state, and a fundraising raffle may need a permit before it needs insurance. Utah's and Idaho's large faith-based and youth-programme sectors make abuse and molestation coverage the first question a carrier asks of a non-profit there; Nevada's event-driven fundraising culture makes the liquor and special-event questions the first in Las Vegas and Reno; Arizona's non-profits that operate cooling stations and heat relief in summer should confirm that pop-up locations and volunteers driving supplies are within the policy's territory and the auto coverage.

How to use this

Bring the current declarations pages, the bylaws' indemnification clause, the largest grant agreement's insurance and bonding requirements, a count of paid staff and regular volunteers, a list of programmes that involve minors or vulnerable adults, and the calendar of events for the year. From that we can say which of the three non-profit policies are in place and at what limits, whether volunteers are treated correctly in each, and whether the crime limit matches the money at risk. A board that has already done this work will hear that from us. We place non-profit coverage with the carriers we represent in Arizona, Nevada, Utah and Idaho, including the specialty programmes written for organisations of this kind.