Recent numbers also demonstrate Americans’ generosity when it comes to charitable giving, with total donations reaching a record $471.4 billion in 2020, the latest Giving USA report found.
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However, nonprofits operate differently than other types of businesses, which exposes them to a unique set of risks. The situation calls for these institutions to be financially protected and having the right insurance is essential to achieve this.
What are the different risks faced by nonprofit organizations in the United States?
Most charities operate on limited budgets, which makes the risks they face harder to mitigate. A major unexpected event could inflict massive funding losses on them, which could be devastating to their operations. Here are some of the exposures that many of these organizations face:
- Theft of funds: This can be perpetrated by an employee, a third-party vendor, or even a customer. For nonprofit organizations with limited financial resources, losing money can have a detrimental effect on their ability to provide services and fulfill their core missions.
- Fraud: Fake fundraising is among the most common forms of fraud that charities are exposed to. Unscrupulous parties can organize such events and keep the profit to themselves. When this happens, an organization can lose the trust of donors and be held liable for losses suffered by the groups or individuals involved.
- Reputational damage: Heavily dependent on the generosity of others, nonprofits enjoy a positive public perception, as this is essential to obtaining the grants and charitable donations they need to provide services. Activities damaging to their reputation, including poor fiduciary management and allegations of harassment or discrimination, could drive away donors, which could hurt their operations.
- Regulatory Compliance: Nonprofits are subject to specific rules set by the IRS to maintain their tax-exempt status. This includes demonstrating that their funds are used for charitable purposes and not for financial or political purposes. Any violation of these regulations can lead to heavy fines or cost them their tax exemption.
- Leadership Mistakes: Directors and officers of a nonprofit organization assume personal risk because of the responsibilities associated with their job duties. Some of the claims they can be held liable for include wrongful termination, discrimination, sexual harassment, and misappropriation of funds.
- Special Events: Fundraisers and other special events present their share of safety and legal liability risks, including personal injury and property damage.
- Volunteers: Charity groups also rely heavily on volunteers to help with their operations, and many tend to take a more relaxed approach when selecting and training these people. This often puts nonprofits at risk, especially if a volunteer causes damage or injury or steals it.
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What kind of insurance policies do US nonprofits need?
Because every nonprofit faces unique risks and challenges, there is no single policy that meets all insurance needs. The type of coverage a charity will need depends on a range of factors, including the industry it is in, its business activities and the number of staff and volunteers.
Several insurers in the United States offer various policies that can help protect nonprofit organizations against the various risks they face. The selection is varied, but according to industry experts, here are some of the most essential covers charities need to protect their operations:
1. General liability insurance
General liability insurance, also known as commercial general liability insurance, protects organizations against claims for bodily injury or property damage resulting from their activities. Some policies also offer coverage for damage to reputation and copyright infringement.
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2. Health insurance
Nonprofits with more than 50 full-time employees are required to purchase health insurance for those workers under the Affordable Care Act (ACA). For those with fewer than 50 employees, the ACA offers a Small Business Health Options Program (SHOP) as coverage.
“Health insurance is always the first thing people think of when they talk about insurance,” said fundraising software provider Donorbox. “The cost of health insurance may seem high, but it is essential for employee retention and job satisfaction. It’s harder to quit a job that offers quality health insurance.
3. Directors and Officers (D&O) Insurance
D&O coverage is designed for charities run by a board of directors. It protects a company’s directors and senior management from allegations of mismanagement in the performance of their duties.
Read more: Why Business Leaders Need D&O Insurance
4. Professional liability insurance
Also called errors and omissions (E&O) insurance or malpractice insurance, professional liability coverage works similarly to D&O policies, protecting the organization against work-related claims such as mismanagement, sexual harassment and discrimination. The main difference is that it not only covers directors and general management, but also other staff, volunteers and the nonprofit itself.
5. Product liability insurance
For nonprofits that sell products to raise funds, product liability coverage can be helpful. This protects the organization against lawsuits from customers claiming loss or injury from the product. Product liability insurance also covers legal defense costs and compensation if the charity is found guilty.
6. Property Insurance
Property insurance not only covers damage to a nonprofit’s premises, it also provides financial protection for loss of equipment, machinery, fixtures, office furniture, inventory and supplies.
“When looking for home insurance, make sure your policy doesn’t just cover the land and the building,” Donorbox advised. “In the event of claims that damage the equipment and accessories on which a non-profit association relies; it’s vital to find a policy that doesn’t just pay market value.
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7. Commercial auto insurance
This type of policy covers the cost of repairing or replacing an organization’s vehicle if it is accidentally damaged or stolen. It also covers the cost of damage to property of others caused by the vehicle.
8. Crime coverage
Crime coverage, also known as crime bonding, protects nonprofit organizations against the actions of unscrupulous individuals, including theft. This type of policy helps organizations prevent such activities from happening and pays out the amount lost due to the crime.
9. Cyber liability insurance
Non-profit organizations collect massive amounts of sensitive data, so it’s no surprise that they’re commonly targeted by cybercriminals. Cyber liability insurance protects an organization against legal costs and expenses related to cybercrime. Coverage may include fines, penalties, and data breach notification fees.
Read more: Non-profit organizations are a data breach target
10. Occupational accident insurance
This type of policy pays for medical expenses in the event an employee becomes ill or injured in the line of duty. It also covers disability and death benefits.
What should nonprofits consider before purchasing insurance?
Nonprofits determining what coverage they need should consider a range of factors before purchasing insurance. The personal finance website The Balance has outlined several factors charities should consider to know which policies suit their needs.
- Number of staff and volunteers
- Type of risks faced by the organization
- Total assets at stake in the event of a lawsuit
- Cover features and benefits