Nonprofit Liability: Do Nonprofit Organisations Need Insurance?
Can you imagine an organisation running just to help others or for a social cause? – These amazing organisations exist and are called nonprofits or NGOs (Non-Government Organisations). These organisations’ primary purpose usually is to promote social causes or help certain groups. The business purely runs on donations, user subscriptions and investors; the money and revenue are all invested back into the business to help it run and grow.
There are nearly 10 million nonprofits worldwide that all stand for a great cause. Some types of nonprofits’ purposes include fighting for the environment, assisting the impoverished, providing services for the disabled and elderly, and so on.
However, even though they stand for a great cause and are the best organisations in the world, they have many nonprofit liability risks. Like all businesses, they can suffer financial and reputation losses due to liability lawsuits.
These nonprofit liability lawsuits can ruin the positive purpose and mission. Moreover, they can be due to many reasons, and a nonprofit may not be ready. Hence even nonprofits and NGOs must purchase a range of insurance to protect their liability and be prepared for sudden risks.
What is Nonprofit Liability?
Nonprofits’ liability is to provide the specific service they promote and focus on reaching their goals honestly. Associations must use all donations, payments, and investments to grow their organisation further and spread their mission.
Therefore, directors and investors do not gain any financial benefits from their involvement. Unfortunately, their liability can be negatively affected by negligence, breach of duty, third-party harm/damage, employee injuries, and cyber-attacks.
Each one of the nonprofit liability risks can lead to lawsuits, severe financial loss or reputation damage. Nonprofits must try their best to avoid these risks and, simultaneously, be ready for them with the following insurances.
Top 5 Insurances That Will Cover Nonprofit Liability
Director & Officers Insurance
Directors and officers are a necessary part of nonprofit organisations. They are the members that run the business and manage operations for the nonprofit. The primary duty is to ensure that the organisation provides honest services and runs as a nonprofit rather than a traditional business. Directors and officers themselves must act in good faith and put the best interests of the organisation first.
If investors believe that a director or manager is not performing their duty, they will be liable, which will also affect the nonprofit liability. For example, a director was caught stealing money from donations from a nonprofit that fed children in unprivileged schools. In this case, investors may take legal action against other directors and managers for not observing such activities and possibly being accomplices.
Nonprofits should purchase director and officer (D&O) insurance to protect directors and officers from the above nonprofit liability risks. The insurance will cover legal fees, settlements, and financial losses when the insured is held liable. However, the insurance will not cover the accused if proven guilty. D&O insurance will cover all directors and officers who belong to the nonprofit company and protect their liability.
Professional Indemnity Insurance
Most nonprofits worldwide provide services to specific groups or for a social purpose. The services can involve caring for disabled people or seniors, cleaning up beaches, teaching immigrants languages or helping the unprivileged. When they provide such services, they are liable and must provide them with care. A simple mistake or negligence by a nonprofit organisation, employee or volunteer can result in liability lawsuits.
Negligence lawsuits can occur at any point, where a party may allege that the nonprofit’s negligence and lack of care caused one harm or some type of damage. For instance, a nonprofit that provides adventure sports for mentally disabled children. During nonprofit care, the disabled child suffers a severe injury. The parents will have the right to sue the nonprofit for calming negligence of duty. In most cases, the accused is doing their best, which may not be their fault.
Nonprofit organisations must purchase professional indemnity (PI) insurance to deal with negligence lawsuits. The insurance will financially protect the organisation and the professionals involved against lawsuits and claims. In addition, PI insurance will cover the legal, compensation and settlement costs to help deal with the case. There are many variations of negligence cases where people believe nonprofits are not doing their duty or not enough.
Nonprofits do an excellent job for communities and causes, but sadly this doesn’t excuse them from cyber-attacks. In fact, nonprofits have a higher chance of being victims of cyber-attacks and having their data stolen. In 2021, more than 50% of nonprofit organisations had reported being targeted by a cyber-attack.
Nonprofits and NGOs are perfect targets for cybercriminals due to the large amount they raise for their cause. The financial data and lack of cyber security make nonprofit websites and servers easy hacks. For example, a food bank nonprofit was a victim of a business email compromise (BEC) attack in 2020. The nonprofit was tricked into paying nearly $ 1 million to a fraudulent account they thought was the construction company supplier of their new location.
Many more cyber-attacks can destroy nonprofits’ liability and what they work for. Therefore, nonprofit organisations should purchase cyber insurance to deal with cyber threats on top of high-quality cyber security. Cyber insurance will cover the costs related to damages and recovery due to a data breach, compromise payments, ransomware attack, or other cyber incidents. Nonprofits need to be more aware of cyber risks and be prepared.
Employee Compensation Insurance
Some of the money nonprofits earn is used to hire great staff to help run and develop the organisation. Most believe nonprofits run only on volunteers, but they also have full-time employees. The Nonprofit liability involves employees’ safety while they perform their duties.
Like any other traditional business, nonprofits are liable if their full and part-time employee is injured while working for the organisation. For example, this could include an employee involved in a beach clean-up who cuts his arm on glass and needs medical attention. The nonprofit organisation must pay employees’ medical bills, salary, and possible compensation if disabled.
By law in countries like Hong Kong, employee compensation insurance is mandatory if you hire even one employee. Nonprofit organisations must purchase high-quality employee compensation insurance to cover their nonprofit liability. The insurance will cover the cost related to employee injuries from injury to recovery. Nonprofit businesses can also purchase personal accident insurance for their volunteers – to cover the chance of volunteer injuries.
Public Liability & Property All-Risk Insurance
Many nonprofits rent and work in their community centre, providing charity services. They invite a large number of people to come to join, donate, and participate. The space hosts events, boarding or activities. The nonprofit is liable for the safety of anyone who enters the site and the premises themselves.
Therefore, if someone slips, falls, or is injured on the premises, they can file a case against the nonprofit. The organisation will be liable for paying compensation and settlement costs to the injured third party. Additionally, there is a chance of property damage due to sudden events, such as vandalism, fires, natural disasters and more. These repair and replacement costs can be very costly and unaffordable.
Nonprofit liability regarding their premises is why they must buy public liability and property all-risk insurance. Public liability insurance will cover the cost of claims regarding third-party injuries or property damage due to nonprofit organisation activities. Property all-risk insurance will cover any damages or loss of property linked to the nonprofit business.
Why Is Insurance Crucial to Protect Nonprofit Liability?
As nonprofit organisations, money is tight, and whatever they get deserves to be invested back into a good cause. However, it can be risky and expensive when nonprofit liability goes wrong.
Hence these insurances are the best solution to help face most possible risks that test nonprofit liability. These insurances provide financial cover, so nonprofits and NGOs do not need to dip into donations to cover lawsuits, compensation, or other related costs.
Nonprofits and NGOs should not be stressing about unpredictable outcomes, especially when they provide such wonderful services and do an excellent part for many communities and causes.
When facing liability risks, donations are never enough, and loyal contributors seem to disappear, but insurance will always cover nonprofit organisations.