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Liability Insurance for Small
by Community Consulting Associates
Summary: A nonprofit organization should consider getting liability insurance in case it is sued. It should consider property insurance to pay for loss of things it owns. A business owners policy, a package that includes both, is sold at discounted rates that may make it a good deal even if the organization owns nothing more valuable than its files. An organization with employees may be required by law to have workers compensation insurance - and may want it even if not required.
Liability insurance protects against two kinds of financial risk: it pays damages for which the organization is found liable, and it defends it in court if it is sued. A housing repair or painting project, a sports program for youngsters, a drop-in facility for the aged or disabled, a field trip or entertainment program - almost any activity that can result in serious injury can result in lawsuits and liability, despite the precautions of trained staff and dedicated volunteers. A public statement can result in a libel or slander suit. An employment relationship gone sour can result in a civil rights or wrongful discharge suit.
Even if there is little reason to blame the nonprofit organization, most competent lawyers will name as a party every individual and organization potentially involved. If the injury occurred at someone's home, the resident should be defended by a homeowners-insurance carrier. Any contractor or other business involved should have insurance. However, if a small nonprofit with no liability insurance is named in a lawsuit - even if the facts provide it with a good defense - legal costs could force it into bankruptcy. Therefore, if it can be found at an affordable price, liability insurance is recommended for every active nonprofit organization.
Liability insurance is often sold in packages that combine coverage against common risks, often called “multi-peril” or “commercial package” policies. Buying such a package will usually mean lower cost than if each coverage were bought separately. Whether the organization owns a building or rents, it may find the best way to get a broad package of protections at a favorable cost is to buy (1) an “owners, landlords, and tenants” policy with a “broad form comprehensive general liability” endorsement, (2) a “commercial general liability” coverage form, or (3) a “business owners” policy (despite the name, it is suitable for a nonprofit organization). Because the business owners policy includes very broad coverages at discounted rates, it may be the best choice, if available. If the organization neither rents nor owns its own premises-for example, a neighborhood association operating from members’ homes and meeting in community facilities-it may be offered a commercial general liability policy, but even if the organization has no property to insure except its records, it may pay less for more coverage with a business owners policy.
Organizations concerned about liability arising from the work product of their employees or volunteers should look into a “products/completed operations liability coverage form” (included automatically in a business owners policy).
Michigan law allows a nonprofit organization to modify its articles of incorporation to give partial immunity from lawsuits to its volunteer directors and officers, and also to other volunteers. Language to claim this liability limitation can be found in the “Sample Michigan Articles of Incorporation: 501(c)(3) Nonprofit” memo, free from Community Consulting Associates (please send a stamped, selfaddressed #10 envelope with your request). Because this provision does not protect these volunteers from all personal liability, some organizations buy a “directors and officers” insurance policy for that purpose; see section 4 of this memo for some sources. Whenever possible, policies should be written on an “occurrence” basis (which covers losses from all injuries that occur during the period the policy is in effect, even if the claim or lawsuit surfaces much later) rather than a “claims made” basis (which pays only for claims that occur and are filed during the period the policy is in force). Claims made policies can be much cheaper, but provide much less security.
Even if the organization feels its principal risk is during the limited period of a project, it should buy a year-round insurance policy.
Of course, an organization that owns or leases vehicles must also have Michigan no-fault vehicle insurance, and should consider the modest extra premium to raise liability limits to $500,000 or $1 million. To cover the exposure of volunteers driving their own vehicles on the organization’s business, it can add the endorsement titled “social service agencies – volunteers as insureds.”
Contracts and grants from government agencies may require a minimum amount of liability insurance, often $1 million. If there is no specific requirement, a nonprofit organization is wise to get at least $100,000 of liability coverage. Some economical packages provide $300,000. Higher amounts - $500,000 or $1 million or more - often cost little more. The amount to buy is partly determined by cost and partly by the risks the organization sees in its work. Providing day care to children creates more risk than making grants to help others deliver services. Insurance costs proportionately less for larger amounts, so it would be a good idea to get quotes on $100,000, $300,000, $500,000, and $1 million - denominations in which insurance is commonly written - and judge whether the additional cost justifies getting more coverage. For slight additional cost, it is possible to get an “annual aggregate limit” at least twice the basic limit, providing protection if there are several large claims in the same year.
A basic insurance package protects the corporation and its staff from financial liability for a wide variety of risks, from a visitor to the office breaking a bone by tripping over an extension cord to negligence during work on a house that results in its burning down. Sometimes a policy covers, at the same cost or a modest additional cost, libel and slander, some protection for directors and officers from the organization's liabilities,1 and even nonowned automobile use (the corporation's risk if it is named as a defendant when a staff member or volunteer has an accident while using a personal car on organization business).
Although the cost is greater, it is preferable for a policy to be written on an “all risk” or “special” form rather than the less comprehensive “named peril” basis. Property insurance should cover repair or replacement costs caused by fire, storm, theft, and most other risk to the building (if owned), to leasehold improvements (if rented), and to contents, including furniture and equipment (extra-cost provision may be needed for electronic equipment like computers or other expensive items). A separate policy or rider may be needed to cover risks of employee dishonesty (“bonding”). Professional liability (often called “malpractice” or “errors and omissions”) insurance is virtually essential if the organization provides its clients with the services of physicians, attorneys, or other professionals. Separate insurance may be required to cover employee injuries; see section 5 below.
Liability insurance premiums are usually based primarily on a rate multiplied by the amount of space owned or occupied, annual payroll, gross receipts, or number of members – or some combination of these. If these factors are quite small, a minimum premium applies. A small nonprofit organization without unusual risks may be able to find a basic insurance package (not including vehicle coverage or workers compensation) for a minimum premium that may be as low as $150 to $300. Organizations whose work involves greater risk or more people should expect to pay more-possibly much more. Beware agents who offer low premiums based on unrealistic salary or space figures; major retroactive premium increases may occur when actual figures emerge after an audit or personnel change.
Talk both with independent agents (those who sell several companies’ insurance) and “captive” agents (who represent only one insurance company). Start by asking for a “business owners” policy. However, it isn't always easy for a relatively small organization to find an affordable insurance policy. Because many agents don't represent a company that is interested in selling a policy to a small nonprofit, or can't make much profit from serving a policyholder whose size and risk justify only a minimum premium, they may show little interest in serving a small nonprofit. Some will quote absurdly high rates to discourage the unwanted business. Some agents are so unaccustomed to handling such business that, when the policy is declined by the companies that license the agent (the “admitted” companies authorized by the Commissioner of Insurance to do business in Michigan), they quote high rates from “surplus lines” carriers (out-ofstate insurance companies that specialize in high-risk policies).
In fact, many nonprofits have gotten comprehensive coverage at fair prices from the established Michigan insurance companies and from national companies that do a lot of business in the state. State Farm, a respected national company, often quotes excellent rates to low-risk nonprofits, and Auto Owners and Citizens Insurance, both Michigan based, may charge a little more but provide more comprehensive coverage. However, it may take some persistence to find an agent willing to help you with a small policy. If inquiries with local agents - starting with the one who sold the organization its workers compensation or other coverage - prove ineffective, here is a strategy suggested by one insurance agent. Call a local civic or service organization (such as the Rotary, Lions, or Kiwanis club) and ask who handles its insurance; many insurance agents join service organizations and most such organizations, quite naturally, buy their insurance from their own members. Then, knowing that this agent belongs to a nonprofit organization devoted to community welfare and has experience getting insurance for it, ask whether he or she is willing to help your organization get its insurance.
Because nonprofit organizations sometimes have difficulty finding commercial sources of suitable and affordable insurance, nonprofit associations have attempted to locate or create specialized insurance programs for them. For information about such programs, call: (1) Lary Wells, Michigan League for Human Services (MLHS), 1115 S. Pennsylvania Ave., Suite 202, Lansing, MI 48912, phone 800/837-5436 or 517/487-5436, fax 517/371-4546; MLHS has arranged for group health coverage for employees of nonprofits through Blue Cross and Blue Shield of Michigan and Blue Care Network, which may provide more benefits and sometimes lower cost than small nonprofits can get elsewhere, and it serves as an agent for liability, workers compensation, directors and officers, and employee benefits coverage through its for-profit subsidiary, Michigan League Insurance Project for Nonprofits, Inc. (2) The policyholder-owned First Nonprofit Insurance Company, 111 N. Canal Street, Suite 801, Chicago, IL 60606, phone 800/526-4352 ext. 7724, fax 312/930-0375, website www.firstnonprofit.com; it offers Michigan nonprofits property, liability, umbrella, workers compensation, and directors and officers coverages tailored for nonprofits. (3) The Michigan Nonprofit Association, 1048 Pierpont, Suite 3, Lansing, MI 48911, phone 888/242- 7075 or 517/492-2400, fax 517/492-2410, website www.mnaonline.org; it works with the Alliance of Nonprofits for Insurance, Risk Retention Group (ANI-RRG), website www.ani-rrg.org, a charitable risk pool owned by and serving nonprofits, to offer general liability, automobile, directors and officers, professional liability, and other insurance to Michigan nonprofits.
Michigan law requires an employer to have workers compensation insurance if it regularly employs three or more persons at one time, or if it has a full-time employee (at least 35 hours per week) during 13 weeks in any 52-week period. This insurance pays most medical and rehabilitation costs for work-related accidents and illnesses and partially replaces lost earnings, and it prevents most lawsuits for workplace injuries. Although designed primarily to protect paid employees and their employers, it may also cover board members and volunteers while doing the organization's work if they get any compensation - even, according to some rulings, a token reward like lunch or a tee-shirt. It also covers the organization’s liability if a subcontractor doesn't carry coverage for employees. So even a nonprofit organization that may not be required to have this insurance should consider getting it.
Workers comp policies can be bought from over 200 insurance companies. Rates are based on a percentage of payroll that varies with job category, minus various discounts, plus a fixed charge. (Some insurance companies insist on counting corporate officers who take an active role in the organization's work, even if unpaid, as full-time employees, at an assumed annual rate of pay, usually at least $13,000. At the 45¢ to 50¢ per $100 rate typically charged for low-risk office jobs, that adds about $58 to $65 a year per officer.) Workers comp coverage is uniform in Michigan, but service, rules, and rates vary widely. It is not unusual for one carrier to charge more than twice as much as another for the same coverage and class of work, so an insurance agent should be asked to quote the lowest rate obtainable.
There are other alternatives. In addition to those listed in section 4 above, the Human Service Association Workers Compensation Fund offers qualified Michigan 501(c)(3) nonprofits a selffunded plan that may, in time, reduce costs. For information about it, call Mary Penz, administrator of the Fund, 28177 Ryan Road, Warren, MI 48092, phone 586/582-3999, or Nancy Rice, client services manager with RSKCo, 17187 N. Laurel Park Dr., Suite 434, Livonia, MI 48152, phone 734/953-4556. Organizations with poor loss experience or unusual risks (this often includes organizations that work with volunteers) may be rejected by private insurers, forcing them into the Michigan Workers’ Compensation Placement Facility, an assigned-risk pool whose rates are usually higher than those in the regular market. Free guides to shopping for and using workers compensation insurance, Michigan Business Guide to Workers’ Compensation (June 2002) and An Overview of Workers’ Compensation in Michigan (May 2002), are available from Bureau of Workers’ & Unemployment Compensation, P.O. Box 30016, Lansing, MI 48909, phone 888/396-5041 or 517/322-1195.
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About the Author:
Community Consulting Associates specializes in helping nonprofit organizations with financial management, government reporting and tax requirements, media and government relations, issue development, research, and writing. CCA has probably helped more start-up nonprofits than anyone else in Michigan to incorporate, draft bylaws, and apply for tax exemption (with a 100% approval record). Information about services, publications, and rates is provided on request.