Any business or organization that interacts with the public is exposed to risks. If harm is done to a person, business or other entity as a result of the activities of your nonprofit or association it can leave you open to liability. This could even include personal liability if your organization is not covered by the appropriate insurance.
It is common for for-profit businesses to have professional liability insurance, but less common for nonprofits, who often think that they don’t need this type of coverage. However, it can be extremely important for protecting the organization and the board from being devastated by a variety of claims and lawsuits.
What types of liability do nonprofits and associations have?
- Any time your organization consults and provides advice or guidance to other organizations, there is a potential for liability, even if there is no formal agreement made.
- You can also have “vicarious liability” due to the actions taken by a vendor or subcontractor that you have hired.
- If you disburse funds from an endowment, you could face liability if the funds were not handed out in the correct amounts or by the timeline promised.
- If you have employees, you face the same types of liability as any other employer in regards to hiring, firing, working conditions and more.
These are just some of the common liabilities faced by nonprofits. Any organization can also find themselves dealing with lawsuits for harassment, negligence, libel and more.
Understanding Liability Insurance
Many organizations mistakenly believe that the liability insurance they have will cover them for any and all types of claims made against their association or nonprofit. But there are two distinct types of policies and they each cover different types of claims. If your institution only has one or the other, you could be leaving your officers or your organization open to other claims that are not covered by your policy.
The two main categories of liability insurance are:
Errors and Omissions (E&O) Insurance (sometimes called Professional Indemnity Insurance) – Covers the entity itself (the nonprofit or association). Types of claims covered include malpractice, errors and omissions, negligence, defamation and governmental fines.
Director & Operator (D&O) Insurance – Covers the directors and officers and protects their personal assets. Types of claims covered include all the types of claims covered in E&O Insurance (malpractice, errors and omissions, negligence, defamation and governmental fines) but also employment liability and lawsuits and trials against shareholders, including criminal trials.
Many organizations have one of these types of liability insurance and assume that they are covered. But if you only have D&O insurance and a lawsuit is brought against your organization for say, providing bad advice that cost another organization money or a reputation loss, your D&O Insurance may not cover that. If your organization consults or provides professional advice to the public, you need E&O insurance.
On the flip side, if you have only E&O insurance and a claim is made alleging defamation, harassment, wrongful dismission or a host of other accusations against one of your board members, your insurance may not cover the costs to defend that board member. The number of different types of damaging claims that can be brought against your directors and officers is enormous. You will want to ensure that they are covered.
Most organizations need both types of insurance to fully protect their entity and members. You will need to consult with an experienced insurance provider and your attorney to confirm that you have engaged coverage appropriate to your situation. If you are a small nonprofit with low risk, you may qualify for bundling general liability insurance with commercial property insurance in a business owner’s policy, which can save you money.
The costs of defending your organization, board and directors against legal claims can be exorbitant. The liability risks are too great to take a chance of not being adequately covered in these types of situations. Contact your legal team today to review your liability insurance coverage to ensure that your leadership and your association or nonprofit are fully protected.