Top 5 New Enhancements in Nonprofit Liability Coverage

By Cristina Moreno | February 11, 2013

Some people hold the misconception that directors, trustees and officers of nonprofit organizations do not have a meaningful exposure to personal liability. The reality is quite the opposite. The standards of conduct and fiduciary duty of directors/trustees of nonprofits are at least as high, if not higher, than similar positions in the for-profit world.

Nearly 85 percent of nonprofits have an annual budget that is less than the average cost to defend and settle litigation against its board. Yet there is affordable insurance coverage available to protect those serving on nonprofit boards.

For many nonprofits, the cost of directors and officers (DO) insurance is under $1,000. Meanwhile, the average cost of a claim is more than $250,000.

Today, coverage enhancements available on nonprofit DO liability policies are broader than ever and can make a huge difference when a board is subject to litigation.

Today, coverage enhancements available on nonprofit D&O policies are broader than ever.

When seeking to insure the trustees, directors, officers and volunteers of a nonprofit, look at the quality of the insurance carrier (financial stability as well as claims reputation), breadth of coverage being provided and the cost. Every insurance carrier has its own nonprofit liability policy/language. The scope of coverage varies significantly. Do not underestimate the differences between one policy and another. These are legal contracts between the insurance company and the nonprofits — perceived little differences in wording can mean huge, real problems.

Here are five coverage feature enhancements currently available on the market.

Defense and Settlement

Expanded defense and settlement wording, specifically allocation wording, is important. All policies have exclusions; therefore, claims often arise that contain both covered and uncovered allegations of misconduct. A good nonprofit liability policy will cover the costs of defending 100 percent of these claims until the limits of liability are exhausted by payment of the covered loss, or the covered portion of the claim is resolved by settlement, verdict or judgment. This is referred to as “the cooperation clause,” or “hammer clause.” There are “soft” to “sledge” hammers. The difference is mainly the percentage the carrier will pay if the plaintiff makes a settlement offer the carrier wants to accept but the insured prefers to continue litigation.

Also, under the defense and settlement provision, one should seek “order of payments” coverage in case of the nonprofit’s financial meltdown. This will prioritize payment of a claim(s) so that the portion of the loss that applies to individual insureds (trustees, directors, etc.) is paid out before payment of the portion of a claim against the entity. Without the provision, the liability limit may be eroded by loss payments on behalf of the entity first, exposing the personal assets of individual insureds.

Definition of Loss

The policy should have an expanded definition of loss that includes pre/post judgment, front and back pay, most favorable venue wording, enhanced breach of contract, and final adjudication wording on the personal liability exclusions. In the past two years, frequency and severity on DO and employment practices liability litigation under the nonprofit policy has increased.

Definition of Insured

The definition of insured should include debtor in possession, domestic partners, independent contractors, volunteers and interns. Although volunteers are afforded some protection by state statutes and the federal Volunteer Protection Act, protection is limited and varies by state. And even then, there is nothing to prevent lawsuits against volunteers. Defense costs will be incurred asserting lawful immunity. Volunteers should not have to worry about defending themselves in litigation. Spousal coverage is standard, but coverage for domestic partners is often lacking.

Definition of Wrongful Act

A wrongful act should include personal injury coverage such as actual or alleged invasion of privacy, malicious prosecution, libel, slander or defamation.

An example of a defamation suit filed in 2004 against a nonprofit organization is Fashion 21 v. Coalition for Humane Immigrant Rights of Los Angeles (CHIRLA). In this case, the nonprofit was sued by the clothing retailer for calling a nationwide boycott, and issuing of a press release and website articles claiming Fashion 21 engaged in illegal business practices by contracting with manufacturers that did not pay minimum wage, overtime, or provide meal and rest breaks. CHIRLA prevailed in its defense when the suit was dismissed on appeal, but not before incurring sizable legal fees.

Additionally, with the increased use of the internet and social media, the exposure has increased. Tweets are often sent with little thought and not atypically, by younger, less judicious staff members. Defamation land mines are everywhere today.

Network Security

Nonprofit DO policies do not offer the most comprehensive network security coverage (privacy breaches and identity theft) as a standalone policy, but certain carriers offer cyber exposure endorsements. For nonprofits that collect and store personally identifiable information, a full network security/privacy liability policy is advised. For smaller nonprofits, an endorsement to the nonprofit liability policy is recommended. Social media’s role in the nonprofit sector has increased in the past few years as a low-cost, efficient and quick way to spread the word and gain recognition. Buyers should seek the added coverage when securing nonprofit liability protection.

A good nonprofit policy will include all five of these enhancements. In today’s litigation environment, enhancements can make the difference between a policy that provides solid comprehensive coverage, and one that leaves gaps that may lead to financial problems and a lost client.

About Cristina Moreno

Moreno is CEO of, an online facility for nonprofit liability, EPLI, homeowners association DO, property managers errors and omissions (EO), real estate EO and miscellaneous EO. Email: Phone: 213-293-4802.

From This Issue

Insurance Journal West February 11, 2013
February 11, 2013
Insurance Journal West Magazine

Nonprofits, Social Services & Schools; Errors & Omissions; Business Auto & Repair: Commercial Auto, Gas Stations, Service Stations, Garagekeepers Liability, Tire Dealers & New / Used Car Dealers; Bonus: The Florida Issue (Special Supplement)

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