7 Things Umbrella Policies Probably Don’t Cover
February 14, 2019 Amy West
The effective management of insurable risk is critical to the financial health of a nonprofit. The traditional lines of insurance of General Liability, Property, Business Auto, Workers Compensation, Directors and Officers and Excess Liability are commonly included in a nonprofit’s insurance business.
Not everything is covered in those umbrella policies and items you would naturally believe are covered might not be safe. There are other lines of coverage to be considered including: Errors and Omissions, Crime, Employment Practices Liability, Fiduciary Liability, Business Interruption and Extra Expense, Media Liability and Cyber Liability.
Errors and Omissions (E&O) insurance covers an organization when a constituent holds the organization responsible for a service the nonprofit provided, or failed to provide, that did not have the intended outcome. Despite the qualifications, training and competency of employees, mistakes are inevitable. Take into account the lawsuit brought about when a teacher in a school for the intellectually disabled inappropriately restrains a student who is disrupting the class causing an injury.
Most E&O policies cover judgments, settlements and defense costs. Even a meritless claim will be covered by the policy so organizations do not have to pay costly out of pocket attorney fees and other court costs.
Crime insurance is a type of policy that protects in the case of theft, embezzlement and fraud. More specifically, crime insurance covers employee dishonesty, robbery, burglary, forgery and alteration. It includes employee dishonesty such as stealing cash, equipment and inventory.
Sadly, fraud exists everywhere, even within the walls of a mission-driven organization. Billing schemes, check tampering and cash larceny are prevalent in nonprofits. Crime insurance should not take the place of an organization instituting sound anti-fraud policies and procedures. However, nonprofits should acknowledge that well-orchestrated fraud schemes are costly and can go undetected for many years.
Employment Practices Liability Insurance (EPLI) insurance covers certain employment claims. EPLI generally covers claims involving workplace harassment, workplace discrimination and wrongful discharge. This coverage can also protect an organization from meritless claims brought by disgruntled employees.
Although EPLI claims might be less frequent than claims relating to “slips and falls” and property damage, they can be more difficult and costly to resolve. Even if the charges are unfounded, the cost to defend an organization can be significant. EPLI should not take the place of robust staff training focusing on appropriate workplace protocols. However, most nonprofits that have employees and volunteers are susceptible to lawsuits claiming employee-related wrongful acts.
Fiduciary Liability insurance is a type of coverage intended to protect individuals or entities from claims that they have violated their fiduciary obligations as defined by the Employment Retirement Income Security Acts of 1974 (ERISA). Examples of the programs that come within this type of coverage include pension, health, life and disability plans. Many nonprofits offer 403(b) retirement plans.
Protecting the fiduciaries of 403(b) retirement plans and similar plans can be complicated. Nonprofit board members and staff involved in any way with the management of a retirement plan are likely considered a fiduciary and can be held personally liable for what happens to the plan under ERISA. Attracting and retaining talented board members and staff are essential to the wellbeing of any nonprofit. The protection afforded by Fiduciary Liability Insurance assists in the attraction and retention of qualified board members and staff.
Do you remember those rain and wind events called Sandy and Katrina and Maria? Many nonprofits were knocked out of business for days, weeks and months, inhibiting the ability to generate income through services provided or fundraising.
Business Interruption and Extra Expense insurance protects an organization whose operations are impaired after experiencing significant property damage or loss resulting from a fire, hurricane or other disaster. Business Interruption coverage reimburses for lost income sustained while an organization’s operations are suspended. It might also cover ongoing expenses including employee salary, rent and utilities. Extra Expense insurance covers the cost of temporarily moving an organization’s operations to another location. Extra Expense reimburses for such costs as moving, space rental and the installation of computers and telephone lines.
Nonprofit managers should carefully evaluate the organization’s ability to provide vital services if a disaster renders their premises unusable.
Media liability insurance protects against a variety of situations that result from communicated information being used against an organization. Slander, defamation of character, invasion of privacy, copyright infringement, damages to intellectual property and plagiarism are often covered by media insurance.
Given their tendency to publish catalogs and display collection images online, some cultural institutions have acquired Media Liability insurance. However, for the most part, media liability coverage is often overlooked in the nonprofit community. Nonprofits that communicate regularly with the media and/or display mission related content through a website face media liability exposure and should strongly consider this type of insurance.
While cyber risk is a significant concern among nonprofit executives, like Media Liability coverage, Cyber Liability coverage is often overlooked. Cyber Liability coverage arises out of the unauthorized use of or unauthorized access to electronic data or software within an organization. Cyber Liability insurance can also provide coverage for claims for spreading a virus or malicious code and computer theft.
Typical business insurance policies only cover “tangible assets” and electronic data is not considered tangible under most traditional policy definitions. The technology landscape is constantly changing. The use of social media and cloud computing are common. Email is the business communication mode of choice and many nonprofits strive to “go paperless” by migrating paper files to electronic storage.
Cyber liability is a real and costly threat. Imagine the associated costs and reputational damages when an organization’s development officer loses a laptop containing confidential donor information, when a hacker gains unauthorized access to a database containing personal and medical information for the people an organization serves or when a virus shuts down an organization’s network for two days impairing its ability to provide mission critical services.
Not surprisingly, there is speculation that funders, bankers and suppliers in the near future will insist that a nonprofit have the appropriate level of Cyber Liability coverage. It is important that managers assess how to mitigate cyber risk.
Managers should consider the types of insurance described above when developing its insurance business plan. However, lines of insurance should not take the place of implementing and maintaining effective internal controls and sound business policies and procedures. The types of specialized coverage described above can be complex and technical.
Amy West is chief financial officer of AHRC New York City in Manhattan. Her email is Amy.West@ahrcnyc.org