Starting a Nonprofit: Insurance

In all the busyness of completing state incorporation and applying for federal tax-exempt status, an item that often gets overlooked in starting a nonprofit organization is setting up proper insurance coverages. Often an organization is prompted to obtain insurance when a third-party inquires about coverage, for example, when a landlord requests to be named as an additional insured on a commercial lease agreement. However, a nonprofit organization should look into obtaining adequate insurance coverages as early on in its formation as possible to best protect its interests.

 Corporate Liability Insurance:

 When it comes to liability insurance, the first step is to ensure that the entity’s bylaws contain adequate language to allow it to indemnify individuals acting on its behalf from liability to the fullest extent permitted by state law. The details surrounding this vary from one jurisdiction to another, so it may be necessary to consult an attorney licensed in your state to prepare this language.  

 Once indemnification language is prepared, the organization can work with an insurance carrier to obtain liability insurance tailored to the specific activities in which the organization engages. Often overlooked is the need for Directors and Officers insurance to cover the actions of the organization’s board. It is worth the extra time and effort on the front end to go over all available coverages with the carrier and carefully determine which are needed. Then, a periodic review of coverages to evaluate changing needs is advisable.

 One established, liability insurance is a nonprofit organization’s best line of defense for dealing with potential lawsuits. Not only will the liability insurance pay for claims of liability within the scope of coverage provided by the policy, but the liability carrier may provide and pay for an attorney’s services when required to defend against a lawsuit within the scope of coverage.

 Property Insurance:

 The organization also should obtain adequate insurance policies to cover both real estate and any items of personal property owned or used by the entity. Compared to liability insurance, property insurance coverage is often very affordable, especially for a newly formed entity without substantial property.

 Worker’s Compensation Insurance:

 Worker’s compensation insurance requirements are state specific, so once again it may be necessary to consult with a professional in your jurisdiction to determine what is required. However, in most situations it will be necessary to cover all employees of the organization under a worker’s compensation policy.  The policy is important in that it will cover claims by employees for any injuries sustained on the job. This insurance in not just for inherently dangerous jobs. A slip and fall can occur in an office. Any employee who travels as part of the job is at risk of injury. So all workers should be covered. Further, the organization may be subject to state penalties for not providing this coverage.