Insurance For My Nonprofit  

An insurance policy is a contract that defines the obligations of both the insured and the insurer. Most insurance policies contain terms that are hard to understand and policies are often written in a confusing manner. Taking the time to understand your policies is well worth the effort. Besides providing coverage, policies also assign certain responsibilities to the insured. Your failure to meet these obligations may impair the coverage your organization relies on for protection.

Every insurance policy has five parts: declarations, insuring agreements, definitions, exclusions and conditions. Many policies contain a sixth part: endorsements. Use these sections as guideposts in reviewing the policies. Examine each part to identify its key provisions and requirements.

Declarations

The Declarations or dec page is usually the first page of the policy. It summarizes key information specific to the policy. The dec page shows the insured’s name and address, the policy dates, a brief description of the business, coverages provided, coverage limits, premiums, and the forms applicable to the policy. The declarations section also contains various schedules that identify the location(s) of the insured’s operations (including values or limits), the various assigned rating classifications, the rates and rating basis, and any special property covered (cameras, fine arts, construction equipment). If the policy is on a claims-made liability form, the dec page will identify it as such, and will show the retroactive date.

Insuring agreements

The insuring agreements specify what the insurance company has agreed to pay for or to provide in exchange for the premium. Often a policy contains a section clearly marked insuring agreements, although there may be additional agreements buried in the policy. Also, the policy may call an insuring agreement a coverage and many policies include more than one coverage. For example, a commercial general liability (CGL) policy may provide Coverage A - Bodily Injury and Property Damage, Coverage B - Personal and Advertising Injury, and Coverage C - Medical Payments. Some policies, such as commercial general liability, contain separate insurance agreements for each coverage area. Policies also call insuring agreements supplemental, additional, or extended coverages.

An insurance policy begins by declaring what it covers and then proceeds to restrict, limit, and exclude coverages. For example, under a directors’ and officers’ liability policy, the insuring agreement may state that “the company will pay on behalf of the insured all loss that the insured becomes legally obligated to pay due to a claim first made against the insured during the policy period because of a wrongful act.” As you read the policy, you must research the definitions of insured, loss, claim, policy period, and wrongful act to determine if the policy will cover the incident and for whom. You cannot simply read the insuring agreements to understand the coverage. Read the entire policy and refer back to the various insuring agreements and other provisions to understand the coverages and limitations.

Definitions

Insurance policies contain many common words that have special meaning within the context of insurance. The policy identifies these words usually by bold print or quotation marks. Most policies contain a section entitled definitions where they explain the special meaning of the designated words. Since definitions may restrict or limit coverage, it is essential that policyholders read definitions carefully and seek clarification whenever a definition is unclear.

Exclusions

Every insurance policy has exclusions or policy provisions that eliminate coverage for specified exposures. Exclusions serve as a way to clarify the coverages granted by the policy. Most policies have a section entitled Exclusions. However, an exclusionary provision can be anywhere in the policy. Furthermore, an exclusion may also contain a broadening provision. For example, in the commercial general liability policy, the Aircraft, Auto, or Watercraft Exclusions eliminate coverage for the ownership, maintenance, use, or entrustment of these vehicles or vessels. However, the exclusion has five exceptions where the policy covers watercraft, such as while ashore on the insured’s premises and for certain nonowned watercraft. Or under a directors’ and officers’ liability policy a contractual exclusion may also be a broadening provision when it indicates that the exclusion does not apply to an employment practices claim. Always read the policy carefully and note the provisions that apply to your operations.

Conditions

Conditions within an insurance policy qualify the various promises made by the insurance company. The insurer does not promise to cover all losses. The company will impose certain requirements or conditions on the insured, such as premium payment or duties to follow after a loss. Another example is that the insurer promises to pay and provide other services only if the insured event occurs and if the insured has fulfilled its contractual obligations. Review the policy to identify the conditions that the organization must follow. Failure to meet your obligations can void the policy or otherwise restrict coverage.

Endorsements

Most policies also contain endorsements. Endorsements are policy forms that modify the main coverage form. Endorsements can add coverage (for example, adding employment practices liability) or they can modify the coverage by revising a definition (providing coverage for nonmonetary claims). An endorsement can also restrict or exclude coverage, for example an endorsement that excludes claims from pending and prior litigation.

Steps in Reviewing an Insurance Policy

Review the organization’s insurance policies when you receive them. Before buying any new coverage, request and review sample policies. However, many people find it difficult to fully understand the scope of coverages without considering a specific loss. One approach is to identify the risks or types of losses an organization expects to experience — an office fire, windstorm, injury (suffered by an employee, volunteer or client), auto accident, theft, or other risks. Then, determine if the policies will cover these expected losses. Ask your insurance advisor to assist with the review process. Here are the steps: 

1. Check for accuracy. Insurance companies are notorious for issuing incorrect policies. The policy may contain spelling errors, the wrong named insured, incorrect additional insureds, the wrong forms, or not include a purchased coverage. Refer any errors to the appropriate insurance agent or broker immediately. Remember that this is a contract. If an organization does not address an error, it can become a problem if a loss related to the error occurs. 
   
2. Review the rating classifications and other schedules. Check to see what rating classifications the insurer assigned to your organization. The insurer calculates the premium charge based on certain rating classifications. There can be substantial differences in the rates among the classifications. One insurance company assigned a circus rating classification to a workers' compensation policy for a nonprofit sports organization. The circus rates were much higher than the appropriate classification of outside sales and did not reflect the insured’s exposures. Ask your insurance advisor to explain any classifications that do not seem to describe the organization’s operations.
   
3. Read the policy and answer these questions. 
   • Does the insuring agreement cover each expected claim? 
   • Is there any exclusion or other provision that eliminates or restricts coverage?
   • What policy conditions must the organization comply with? 
   • Are the people or operations affected by the conditions aware of them? For example, if the policy requires that a burglar alarm always be operational, have you informed the office manager, maintenance staff, or other appropriate personnel? 
   • If the loss is covered, is there a deductible? How much is it?
   • How much will the policy pay for each loss? 
   
   An insurance contract is a complex contract with conflicting and confusing provisions. You must read the entire contract to fully understand the coverages, the insurance company’s responsibilities, and your obligations. Some insurance advisors recommend that buyers review the endorsements first to identify those sections of the main policy form altered by the endorsements. This makes the process of reading the main form easier by alerting the reader in advance to sections deleted or altered via endorsement.

During litigation based on disputes over whether coverage applies, the courts have scrutinized a wide range of policies. Unfortunately, various courts have rendered conflicting interpretations.  Most losses do not involve complex policy interpretations — the insurance company and insured quickly agree that the policy covers the loss. However, you must know your duties and responsibilities to qualify for coverage. Take the time to understand your policies. Your insurance advisor can help you with this task.

 (This document was adapted from Coverage, Claims & Consequences:
An Insurance Handbook for Nonprofits, available at www.nonprofitrisk.org.)

Liability for wrongful acts related to hiring, firing or the employment relationship, such as wrongful discrimination and sexual harassment.

Commercial general liability insurance — Covers liability exposures that are common to all organizations; a combination of three separate coverages, each with its own insuring agreement and exclusions:

• Coverage A = general liability;
• Coverage B = personal injury and advertising injury liability; and
• Coverage C = medical payments.

Insuring agreement — Part of every insurance policy; specifies what the insurance company has agreed to pay for or to provide in exchange for the premium.

Insurance policy — A legally binding contract that defines the obligations of both the insured and the insurer.

Named insured — An individual, business or organization that is identified on the policy declarations page as the insured(s) under a policy. Most policies, especially liability policies, will have insureds or additional insureds other than the named insured (such as employees, volunteers, board members, landlords), but only the named insured is responsible for premium payments, receipt of notices, and adjustment of losses.

Declarations — Usually the first page of an insurance policy; summarizes key information specific to the policy; sometimes called a dec page.

Definitions — Part of every insurance policy; explain the special meaning of the designated words (identified in bold print or set off by quotation marks) within the context of insurance.

Endorsement — Part of most insurance policies; policy forms that modify the main coverage form; changes to the policy language.

Exclusions — Part of every insurance policy; policy provisions that eliminate coverage for specified exposures.

Deductible — Amount deducted from a loss. The deductible is an amount assumed in advance by an insured as required by the insurance company or as a means of obtaining a lower premium for the coverage. Also, the amount of the loss that the insured must pay.

Conditions — Part of every insurance policy; qualify the various promises made by the insurance company.

Liability — Any enforceable legal obligation. For example, the failure to meet the duty of care of a reasonable person under similar circumstances.

Insurance — Traditional risk-financing tool used to transfer the financial hazard of risk. An insurance policy spells out what is or is not covered caused by all or specific perils (causes of damage or injury). Insurance is also a contract whereby an organization agrees to indemnify another and/or to pay a specified amount for covered losses in exchange for a premium. For many nonprofits, insurance provides the funds to pay for the nonprofit’s unexpected losses of people, property and income, while ultimately keeping the organization in operation.

Declarations — Usually the first page of an insurance policy; summarizes key information specific to the policy; sometimes called a dec page.

Accident — Unexpected or chance event. This term is frequently defined in older commercial general liability (CGL) policies.

Property — Category of nonprofit assets at risk that includes real property (buildings, improvements and betterments), personal property (furniture, fixtures, valuable papers and records, equipment, and supplies) and intangible property (copyrights, business goodwill and trademarks).

Premium — The payment for an insurance policy or bond.

Context — The environment and circumstances facing your nonprofit which affect risks and risk management efforts. For example, a nonprofit that serves vulnerable clients is exposed to a different array of risks than an organization that doesn’t. A nonprofit that has never faced an incident or lawsuit may be somewhat less enthusiastic about risk management activities. Exploring the context for risk management in a nonprofit is the first step in the risk management process.

Broker — An insurance professional/intermediary who markets and explains insurance products to insureds and prospective insureds. Brokers are typically licensed by a state to place insurance on behalf of clients (individuals and organizations) with any number of companies, while others represent a single insurer. A broker technically represents the client.

Agent — An insurance professional/intermediary who markets and explains insurance products to insureds and prospective insureds. Agents, like brokers, are licensed by state regulatory agencies. However, they are restricted in the marketing and placement of coverage to those carriers with whom they have a contractual relationship. Some agents have relationships with a number of companies, while others represent a single insurer. An agent, therefore, represents the company or companies with whom she or he has a relationship.

PERI is a nonprofit organization created in 1997 with a mission to provide practical resources to advance to practice of risk management by public entities and small nonprofit and business organizations.  PERI's web site is www.riskinstitute.org.

Risk — A measure of the possibility that the future may be surprisingly different from what we expect. Downside risk of loss and upside risk of gain.