Are capital limitations a thing of the past for nonprofits?

Not-for-profit companies with large insurance companies have been vulnerable to class-action lawsuits over the past decade. The change is closely related to the phenomenon of social inflation, or the rising cost of insurance claims due to social and legal trends.

The new reality has forced insurers to re-examine their approach to nonprofit profitability. Carriers have begun advising nonprofits to do their work more closely with their risk profile.

One expert said Insurance Business that the era of large limitations for such businesses served by a single carrier is almost over.

“Forprofits often have very large umbrellas attached to their policies,” said Stephen Cook, director of nonprofit underwriting at AmTrust Financial. He explained that many small organizations were asking for service limits that far exceeded their actual needs.

“When it started, it was common for a nonprofit to have a $10 million umbrella, (but) there was no real type of justification,” Cook said.

This “excess insurance” has indirectly painted a target on the backs of non-profit organizations. The presence of large umbrella policies has invited higher demands from claimants, driving up litigation costs and settlement figures. This is because when a claim arises, attorneys representing the plaintiffs often see an opportunity to pursue the full amount available.

“As a lawyer, his job is to do the best for my client, I'll ask for $10 million in total, or $15 million, hopefully I'll get to $10 million,” Cook said. “We need to have an honest conversation (with nonprofit clients) about how much insurance they need.”

Getting enough coverage – a wake-up call for nonprofits?

Brokers and agents play an important role in guiding nonprofits to strike the right balance between adequate coverage and avoiding excess insurance that can lead to lawsuits.

“They have to set reasonable expectations,” Cook said, suggesting that retailers should “undersell and overdeliver” when it comes to payment limits.

The emphasis is now on reconciling policy limits with the actual scale and scope of nonprofit activities, rather than simply assuming that more coverage is always better. Cook said: “It might make more sense to bring (the client) down to a limit that's still appropriate for you, appropriate for your size, but also consistent with the size of your operation.”

The discussion of appropriate coverage limits also highlighted the importance of evaluating the mission and operations of the nonprofit organization when determining insurance needs.

Different types of nonprofits carry different levels of risk, depending largely on how they interact with their clients. For example, organizations that provide services that involve direct, hands-on care, such as home health providers or substance abuse centers, are naturally more exposed to debt than those that indirectly engage clients, such as resource centers or vocational schools.

Substance abuse programs, medical detoxification centers, certain types of schools, and disaster centers are some examples of high impact facilities that often require large insurance policies also fall into this category due to the intensity of their work and the high likelihood of incidents that could lead to claims.

“The large coverage limits for one company are gone,” Cook reiterated, noting that most carriers cap basic coverage limits at about $5 million. In addition, organizations are encouraged to seek additional coverage through excess markets.

“Insurance is a big factor in this as well,” he said. Insurers also prefer to limit their exposure, especially when faced with potentially high costs associated with unprofitable claims.

How can marketers help nonprofit clients with the new reality?

Marketers must deeply understand the specific risks associated with non-profit operations, which often require a flexible approach that goes beyond a simple checklist.

“Having an agent who knows the type of business, knows how to talk to it—that's a change,” Cook said.

Different segments of the nonprofit industry also face different levels of difficulty in obtaining insurance. Some sectors, such as churches and childcare centers, are currently facing a difficult market due to high debt and asset risks, while others, such as YMCAs and community centers, are in much better shape.

However, organizations that have adopted a proactive approach to loss control will also find a favorable insurance environment, according to Cook. He encourages the industry to remain flexible and informed, ready to adjust their strategies as needed.

Ultimately, he said, the future of not-for-profit insurance lies not in expanding coverage limits but in encouraging stronger thinking among the insured. This means taking steps to prevent losses before they occur. Cook encouraged dealers to direct customers to loss control tools and information provided by carriers, which can help nonprofits identify and mitigate risks early.

“We underwrite that due diligence for the insured,” he said.

Are you a vendor working in the non-profit sector? What trends have you seen in the space? Please leave your comments below.