Alera Group, Inc.

Insurance for Nonprofits: Challenges Require Innovative Solutions

April 28, 2022

When soaring lumber and real estate costs caused Habitat for Humanity to scale back the number of houses it was building last year, billionaire philanthropist MacKenzie Scott came to the rescue with a $439 million donation, enabling the nonprofit to ratchet construction projects back up. The Habitat donation was just one example of how Scott has deployed her wealth since 2019, a period in which she has bestowed more than $12 billion in grants on 1,257 different organizations, according to a recent profile in the New York Times.  



It’s questionable whether the world would be better off with more billionaires, but the nonprofit world almost certainly would be better off if more billionaires were like MacKenzie Scott.  



Earlier this month, the Chronicle of Philanthropy reported through the Associated Press on the current plight nonprofit organizations: “Nonprofits of all kinds are getting hit hard by inflation, experts say. Price and wage increases are hurting nonprofits in multiple ways, making it harder to keep up with their own basic operational expenses while also forcing them to curtail the services they provide. At the same time, there are early signs that the burst of generosity donors showed in the first year of the pandemic may be slowing considerably.” 



The challenges don’t stop there. Even before the COVID-19 pandemic dramatically increased the need for services, nonprofits – like their counterparts in most for-profit industries – had to contend with the still ongoing hard-market conditions for Property and Casualty (P&C) Insurance. Conditions lately have begun leveling off for some industries and some lines of coverage – but not for nonprofits.  



And with legal analysts predicting a rise in lawsuits arising from organizational responses to the pandemic while cybersecurity experts forecast an ever-increasing number of attacks on businesses of all kinds, the P&C hard market afflicting nonprofits isn’t about to soften.  



At least in terms of insurance, life as nonprofits knew it three years ago is gone. For those insuring through traditional carriers, coverage is going to remain expensive and demanding, with underwriters requiring rigorous risk management programs for an application to be considered. 



P&C Market Outlook Entering 2022  



In December 2021, Alera Group published the Property and Casualty 2022 Market Outlook, a comprehensive examination of the factors behind market conditions and forecast of the P&C landscape going forward, with recommendations on securing coverage and managing costs.  



The Market Outlook includes analysis of individual industries and lines of coverage. Here’s what we had to say in the whitepaper’s section on General Liability Insurance:  



“The insurance marketplace is especially challenging for nonprofits. Costs continue to rise, coverages are becoming restrictive, and the number of carriers who want to write these organizations is shrinking.” 



We saw these factors as the most significant influences on the P&C market: 




    
  • “Steep insurance price increases and a strain on resources will make it challenging for many nonprofits to maintain adequate protection. Given budget constraints, nonprofits will need to work closely with their agents/brokers to evaluate their tolerance for assuming more risk. 

    • 
  • “The impact will vary. Price increases and availability will vary based on the organization’s geographic operating area, mission, claims history and focus on risk management. For example, some parts of the country, such as New York and Texas, are seeing higher pricing for liability coverages than other states. In the California wildfire areas, the property insurance market is limited and the prices are high. 

    • 
  • “Leadership under pressure. Many nonprofits fought hard to keep their organizations running during the pandemic while meeting the changing needs of their communities. Fast decisions, out-of-the-box thinking and new ways of delivering services were a necessity. Now that these decisions are being examined, insurers anticipate that the frequency and severity of lawsuits will increase significantly. 

    • 
  • “Expect to see increased scrutiny from insurance company underwriters. Given the range of risks nonprofits face, underwriters will be looking very closely at the activities in which the organization is involved, the potential liabilities, and policies and procedures that are in place to mitigate loss. 

    • 
  • “Cyber risk is growing. As nonprofits increase their reliance on social media for marketing, engaging stakeholders and fundraising, and more workers do their jobs remotely, their exposure to cybercrime increases. As a result, Cyber Liability is becoming a critical coverage for many nonprofits. That said, obtaining coverage can be expensive and difficult. Strong pre- and post-cyberattack procedures and employee training are must-haves from insurers’ perspectives. 

    • 
  • “Employment practices liability will continue to be a concern. Vaccine mandates, discrimination and wrongful termination, less supervision due to remote work, and staff shortages are increasing the likelihood of claims. 

    • 
  • “Coverage for sexual abuse and molestation is hard to purchase. Revisions to revivor laws have expanded the statute of limitations on sexual abuse and molestation claims. This is leading insurers to exclude or significantly cut back on this coverage. Nonprofits who serve vulnerable populations will be the hardest hit.” 



Despite the bleak forecast, there were some glints of good news: Property Insurance rate increases are flattening, and market conditions for Workers' Compensation remain stable. For Employment Practices Liability, Directors and Officers, and Umbrella/Excess Insurance, on the other hand, it was bad news across the board – unfavorable conditions for rates, availability, coverage limits and underwriting scrutiny. 



Basic Coverages for Nonprofits 



So, what’s a nonprofit to do? For any organization planning to remain functional, operating without insurance is not an option.  



Nolo, a print and digital publisher of information on business and legal topics, cites these essential components of any nonprofit insurance program: 




    
  • General Liability  

    • 
  • Property  

    • 
  • Auto  

    • 
  • Directors and Officers (D&O) 

    • 
  • Professional Liability 

    • 
  • Workers’ Compensation 



Because liability policies typically exclude coverage for claims involving abuse and molestation, it’s essential to add this coverage to nonprofits’ insurance programs, given the risk level throughout much of the industry. 



For nonprofits that sell products to the public – as many do to raise funds for their organization – Professional Liability Insurance is also a must. 



There is one glaring omission from the Nolo list – a coverage no organization doing business in today’s hyper-connected world should be without. And that coverage is …  



Cyber Insurance 



For multiple reasons, nonprofits are inviting targets for cybercriminals, as The Chronicle of Philanthropy reported in a story published earlier this year: “Nonprofits Are at Risk of Cyberattacks. Here’s What You Need to Know.” The article requires a login, but it’s well worth the few seconds it takes to sign up for a free account.  



Given the situation in Ukraine and heightened U.S. government warnings about cyberattacks from Russia in retaliation for American sanctions, these two paragraphs from The Chronicle are particularly chilling: 



“Few charities are prepared to rebuff or respond to intrusions. Roughly 70 percent of the nonprofit organizations that Microsoft works with have not conducted a basic risk assessment to understand where vulnerabilities may exist in their technology infrastructure. And a 2018 survey — the latest available from NTEN, a nonprofit that helps charitable organizations with technology — found that only 21 percent of nonprofits had plans to respond to a cyberattack.” 



Such behaviors are red-flag indicators to underwriters, signaling the message “BAD RISK!” 



CPO Magazine recently published a helpful article addressing the problem of strict underwriting and rising Cyber Insurance rates: “Follow These Best Practices to Meet Cyber Insurance Requirements and Save.” The piece details these four factors underwriters consider when evaluating an organization’s cyber-risk profile: 




    
  1. Enable multi-factor authentication across all users. 

    2. 
  2. Monitor access and increase visibility. 

    3. 
  3. Attribute actions to particular users. 

    4. 
  4. Automate alerts and responses. 



Alternative Risk Solutions 



Increasingly, organizations across industries are turning to alternative risk solutions such as captive insurance programs and risk-purchasing groups. In a captive – whether a single business or a group of like or heterogeneous organizations – the members are the insurance company, able to control costs and claims, improve cash flow, and increase coverage and capacity, among other benefits. 



In a recent article on  public housing authorities experiencing success through a captive program – “That’s Right; Nonprofits Thrive in Captives. How These Businesses Found a Home in Vermont” – the online publication Risk&Insurance reported on how the captive Housing Authority Insurance (HAI) Group created protection traditional insurance carriers were unwilling to provide. HAI Group has now been in operation for 35 years. 



“The market was hard, and there was an obvious need for the housing authority group to form,” Vermont’s director of captive insurance said of the captive’s mid-1980s formation. “The (group) was a good fit for a captive program because of their focus on the needs of the public housing authorities, and their commitment to helping the public housing authorities improve upon risk management.” 



Alternative risk solutions aren’t for everyone. For starters, forming a captive requires the upfront capital to self-insure and to transfer risk through reinsurance. But given the P&C market conditions for nonprofits, moving to a captive is an option you should at least discuss with your agent or broker. 



Next Steps 



For organizations working with traditional insurance carriers, here are some steps suggested in an earlier post on insurance for nonprofits by Alera Group colleague Joel Jarvis: 




    
  • “Start the renewal process early. Containing costs requires work. You need to give yourself time to provide the information that will enable your agent or broker to market you favorably, and you need to give underwriters time to review your proposal. 

    • 
  • “Estimate low on your expected revenue. If revenue exceeds your projection, your insurance carrier will automatically adjust for the following year, but if revenue doesn’t meet an overly optimistic estimate reflected in your rate, the carrier will not provide you with a discount. 

    • 
  • “Accompany the insurance carrier’s loss-control representative during inspection of your property. This will help if you need to contest any claim denial based on allegedly faulty safety conditions. 

    • 
  • “Be diligent in your risk management practices, beginning with vigilant hiring and employment practices. Do extensive background checks, conduct annual employee reviews and do not allow staff or volunteers to work one-on-one with clients.” 



Here’s another tip: If you already have a strong risk management and loss control program, as well as a favorable claims history, save money on premium by accepting a higher deductible.  



Finally, consider Step 6six in Bridgespan’s “Eight Steps for Managing Through Tough Times”: “Collaborate to reduce costs and expand impact.”  



Bridgespan is referring to collaboration among nonprofits, but at Alera Group, we know that collaboration is also a powerful source of good when practiced within a national insurance brokerage in conjunction with a client. With more than 130 locations around the country, Alera Group combines local service with national reach that enables our brokers to collaborate with other specialists on innovative solutions — including captives and other alternative risk solutions — customized to each client’s industry and organization. 



To contact an Alera Group agent or broker about insurance for your nonprofit, including alternative solutions such as captives, click on the link below. 



CONTACT AN ALERA GROUP NONPROFIT SPECIALIST 




About the Author 



Dave Schroer 

Senior Vice President, Risk Management 

GCG, An Alera Group Company  



Throughout his career, Dave has consulted with business owners on how to best manage their exposures to risk. This includes understanding their individual risk tolerance and constructing insurance programs, in combination with other risk management techniques, to mitigate risk. When claims ultimately do occur Dave has been a close advocate to his clients to make certain they are treated fairly in the claim adjustment process. 



Contact information:  





The information contained herein should be understood to be general insurance brokerage information only and does not constitute advice for any particular situation or fact pattern and cannot be relied upon as such. Statements concerning financial, regulatory or legal matters are based on general observations as an insurance broker and may not be relied upon as financial, regulatory or legal advice. This document is owned by Alera Group, Inc., and its contents may not be reproduced, in whole or in part, without the written permission of Alera Group, Inc.  

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