HOW MUCH LIABILITY INSURANCE DOES MY NONPROFIT NEED?

Unless it has the financial resources to survive uninsured lawsuits, a nonprofit needs coverage for all its insurable liability exposures.  This always includes General Liability and Directors & Officers Liability, and might include more specific types of liability depending upon the nature of a particular nonprofit’s operations (see What Are the Types of Liability Insurance?).

A nonprofit may also need liability insurance to comply with the requirements of statutes or contracts.

LIABILITY INSURANCE REQUIRED BY STATUTE

Workers Compensation

Required for employers in all 50 states.

Exemptions – Some states exempt very small employers (including nonprofits) from the requirement to purchase Workers Compensation coverage

                      STATES WITH NUMERICAL EXEMPTIONS: NUMBER OF EMPLOYEES

Fewer than 3	Fewer than 4	Fewer than 5
Arkansas Georgia Michigan New Mexico North Carolina Virginia Wisconsin	Rhode Island South Carolina Florida	Alabama Mississippi Missouri Tennessee

Penalties for non-compliance, depending on the state, include fines, criminal prosecution, revocation of corporate charter, and / or imprisonment.

Compulsory Automobile Liability

Automobile liability coverage is required for vehicle owners in all states, except New Hampshire, Tennessee, and Wisconsin. In these exempt states, liability coverage is not mandatory; however, financial responsibility laws do apply.

Penalties for non-compliance, depending on the state, include fines, criminal prosecution, suspension of driver’s license, suspension of vehicle registration, and / or imprisonment.

LIABILITY INSURANCE REQUIRED BY CONTRACT

Type of Contract	Coverage Usually Required
Government Funding	General Liability, Workers Compensation, Automobile Liability and Professional Liability
Mortgages	General Liability
Office or Real Estate Leases	General Liability
Vehicle Leases	Automobile Liability
Office Equipment Leases	General Liability
Contracts for Use of Property for Special Events	General Liability (sometimes written short-term under the name Special Event Liability)

VOLUNTARY LIABILITY INSURANCE

REASONS NONPROFITS VOLUNTARILY PURCHASE LIABILITY INSURANCE

1.	To ensure that a source of recovery is available to pay for harm caused by the nonprofit’s operations.
2.	To protect board members, employees, and volunteers from personal liability.
3.	To fund corporate bylaw indemnification agreements.
4.	To attract new board members who would otherwise be unwilling to serve.
5.	To comply with board members’ fiduciary duty to preserve corporate assets.

COMMON MYTHS ABOUT LIABILITY INSURANCE

Myth	Fact
Very small and start-up nonprofits with no assets don’t need liability insurance because nobody would sue them.	Very small and start-up nonprofits are sometimes sued.  If a nonprofit is sued and has no assets or insurance: there will be no resources for legal defense costs the nonprofit may not be able to compensate someone who has suffered harm due to the nonprofit’s operations
Nonprofits don’t need liability insurance because they’re protected by charitable immunity.	The common law doctrine of charitable immunity no longer exists except on a limited basis in a handful of jurisdictions, and in no case prevents someone from filing suit against a nonprofit. Federal and state volunteer protection statutes have been enacted to protect volunteers, but have not been effective in preventing lawsuits or reducing judgments.
Nonprofits don’t need liability insurance because board members are covered under their homeowner’s policies.	Homeowners and personal umbrella policies will often cover volunteer activities, but coverage is for the types of claims covered under General Liability, and not the types of claims covered under Directors & Officers Liability policies.
Nonprofits don’t need liability insurance because board members and employees are covered by the ‘corporate shield’.	The ‘corporate shield’ doesn’t prevent lawsuits, and isn’t a defense for board members or employees directly involved in causing an injury.