4 Gaps in Coverage: Horror Stories from an Insurance Expert

Nonprofit insurance risk managers and buyers never want to think about their organizations or their leaders facing losses or being the targets of lawsuits claiming hundreds of thousands of dollars in damages. Unfortunately, the reality is that nonprofit and human service organizations are not immune from catastrophic losses or litigation. Purchasing the right types, and the right amounts, of insurance can mitigate potential damages and allow nonprofits to focus on continued operations. However, we’ve found that, when we’ve provided a coverage analysis to potential clients, too many organizations are uninsured or underinsured.

The following four common coverage gaps, featuring actual examples, illustrate the potential peril of underestimating your organization’s insurance coverage needs:

1. CYBER LIABILITY

Cyber criminals continue to target nonprofit and human service organizations of all sizes. In one notable claim scenario, a New York-based nonprofit providing health and human services found itself locked out of its own systems, the unwitting target of phishing and ransomware attacks.

When the dust settled, the out-of-pocket cost to get the organization up and running again was approximately $800,000, including the ransom, legal fees, and forensic investigation costs. Other costs related to unplanned downtime and reputation management only magnified the consequences of a problem that may not have occurred, had the organization used multi-factor authentication and a better cyber security program.

Fortunately, this organization had cyber liability coverage. Had they not, it’s easy to see how this type of event could be catastrophic.

2. ABUSE AND MOLESTATION

One nonprofit found itself facing a lawsuit alleging the organization failed to provide adequate security and supervision for students at a high school, after two students, both minors, were found on school grounds engaging in a consensual sexual act. The parents of one of the children filed suit, ultimately obtaining a high six-figure settlement.

General Liability insurance policies do not typically cover this type of claim. However, this type of scenario would be covered under “Abuse and Molestation” insurance policies when the underlying situation involved the care, custody, and control of the organization (as it did in this client’s case.) nonprofit Directors and Officers could also be targeted by this type of action, on the grounds that they failed to manage proper hiring, screening, and staffing.

The bottom line is that, absent the right coverage designed specifically for abuse and molestation claims, nonprofits could struggle to defend against and settle this type of case.

3. UNINSURED/UNDERINSURED MOTORIST COVERAGE

All too often, nonprofits are left holding costly bills when auto accidents occur – even if neither the organization nor its employees were at fault for the accident. Each state sets its own minimum requirements for auto insurance coverage. Unfortunately, the minimum amount of liability coverage required is often woefully inadequate. If multiple occupants in a vehicle become injured, expenses can quickly rise.

One of Lamb Insurance Service’s nonprofit clients found this out the hard way, after a company van carrying eight passengers was struck by another driver. While the other driver was at fault, he carried only the state-mandated minimum amount of coverage – $25,000 in this case. That meant the $700,000 claim came back to the nonprofit’s insurance policies.

The injured employees’ medical expenses were covered under the employer’s workers’ compensation policy, but the workers filed suit for damages related to pain and suffering. Unfortunately, their fleet auto insurance policy only covered up to $350,000 for uninsured or underinsured motorists claims, leaving them on the hook financially for the additional amount awarded to their injured staff.

Evaluate your organization’s appetite and ability to weather large claims, absent adequate insurance protection. Then, talk to your insurance professional about whether your current auto insurance coverage levels are sufficient.

4. CONSTRUCTION / POLLUTION LIABILITY

Another common gap relates to construction-related losses. Construction accidents may be covered under multiple types of insurance policies, depending on the facts and circumstances. For example, if a construction worker is injured on the job, the claim could come back to the nonprofit even though worker’s compensation would be the primary coverage, the insured’s general liability policy may be put on notice due to their contractual relationship with the contractor and subcontractor.

Risks can also come from failing to carefully read or understand what contractors’ insurance policies cover – and what they exclude. A nonprofit learned this first-hand when they purchased a neighboring property with the intention of demolishing it to expand operations. The structure contained asbestos, so the nonprofit engaged an asbestos remediation company. After the project was already underway, the organization realized its contractor’s indemnification agreement was weak, at best. Compounding the problem, the policy specifically excluded this type of work performed in the state where the nonprofit was located. The contract included asbestos remediation; however, their policy specifically excluded any claims arising out of this type work. In effect, these provisions meant the nonprofit was not covered. Were a loss to occur, the organization would likely be on the hook financially.

Engaging insurance professionals who work exclusively in the nonprofit and human service space can help your organization avoid winding up in circumstances similar to the organizations profiled above. Lamb Insurance Services can review your coverage and make insurance recommendations as well as provide guidance and suggestions for general risk mitigation and controls. To learn more, contact us or request a quote online today!