Do Nonprofits Need Professional Liability Insurance?
Many nonprofit organizations and foundations think they don’t need professional liability insurance, which is also known as errors and omissions (E&O) insurance. Instead, nonprofits typically get management liability coverage, like directors and officers (D&O) insurance, to help protect the people in charge. But that may not be enough coverage and protection.
“Nonprofits don’t pursue professional liability insurance as consistently as for-profit companies, but it’s an extremely important coverage to consider,” said Steve Barbal, national managing director and underwriter for Global Specialty at The Hartford. “There may be a misconception that some of the services and exposures could be covered within their D&O policy. However, these policies don’t typically cover professional liability claims, though.”
During the endowment or grant review and administration process, Barbal explained that nonprofit foundations and organizations can face lawsuits claiming:
- Errors in their marketing or promotion materials for the endowment or grant
- Errors in their administration of the endowment or grant
- Personal injury, such as libel or slander
- Discriminatory behavior
D&O Insurance vs. Professional Liability Insurance
D&O insurance and E&O insurance are distinctly different insurance policies:
D&O insurance helps protect the personal assets of directors and officers against claims alleging mismanagement of their organization. It doesn’t cover every kind of liability claim, though – particularly related to professional services given.
E&O insurance on the other hand, provides coverage to the insured entity and its employees for actual or alleged negligence in the professional services given to others.
Barbal said there’s likely some confusion around how D&O coverage works. He noted that some D&O policies broaden the policy definition of “wrongful acts” to include other exposures. Some may interpret this as a D&O policy also covering errors and omissions in professional services, but according to Barbal, that's not always true.
“With D&O policies, almost all of them have a specific professional services exclusion built into it,” Barbal explained.
D&O and professional liability insurance are both essential coverages for nonprofits. The coverage intent of the policies is different, and both complement each other.
What Are Some Liability Risks That Nonprofits Face?
Some nonprofits may evolve to provide additional services that they didn’t before, which can expose them to liability risks. For example, consulting with other nonprofits can put an organization at risk of a lawsuit.
Sometimes, it doesn’t even have to be a formal arrangement, Barbal added.
“You can be indirectly providing advice or guidance to other foundations at a conference as they see you’ve had success with your organization’s endowment. So, they ask how you do it,” Barbal explained. “If you enter into a consulting engagement, that enters the territory of professional services and there’s liability there.”
Foundations and other nonprofit organizations may hire vendors or contractors to help provide services.
Whether it’s referring or hiring an accountant, a lawyer or another professional to help with management or to provide services, this can put a nonprofit organization at risk of a lawsuit. Known as vicarious liability, a nonprofit can get sued due to the actions of the vendor or contractor, Barbal said.
Some foundations recently announced they would help manage another organization’s endowment. There is a liability risk here because you hired the other foundation. So, you’re potentially responsible for financial losses if your client feels you were negligent in performing your service to them, Barbal explained.
Nonprofits can face claims from recipients or applicants that the money from the endowment was not disbursed in a timely manner. Some other claims they face from recipients are if they didn’t get:
- An endowment they were entitled to
- The correct endowment
- The amount of money expected
Andrea Potetz, professional liability product director at The Hartford, said it’s not uncommon for larger foundations to work with smaller nonprofits.
"Some nonprofits don't perform their own fiscal administration. They may hire a larger foundation or organization to manage this for them," Potetz said. "You have to think about whether D&O coverage will be available when it comes to financial services. If it's a larger organization assisting other nonprofits with endowments, this is a professional service."
Professional Liability Insurance for Nonprofits: An Essential Coverage
If your nonprofit doesn’t have professional liability insurance, it’s not too late to get coverage. We know that getting the right coverage can get complicated. Our experienced underwriters have specialized knowledge in the challenges that nonprofits face.