| by Ross Haight There's a lot to consider when evaluating the potential business risks of non-profit organizations. Emerging technology-associated risks, combined with traditional risks such as fire and theft, makes managing your exposures a daunting task. To take some of the mystery out of the process, this article takes a "plain language" approach to examining some of the more common insurance coverages used to manage risk. There are also a number of questions you can ask yourself and your insurance advisor to accurately assess your association's insurance needs.
Insurance is a financial tool that enables an association to manage the financial risks that every enterprise faces in its _day-to-day activities. As such, it is part _of a holistic approach known as risk management.
The concept of risk management is quite simple. It's the ability to recognize and assess the type and potential effects of your risks; determine whether these risks can be eliminated or reduced and, if so, what effect that reduction or elimination will have on the enterprise's ability to perform its function. It also establishes appropriate means of financing the remaining risks to protect the assets of the enterprise. Insurance is the most common method of transferring risk for financial security.
Many of the risks facing associations are similar to the for-profit sector — fire, theft, weather emergency, automobile accident and civil lawsuits — to name a few. These risks can be addressed in the vast majority of cases with readily available insurance products. A "typical" portfolio of insurance protection will contain all or most of the following, in one or more insurance policies:
Property Insurance
"All Risks" property insurance covers buildings, equipment and stock, computer hardware and software, valuable papers and records, accounts receivable, property in transit, property on exhibition and some type of time element coverage. Time element refers to financial loss that occurs as a consequence of physical loss or damage to property. The most common type — business interruption insurance — pays the ongoing expenses and the profit of the business that can not be earned because of the loss. However, a profit component is not necessary to make this coverage worthwhile; it also covers extra expense that must be incurred to continue normal operations. Extra expense can be insured separately, as it usually is for a non-profit organization.
Key Questions to Ask:
Have I properly assessed and insured the value of the various types of property the enterprise owns or uses?
Is it insured for replacement cost or actual cash value, and was this decided appropriately?
Where are the various types of property insured — only at the declared location, or anywhere else that it may be used or located?
What happens to our operations if there is a significant property loss — will we lose income or incur extra expense to continue operations?
Crime Insurance
Employee fidelity, money and securities, counterfeit currency, credit card forgery and computer/electronic funds transfer fraud are common crime coverages. The critical coverage for most buyers is employee dishonesty — usually called fidelity. This insurance protects against the risk that one or more employees, and perhaps non-employees as well, might convert the assets of the enterprise improperly for their own use or for other purposes (e.g., charitable giving). A common error made by buyers is to assume that only enough insurance is required to cover a one-time act of dishonesty. In fact, employee dishonesty is often made up of any number of small acts over time (often a long time) which, when discovered, add up to a significant — sometimes crippling — loss to the enterprise. Computer/electronic funds transfer fraud coverage is not always part of "standard" crime insurance packages, but it is of growing concern to many organizations. It covers against the risk that one or more non-employees might use electronic means to divert the assets of the enterprise, and is the most easily obtained protection against the emerging risks of the electronic world.
Key questions to ask:
What is the probable worst-case scenario in the event of long-term employee dishonesty and is there a sufficient amount of insurance against it?
Do we keep significant amounts of money and/or securities on premises or is money transported by employees, by mail or by others?
Are these amounts reasonable and necessary, and are they properly insured?
Do we use corporate credit card accounts and are we liable for their use if forged?
Are we at risk for loss of money or property by fraudulent interference with our computer systems or funds transfer systems?
General Liability Insurance
General liability insurance is coverage against the civil liability of the enterprise and its personnel for loss or damage to others. Coverage is for bodily injury to others or physical loss or damage to their tangible property. It should also extend to personal injury (libel or slander and other risks, such as false arrest and wrongful eviction) and advertising injury. Advertising injury covers similar risks that flow from advertising activities by or for the buyer. One important note is that many insurance policies eliminate coverage for publishing and broadcasting activities, and this can be a critical exposure to loss for an association.
Other risks that this policy covers include liability for injury to employees, but usually only those employees subject to Workers' Compensation. Care must be taken to ensure that optional employer's liability insurance is in place if any employees are not subject to Workers' Compensation. Other vital coverages are non-owned automobile liability insurance and its contractual liability endorsement. This covers liability for the use and operation of rental vehicles and other non-owned autos, such as delivery vehicles, as well as the liability of the enterprise for employees' vehicles used in business (note that the employee and any owner of the vehicle is not covered in this case).
Tenant's legal liability is another extension that is noteworthy. If you do not own (or are not responsible for insuring) a building, you are likely a tenant in a commercial building. Tenant's legal liability can insure your liability for damage to the occupied premises as a result of fire. Your coverage would be more complete to take the "all risks" option. This coverage also can and should be portable — that is, written on a "blanket basis." For example, it will then cover hotel rooms or exhibition space occupied in the course of association activities.
Another type of insurance policy that is suited and available to the non-profit sector, is directors' & officers' (D&O) liability coverage.
Non-Profit Directors' & Officers Liability
D&O coverage insures against the financial consequences that might arise from a "wrongful act" of the enterprise, its directors, trustees, officers, employees, committee members and volunteers. A "wrongful act" can have a broad definition including defamation, breach of duty, neglect, error, omission, misrepresentation, misleading statement, other acts and most importantly, any matter claimed against any individual because of service in that capacity with the association. In essence, it is management errors and omissions insurance against claims brought by suppliers, government entities, employees, members, suppliers and others. With a few minor exceptions, it generally doesn't cover what's included under general liability. It is usually written on a claims made basis — meaning insurance only applies while a valid insurance policy is in force. It normally covers defence of claims within the amount of insurance, not as a separate amount. It should extend to your spouse, heirs and estates, as it really is a form of personal liability insurance. It does not cover the return of improperly acquired funds in most cases, nor professional services (such as legal or accounting services), nor many breach of contract claims, or pollution. It does cover claims for mismanagement of assets, failure to ensure proper accounting, including tax accounting, personal liability for tax not paid by the enterprise, and many types of employment relations claims. For example, one claim against a non-profit organization resulted from it allegedly misrepresenting prizes awarded at a charity golf tournament.
Key questions to ask:
Does the association provide professional services for its members or others?
Do we apply principles of governance and accountability that are appropriate to our responsibilities and capabilities?
What do the bylaws of the enterprise and applicable governing legislation say about indemnity and the power to purchase insurance of this type?
Is the amount of insurance carried sufficient (keep in mind that the amount of coverage includes defence costs)?
While there are many other insurance products available, including automobile insurance, professional liability insurance, insurance for e-commerce and cyber perils, this gives you an overview to begin the process of reviewing your association's risk. It should also help you prepare for discussions with your insurance advisor.
Finally, there are five key points to consider that can make your management of risk and insurance easier and more productive.
1. Apply the principles of risk management: where possible, eliminate or reduce risk, then treat the remaining risk by transferring it contractually to others (including insurance companies) and by preparing as far as possible for the consequences of loss.
2. Continually re-examine your portfolio of insurance protection. Are the values reported correctly? Do you have coverage where and when you need it? Do the deductibles make sense, neither too high for reasonable comfort nor so low that you are trading dollars with your insurance company?
3. Your insurance advisor and insurance company should be a knowledge source. Do you get various options clearly explained to you for consideration when placing or renewing your insurance? Are you provided with useful information on how to control your losses?
4. Make sure you know what to do in the event of loss. Do you have a record of whom to call and can you get through 24 hours a day? What do you need to do if you discover employee dishonesty or receive a claim for loss or damage from others?
5. Keep your insurance records in good order, including applications and other forms you filed to obtain the insurance. Retain insurance policies, especially any type of liability and crime policies in particular, as valuable papers of the enterprise forever.
Ross Haight is a Vice President with Marsh Canada Limited, Canada's leading risk and insurance services firm. With more than 20 years of insurance industry experience, Ross specializes in the design and implementation of coverages. He is an expert in insurance policy language.
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Copyright 2008 Canadian Society of Association Executives
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