When does my non-profit need insurance?

A lot of people ask me this question. And there are a few easy answers, and then a lot of grey area. Non profit organizations, most commonly 501c3 corporations, the legal rights and duties of a for profit corporation. They can have employees, sign contracts, own properties, be sued, and most other things than any other business can do. This means that they in general would need insurance when any other business would.

There are a few very clear cut times. Sometimes the state requires you have insurance, like if the organization buys a vehicle, or if it required for a permit. Insurance could be required by a contract the organization signs. But if you’re just starting out, neither of these may apply to you.

While it’s a good idea to have property insurance if the non profit owns something of value (even if it’s been donated) there is rarely a requirement to insure it unless a bank loan is secured against it. So when do you have enough property to insure, and is it worth the money? Non profits are never running short of things to spend money on, but never have the donations or program revenues to buy everything everyone would like. If the operations of the non profit require certain property (like a building, or computers, or anything tangible), and that property could not be quickly replaced out of current funds without severely affecting operations; then there is a need for insurance. Put a little more plainly, if you own something that you need, that you can’t afford to quickly replace, it’s worth insuring.

Liability insurance works a little differently. Often, liability insurance is required by a third party like a grant maker, landlord or the like and the decision is made for the organization. But when it is not, you have to weigh the cost against the value. Liability insurance protects against some of the costs of certain demands for money and lawsuits against the organization. So if the likelihood and severity of these demands outweighs the cost of the insurance, than the choice to buy insurance is easy.

However, when an organization has no employees, and only as much money as people donate, it’s tough to spend on anything but direct program services. So, what makes a suit more likely? If the organization is perceived to have something worth expending resources to stop or take, a suit is more likely. It costs money to file a suit. But for causes of principle, people what that money back in a judgment.

When there is no other reason to buy liability insurance, the basic advise is purchase it when you feel you have assets worth protecting. We go through a very similar discussion with our larger insured’s when looking at limits. Does the likelihood of a lawsuit of that magnitude outweigh the cost of the insurance, and what assets does my organization have at risk?