The Nonprofit:
A nonprofit operated a bicycle library in a midsized city, offering access to approximately 200 bicycles through a low cost monthly subscription.
To expand its service area, the nonprofit entered into a one year contract with a consultant.
The contract outlined several deliverables, including identifying potential neighborhoods for expansion, surveying residents, securing donor support, scouting possible locations for storage and maintenance, and preparing detailed materials for the nonprofit’s board.
The consultant was to be paid $9,000 per month, with certain key deliverables due on a quarterly basis.
The Incident:
Six months into the contract, the consultant had not produced most of the agreed upon deliverables and had missed two quarterly deadlines. Limited progress had been made toward completing the work outlined in the agreement.
As a result, the nonprofit decided to terminate the contract
The Legal Action:
Following termination, the consultant retained legal counsel and filed a lawsuit against the nonprofit alleging breach of contract. The consultant sought significant damages related to the remaining term of the agreement.
The Coverage:
When the lawsuit was filed, the nonprofit reached out to their insurance broker to begin the claim process. However, the nonprofit learned that breach of contract claims are generally not covered by insurance policies, including those offered by Nonprofits Insurance Alliance (NIA).
When insurance providers do offer Breach of Contract coverage, it is often as a “defense-only” policy.
For example, NIA offers defense-only Breach of Contract coverage as an optional endorsement for an additional cost. Without that separate endorsement, Breach of Contract coverage is excluded from NIA’s standard Board & Executive policies.
The Result:
As a result of the claim being outside the scope of their coverage policy, the nonprofit was responsible for addressing the claim without insurance coverage for damages.
Things the Nonprofit Did Well:
The nonprofit had a written contract that clearly outlined expectations, deliverables, and payment terms.
Maintaining documentation of the consultant’s missed deadlines and incomplete work helped establish the timeline and context of the dispute once legal action was initiated.
How Can Your Nonprofit Protect Itself?
Nonprofits that rely on contracts sometimes consider how deliverables are defined, how timelines and milestones are established, how progress is documented, and how termination provisions are structured before entering into agreements.
Clear contracts, defined timelines, ongoing documentation, and legal review when disputes arise can help organizations navigate contractual relationships and respond effectively if disagreements escalate.
NIA Resources:
Although Nonprofits Insurance Alliance does not offer coverage for breach of contract claims, NIA provides educational resources that may help nonprofits navigate partnerships and collaboration efforts.
- Managing Collaboration Risks: Partnering with Confidence and Success: This free e-book includes background information and sample checklists intended to support nonprofits when working with other organizations or entities.
- Webinar: How Does the Liability Flow?: This on-demand webinar is available at no cost to NIA insured nonprofits. It discusses additional insureds and highlights the importance of reviewing and understanding certain contract provisions. Login is required.
From the Claims Files stories are for general information only. They are simplified examples and do not guarantee coverage, a defense, or any specific outcome. Some losses described in this series may not be covered.
Coverage depends on the specific facts and on the terms, conditions, and exclusions in your policy. Contact your insurance broker or agent for guidance, and follow your policy’s claims reporting procedures if an incident may involve a claim.
This story is not legal, medical, financial, or professional advice. In an emergency, contact local emergency services first. Any risk management practices mentioned are general suggestions and may not apply to every nonprofit. Follow all applicable laws, licensing rules, and reporting requirements.
