Nonprofits Insurance Alliance

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How Does the Liability Flow? A Discussion of Contractual Liability

“In any negotiated agreement each party should be liable for the things over which they have control.”

In my previous blog, I discussed four tips for how you and your insurance broker could better work together, and one of the topics discussed was reviewing a contract with your broker before you sign to make sure there’s no problematic wording.

In recent months, one of the questions we’ve received most often from our nonprofit members and our brokers has been concerning the contracts our members are being asked to sign by their local municipalities.  These contracts cover everything from work the nonprofit is doing for the municipality (i.e. family/child services, foster care agencies, etc.) to the simple use of public space for a fundraising event.  Recently, the contract wording has become increasingly draconian, often pushing all liability onto the nonprofit, and in many cases, inappropriately so.

Many of the questions we get are about the indemnification clause in the contract.  This clause determines how the liability flows in case of a claim against the nonprofit or against the municipality. You want to make sure your nonprofit is covered in cases where there’s a claim from an error or omission on your part.  Accidents happen and things are sometimes missed, which is why you buy insurance.  However, you need to make sure you’re not being forced to cover someone else’s liability because of onerous contract language. We always recommend that our members have someone with legal expertise review any contract before signing it.  We will only opine on sections of the contract related to indemnification.

Indemnification Clauses

An indemnity agreement is a risk transfer mechanism (a contract) in which one party (the indemnitor) transfers risk from (indemnifies) another party (the indemnitee).

What exactly does that mean in layman’s terms?  The indemnification agreement attempts to ensure that liability is assigned to the person responsible for causing that claim, or through whose negligence or omission the claim has occurred.  Again, each party should be liable for the things over which they have control.

Here’s an example of a nonprofit project and a typical indemnification clause:

The city of Mos Eisley has a contract with the nonprofit Solo Foundation to provide services to the homeless to help them obtain housing.  Solo meets with the clients at their office to provide job search services, financial counseling, and prescreening for city funded housing.  The city requires all of its contractors to include the following indemnification agreement in the Service Contract:

“Consultant agrees to add the city of Mos Eisley as an Additional Insured and to hold harmless and indemnify the city of Mos Eisley, its officers, agents and employees for all claims, legal expenses or judgements which is caused by any negligence, liable act or omission of the consultant or those acting in the consultant’s behalf in the performance of your ongoing operations with respect to this contract.”

A good contract would have mutual indemnification wording where each party agrees to defend and possibly indemnify the other party for claims caused by their respective actions.  That being said, the indemnification wording above would be considered a fair indemnification clause.  We will talk about why it is fair in a bit but first we want to explain the term Additional Insured.

Additional Insured

An additional insured (AI) is a person or organization that enjoys the benefits of being insured under an insurance policy, in addition to whomever originally purchased the insurance policy (the named insured).

Here’s a real-life example:

A nonprofit hires a psychologist as a consultant to council its clients on-site once a week, in a group session. The psychologist requires, by contract, that the nonprofit add her as an additional insured on the nonprofit’s insurance policy.  On the way to a meeting, one of the clients slips on a wet floor on the nonprofit’s premises and hurts their back.  The client then sues the nonprofit and the psychologist as a result of the incident.  As an additional insured, the psychologist would be defended by the nonprofit’s insurance policy.

So why would anyone want to be added as an additional insured?  Being added as an AI helps to ensure fiscal responsibility for a claim is allocated to the party liable for that loss.  Again, people should be responsible for the things over which they have control.  In the case of our previous example, the nonprofit should have been in control of keeping a safe environment (dry floors).  The additional insured is being covered only for claims caused by the actions of the named insured to the policy.  An entity/person should only be added as an AI when there is some legal relationship between the nonprofit and that entity.  In other words, if you are not being required by written agreement to add someone as an additional insured, you shouldn’t.

In some cases, the nonprofit will want to be added as an additional insured on another’s insurance policy.  As an example, if the nonprofit has hired a contractor to do construction at the nonprofits location, it is a good idea to have that contractor, by way of a written agreement, add the nonprofit as an additional insured to the contractor’s insurance policy.

“Arising Out Of” vs. “Caused By”

What makes the above indemnification clause fair?  Well, there are a couple phrases the nonprofit should look for and try to avoid with respect to the indemnification clause.  These phrases are: “arising out of” and “sole negligence.”  Here is the indemnification clause being referenced:

“Consultant agrees to add the city of Mos Eisley as an Additional Insured and to hold harmless and indemnify the city of Mos Eisley, its officers, agents and employees for all claims, legal expenses or judgements which is caused by any negligence, liable act or omission of the consultant or those acting in the consultant’s behalf in the performance of your ongoing operations with respect to this contract.”

Now, let’s change a few words:

“Consultant agrees to add the city of Mos Eisley as an Additional Insured and to hold harmless and indemnify the city of Mos Eisley, its officers, agents and employees for all claims, legal expenses or judgements arising out of the performance of your ongoing operations with respect to this contract.”

The first version states specifically that the claim must be “caused by” the nonprofit’s negligence.  This is preferable as the nonprofit should not accept liability for things outside their control.  The second version is much broader in scope.  It could be argued, inappropriately so, that any claim or loss that happens “arises out of” the nonprofits operations.  Here is a real-life claims scenario to illustrate that point (note that the names have been changed to protect the innocent):

Good Heart Housing leases apartments and houses to ensure the availability of low cost housing for their clients.  They lease an apartment from Dick.  Dick requires Good Heart to add him as an additional insured.  In one of the apartments that Good Heart is using to house a family, there is a fire.  The fire is caused by faulty wiring that Dick knew about but didn’t fix (or tell Good Heart about).

It is clear that it was not the family’s or the nonprofit’s fault that the fire started.  Should the nonprofit’s insurance (via the indemnification clause with “arising out of” wording) reimburse Dick for the loss?

Under “arising out of” scenario, Dick could argue that this fire loss should be covered under the additional insured language because the fire was “arising out of” the nonprofits actions (renting the house).  Under the “caused by” wording, it is clear that the fire was not caused by the actions of our insured (or the family).  It was not the fault of either that the fire started.

Sole Negligence

Now let’s discuss the concept of “sole negligence.”  Here is another example of a poor indemnification clause:

The Nonprofit agrees to indemnify, defend, and hold harmless The City, its  agents,  employees  and  officers,  from  any  and  all  liability,  cost,  or expense,  including  but  not  limited  to  attorneys’  fees,  arising  out  of  or  relating to  the  performance  of  the  work,  regardless  of  whether  caused  in part  by  the  acts  or  omissions  of  the Nonprofit.    Nothing herein  shall  be interpreted as obligating Nonprofit to indemnify The City against its sole negligence or willful misconduct.

Essentially, this clause means that if a claim is the result of the City being anything but 100% at fault, the nonprofit will be held responsible.  In other words, let’s say the City is 99% responsible for a claim/loss.  The City can point to the sole negligence clause and try to push 100% of the liability onto the nonprofit. To make matters worse, it is very rare that a judge (jury) would find either part 100% liable for any claim/loss.  That is why some municipalities insist on this wording. Better wording would be to suggest that indemnification for a claim will be allocated proportionally by the contribution of either party to that claim.

In summary, there are three things you would like to see in any indemnification clause for a contract you are going to sign:

  1. You want to make sure the wording refers to claims “caused by” your actions and not “arising out of” anything. The “arising out of” wording is too broad and could lead to liability being assigned to you that is out of your control.   Don’t agree to take on liability for things outside your control.
  2. If you are agreeing to indemnify another party via a written agreement you should ask that that party agree to also indemnify you (mutual indemnification). That way everyone is liable for the things over which they have control.
  3. You should ask that any “sole negligence” wording be removed. This type of wording will almost always lead to the indemnitor being responsible for all losses.

Lastly, it is always a good idea to have your broker review any contract before you sign it to ensure you will be compliant with the indemnification and insurance clauses.

Emergency Preparedness: Weather and Natural Disasters

Chances are you’ve seen the movie Twister at least once before. If so, you probably remember the opening scene, where the father rushes his family into their home’s storm cellar as a tornado approaches, with just enough time to save them, but not himself. Even though it’s just a movie, had this been real life, the entire family may have survived had they been more prepared and had a plan in place.

The fact is, we’ve nearly all experienced some form of severe weather. Some have even faced a full-blown natural disaster, such as an earthquake. Knowing what environmental risks your nonprofit is most likely to encounter is the first step toward being prepared in the event of an emergency. And don’t just consider high impact incidents like hurricanes and tsunamis. Did you know that the National Weather Service states that extreme heat kills more people than hurricanes, floods, tornadoes, and lightning combined?

When extreme weather or a natural disaster is imminent, it’s too late to plan. Every organization should have a comprehensive emergency preparedness plan, including a section for weather and natural disasters. Besides the major benefit of providing guidance during an emergency, developing an emergency preparedness plan has many other advantages, and you may discover unrecognized conditions that could aggravate an emergency situation and can work to eliminate them in advance.

If disaster does strike, are you confident in your ability to quickly secure your nonprofits’ clients, employees, volunteers, and facilities? If not, walking through risk scenarios will help determine your readiness. Start by assessing your risk for various natural-disaster scenarios. If you’re in the Eastern U.S, you may need to prepare for hurricanes and severe winter storms. Nonprofits in the Midwest and the South are at risk for tornadoes, and West Coast nonprofits are subject to and should prepare for disasters such as earthquakes, mudslides, and wildfires.

Good emergency planning takes the cooperation of individuals across your organization. Consider building a cross-functional team, clearly defining the roles and responsibilities of each member, and once your team is in place, develop an action plan to define how your organization will respond to likely disasters. Be sure your plan includes emergency supplies, such as: non-perishable food, bottled water, battery-powered radios, first aid supplies, flashlights, batteries, duct tape, plastic sheeting and plastic garbage bags. Planning is necessary in order to avoid risks and potentially even save lives.

Additionally, be sure to know the difference between a weather watch and a weather warning. A weather watch means there is a possibility of an incident. Conditions are right for the weather, but nothing has happened yet. No response is needed other than keeping informed and being prepared. With a weather warning, severe weather has already been seen or is expected. This is serious, and appropriate actions should be taken. Your plan should take advantage of such warnings with, for example, instructions on sand bagging, removal of equipment to needed locations, providing alternate sources of power, light or water, extra equipment, and relocation of personnel with special skills.

Once your plan is in place, training is important. Your staff and volunteers need to clearly understand what to do in the event of an emergency, and be comfortable in carrying out any assigned responsibilities. Be sure to do some drills or live practice so people are prepared to respond in an emergency situation. While it’s impossible to prevent these incidents, preparation can mean the difference between temporary disruption and sustained disaster for your people and your operations.

Here are some additional resources to assist you in developing and enhancing your organization’s emergency preparedness plan:

Managing Volunteers

Did you know that many 501(c)(3) nonprofit organizations have no paid employees? Volunteers provide a critical link between nonprofits and their communities by bringing needed skills, connections, insights and resources to the organization. In some cases, they also serve as valuable public advocates and ambassadors for the nonprofit. Some organizations only have a few volunteers, while others manage hundreds of volunteers – but the fact remains that volunteers are critical to the relationship between nonprofits and their communities.

It’s important that your volunteers know what they can expect in the way of guidance and supervision, as a lack of clear directions and/or difficulty in contacting a supervisor can cause frustration and lead to mistakes. While there are many ways in which to manage a volunteer workforce, consider checking your strategies against the list below to assure your nonprofit is following the best safety practices possible:

      1. Commit to providing explicit instructions for all volunteers, as they cannot meet expectations that are unclear.
        • Similar to a job description, volunteer position descriptions typically include a list of expected duties and responsibilities.
        • It is a good practice to provide a volunteer handbook, set of policies, and/or a procedures manual. This establishes expectations and provides critical information about the organization. Clear policies and procedures can also minimize liability.
      2. Let volunteers know what they can and cannot (or should not) do. As an example, many programs specifically prohibit volunteers from offering rides to clients, or taking clients home for meals or social activities. Avoid unintended liability by providing explicit direction. Don’t assume that your interpretation of “common sense” will prevail.
      3. All volunteers should sign a volunteer waiver. If your organization allows minors to volunteer, their waiver must be signed by a parent/guardian.
      4. Any volunteers that pose a safety concern or pose a threat to your nonprofit’s clients or staff should not be permitted to continue participating as a volunteer.
      5. Volunteers should be subject to discipline leading up to and including termination of their volunteer service. Executive Directors should not be expected to welcome volunteers just because they happen to be a friend of a board member or a donor. They have to have a role with expectations agreed to in advance.
      6. Volunteer injuries need your immediate attention. If a volunteer is injured when providing volunteer service, it is important to conduct a prompt and thorough investigation. Your action plan should include:
        • Demonstrating compassion and concern for the volunteer’s well-being; determining the cause of injury;
        • Notifying your insurance broker to determine if there is any coverage available;
        • Evaluating whether future incidents can be prevented with training, equipment or other measures;
        • Evaluating the adequacy of the immediate response following the incident.
          (Were medical personnel contacted in a timely fashion?); and
        • Identifying how the organization’s response to a similar incident could be improved.

When using youth volunteers (anyone under the age of 18), you will want to think about their duties and responsibilities and whether those activities are suitable. There are several things to consider when engaging youth volunteers:

      • In opportunities where children get involved alongside their parents, you should ensure the activity is suitable and that parents are briefed about any risks. In this type of activity, parents remain responsible for their children.
      • For opportunities in conjunction with other groups (e.g., schools, clubs), we recommend working with the group leader to ensure they have appropriate supervision and insurance in place. You should still assess the risk of the activity and ensure it is suitable for the group. Your organization is responsible for ensuring the activity is safe, but the supervision is the responsibility of the group leader.
      • For individual opportunities for youth, ensure that there will be proper oversight in place as they will not be as closely supervised as they may be in one of the two options noted above. At no time should a minor volunteer be alone with an adult.
      • Any projects for which you are providing equipment, such as gloves or gardening equipment, have appropriate sizes for the youth. It’s your responsibility as the nonprofit to ensure youth volunteers have a safe, healthy and positive experience.

In addition to ensuring that volunteers are safe, don’t forget to show your appreciation on a regular basis! The importance of a simple verbal “thank you” cannot be overstated.

Remember that a volunteer is an individual who performs hours of service for you without promise or expectation of compensation. Any compensation provided to a volunteer, such as a stipend, may inadvertently convert your volunteer into an employee. It can also jeopardize the legal protection for the volunteer under the Volunteer Protection Act.

While the law provides some relief for the negligent acts of volunteers, these laws vary widely from state to state and are often misunderstood. And, don’t make the mistake of assuming that your nonprofit will be exempt from liability because its purposes are charitable, or because the person responsible for the harm is a volunteer.

Managing volunteers is similar to managing paid staff. As with your staff, volunteers expect to be provided with rewarding experiences, treated with respect, trained as needed, properly supervised, and provided with feedback. Millions of volunteers across the country support our communities through all kinds of valuable service.  And, they provide this service with an admirable record of safety.  Since inadequate or improper training and oversight is frequently the cause of an incident and/or injury involving a volunteer, we hope these suggestions will help make that record of safety even better!  Wouldn’t we all prefer to avoid incidents and injury to people and property and spend money on direct services rather than on expensive claims against the organization and volunteer?

4 Tips for a More Rewarding Nonprofit/Broker Relationship

In an earlier blog, we explained the difference between an insurance broker and an insurance company.  As discussed in that article, the broker is someone who specializes in insurance and risk management, whose role is to help the nonprofit put together an insurance program of one or more policies to mitigate the potential for financial loss from a variety of risks. Essentially, they act as a consultant to the nonprofit to understand the risks associated with the nonprofit’s mission and the types of insurance needed to cover those risks. Part of that discussion would include if there are risks that cannot be insured against.

As you begin (or continue) a relationship with your broker, here are some key considerations to ensure you are getting the best coverage for your nonprofit at the best price.

  1. Ask your broker to walk you through your policies

Part of your broker’s job is to help you understand the insurance coverages you are purchasing.  That includes understanding not only what is covered, but also what may not be covered.  The last thing you want is to have a loss and find out it is not covered or that the limits available are not adequate.  Here are a few sections included in most insurance policies to which you want to pay close attention:

Limits Section (aka Declarations or “Dec” Page) – This part of the policy shows what limits you have available to you for each accident (occurrence limit), and also for the whole policy year (aggregate).  You and your agent should review this section to make sure you have adequate limits, especially if any of your contracts require you to carry specific insurance limits.

Insuring Agreement (aka Coverage Agreement) – These paragraphs will summarize when your policy will be triggered, and who is covered.   It may also discuss when the insurance company starts and stops defending a claim.

Exclusions – This is a very important section as it details what things are specifically excluded from coverage in your policy.  You and your broker should look through this section and confirm that there are no exclusions for activities critical to your nonprofits mission or activities.

Definitions – This section defines all the key terms used in the rest of your policy.  As an example, your policy may say that it pays “Damages” for claims which occur in the “Coverage Territory.”  You need to understand how the insurer is defining Damage and exactly what the Coverage Territory is, to ensure it meets your needs. For the most part, any term in quotes or capitalized will be in the Definitions section.

Lastly, review the schedule of properties and vehicles listed in the policy to make sure everything is there that should be and nothing is missing.  More about that in the next tip.

  1. Tell your broker ASAP about any changes to your operation

This can’t be emphasized enough.  In order to ensure you have the necessary coverages in place you should, as soon as possible, tell your broker about any changes to your operations.  This includes buying or selling properties, buying or selling (or leasing) vehicles, changes in location, change to employees and adding or changing programs or operations.

Some polices give a grace period for reporting new vehicles and buildings, but not all.  You don’t want to have a claim only to realize it won’t be covered because the vehicle or property was not listed on your policy.  On the flip side, if you sell a vehicle or a property, you don’t want to pay insurance for something you no longer own.

Also, if you change operations (i.e. add a new program) you want to make sure these new operations are covered.  As an example, maybe just a general liability (GL) and a directors and officers (D&O) policy were adequate for your operations when you first started. Subsequently you added a program with children, and now you want to consider adding an improper sexual contact and physical abuse (ISC) policy in addition to the other policies you have.

  1. Don’t sign a contract without first reviewing it with your broker

Part of the broker’s job is to assist the nonprofit with risk management.  This includes helping the nonprofit review those parts of any contract they sign (as part of work they perform) that may affect their exposure to loss.

Recently, the indemnification and insurance requirements in contracts that nonprofits are required to sign have become draconian.  Specifically, municipalities all over the country have begun to push as much liability as possible off to the nonprofits performing services and work.  Quite often, the liability that the nonprofits are being asked to accept are outside of the control of the nonprofits.

As an example, many contracts have wording which require the nonprofits to accept liability for all claims “arising out of this contract from any cause whatsoever, including the acts, errors, or omissions of any person.” The argument can be made that every claim “arises out of” the contract.  This means the nonprofit may be forced to defend and possibly indemnify another party for claims caused through the negligence of that other party.  In other words, the nonprofit may be forced to pay for a loss that was not their fault and out of their control.

Your broker can help you review the insurance sections of your contract to make sure the liability flows in the correct direction.

  1. What to ask when comparing quotes from different insurance companies

Comparing quotes from different insurance companies can be a very daunting task, even for those familiar with insurance.  You must look at limits, price, exclusions, sublimits, endorsements, etc.  For those who don’t do this on a regular basis, it can make your head spin!

The first thing your broker should explain is variance in price between different quotes.  As Warren Buffett once said, “Price is what you pay.  Value is what you get.” One quote for insurance may look more attractive than another quote because it is less expensive but quite often, it is less expensive because it provides less coverage or there are hidden costs. As an example, sometimes insurance companies use deductibles and self-insured retentions (SIR) as a way to lower their own costs and shift risk to the nonprofit.

When the nonprofit accepts a deductible or SIR, they are responsible for that portion of a claim.  For example, if there is a $10,000 loss and the policy has a $1,000 deductible (or SIR), the nonprofit is responsible for that deductible and will only receive a net claims payment of $9,000. When comparing two policies, make sure any deductibles or SIRs are the same.  A policy with a higher deductible may have a lower up front cost, but may be a bigger overall “insurance spend” on the back-end.  Also make sure your broker explains the difference between a deductible and a SIR.  The latter is an “upfront” out-of-pocket cost. The former is billed back to the nonprofit once the claim is settled.

Another question to ask the broker about is claims settling philosophies between companies.  Some companies have the reputation of denying claims often and with wild abandon.  They can afford to charge less premium because they are more likely to deny claims. Their polices are craftily worded to exclude certain coverages and losses, or are silent on certain issues.  Other carriers, like the carriers in the Nonprofits Insurance Alliance Group, try to find coverage for their nonprofit members.

Lastly, you should ask your broker about the difference in commission they will receive from the different insurance companies.  Your broker is compensated by the insurance company via a commission which is part of the premium you pay.  Most brokers will advise their clients based on what is best for the nonprofit.  They want to make sure the nonprofit understands the differences discussed above and makes an informed decision.  There are a few brokers, however, who may be tempted to recommend an insurance policy from the company that will give them the biggest commission, regardless of what is in the best interest of the nonprofit.  Asking for transparency of the commission arrangements will help you understand the decision making process.

Handling Terminations of Employment

No termination should ever come as a surprise. This is a common mantra by labor, employment and human resource specialists alike, because it summarizes the topic of employment terminations so well.

Preparing to terminate an employee is no simple matter because the way an employer handles the employment relationship from the start all the way through this final event, can either set the stage for lengthy and costly litigation, or more preferably, end a relationship in an uneventful farewell.

Typically a termination follows conduct that is either so egregious, the employee is foolish not to expect a termination (e.g., theft of company property, assault on a coworker, engaging in sexual harassment), or results from a series of disciplinary measures where the employee was put on notice that continued poor performance or behavioral issues would result in further discipline or termination.

Certain misconduct may result in more immediate and severe consequences. For instance, in the event of workplace violence, sexual harassment, theft/dishonesty, or being under the influence of drugs or alcohol, it may be more appropriate to issue an immediate termination rather than use progressive discipline. Contrast this to intentional reduction in output, insubordination, or consistently late/incomplete work. These types of issues may not warrant immediate termination, but should still be documented as soon as a pattern of poor performance is noticed. Importantly, inaccurately stellar performance evaluations will do more harm than good when it comes time to defend a decision to terminate for “poor performance.”

While it may be true that the doctrine of employment-at-will is the fundamental employment relationship in the United States, meaning that without notice, an employee may quit at any time and for any reason, or an employer may end employment at any time and for any reason not prohibited by law, caution must still be taken when terminating an employee, and employers would be prudent to carefully evaluate their decision for any termination.

Managers and supervisors are often hard-pressed for time, but taking the time to clearly document misconduct or concerns will help demonstrate objectively, the reasons for discipline and/or termination.  Also consider whether policies and procedures have been explained to staff and consistently applied. Did the employer review similar incidents and apply consequences as they would for any other employee who engaged in similar misconduct? Was this employee properly trained and made aware of expectations? Were all employees, without regard to their protected class, treated the same?  If applicable, were they given the proper warnings prior to termination?

Some best practices in preparing for and conducting a termination include:

  • Ensuring credible documentation is in the employee file regarding negative performance/behavior
  • Discussing termination with direct supervisor(s) and HR
  • Being honest with the employee about reasons for termination but keeping the explanation to a minimum
  • Expecting the unexpected. Employees will react in all different ways, be prepared ahead of time for all possible scenarios.
  • Supervising the removal of personal effects
  • Scheduling a termination to minimize disruption in the workplace
  • Communicating the termination privately, but considering a witness, especially in terminations you think will be contentious on any level
  • Allowing the employee the opportunity to respond to any investigative findings or decisions for termination
  • Arranging for timely termination of access (e.g., email, computer logins, key access) to prevent sabotage
  • Communicating other housekeeping items to employees such as the continuation of benefits, when they can collect their belongings, and how you will logistically exit the room once the termination meeting ends
  • Acting swiftly and without hesitation once a decision has been made

Lastly, even those terminations that are well-documented and warranted may not be a welcomed action by employees, and the employer may want to consider severance pay in exchange for a release of claims. If an employee is litigious, a member of a protected class, has recently requested or taken a medical leave of absence (whether for physical or mental illness), filed a complaint regarding the workplace, or has disclosed a disability or need for some accommodation, employers should consider risk of a lawsuit for discrimination or retaliation. Inconsistencies applying rules to any employee will lend to a risky situation for the employer.

The EEOC prohibits consideration of race, religion, sex, national origin, age, disability or genetic information when making decisions to terminate employment.  Other laws also require employers to provide certain notices to employees following termination (e.g., COBRA) and may require that final pay and all reimbursements are made to an employee at the time of termination.

No matter the reason for a termination, employers should remember that the loss of a job could be detrimental to the employee, so it is always best to practice courtesy, compassion, respect and professionalism during the process.

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