Starting a Nonprofit Organization: Insurance Coverage

 In all the busyness of completing state incorporation and applying for federal tax-exempt status, an item that often gets overlooked in starting a nonprofit organization is setting up proper insurance coverages. Often an organization is prompted to obtain insurance when a third party inquires about coverage, for example, when a landlord requests to be named as an additional insured on a commercial lease agreement. However, a nonprofit organization should look into obtaining adequate insurance coverages as early on in its formation as possible to best protect its interests.

Corporate Liability Insurance:

When it comes to liability insurance, the first step is to ensure that the entity’s bylaws contain adequate language to allow it to indemnify individuals acting on its behalf from liability to the fullest extent permitted by state law. The details surrounding this vary from one jurisdiction to another, so it may be necessary to consult an attorney licensed in your state to prepare this language.  

Once indemnification language is prepared, the organization can work with an insurance carrier to obtain liability insurance tailored to the specific activities in which the organization engages. Often overlooked is the need for Directors’ and Officers’ insurance to cover the actions of the organization’s board. It is worth the extra time and effort on the front end to go over all available coverages with the carrier and carefully determine which are needed. Then, a periodic review of coverages to evaluate changing needs is advisable.

One established liability insurance is a nonprofit organization’s best line of defense for dealing with potential lawsuits. Not only will the liability insurance pay for claims of liability within the scope of coverage provided by the policy, but the liability carrier may provide and pay for an attorney’s services when required to defend against a lawsuit within the scope of coverage.

Property Insurance:

The organization also should obtain adequate insurance policies to cover both real estate and any items of personal property owned or used by the entity. Compared to liability insurance, property insurance coverage is often very affordable, especially for a newly formed entity without substantial property.

Worker’s Compensation Insurance:

Worker’s compensation insurance requirements are state-specific, so once again it may be necessary to consult with a professional in your jurisdiction to determine what is required. However, in most situations, it will be necessary to cover all employees of the organization under a worker’s compensation policy.  The policy is important in that it will cover claims by employees for any injuries sustained on the job. This insurance is not just for inherently dangerous jobs. A slip and fall can occur in an office. Any employee who travels as part of the job is at risk of injury. So all workers should be covered. Further, the organization may be subject to state penalties for not providing this coverage.

Employee Benefits:

Finally, a nonprofit organization may opt to provide health insurance, disability insurance, and life insurance as part of an employee benefit plan.

Contact Clergy Financial Resources to help you with the next steps.

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Clergy Financial Resources serves as a resource for clients to help analyze the complexity of clergy tax law, church payroll & HR issues. Our professionals are committed to helping clients stay informed about tax news, developments and trends in various specialty areas.

This article is intended to provide readers with guidance in tax matters. The article does not constitute, and should not be treated as professional advice regarding the use of any particular tax technique. Every effort has been made to assure the accuracy of the information. Clergy Financial Resources and the author do not assume responsibility for any individual’s reliance upon the information provided in the article. Readers should independently verify all information before applying it to a particular fact situation, and should independently determine the impact of any particular tax planning technique. If you are seeking legal advice, you are encouraged to consult an attorney.

For more information or if you need additional assistance, please use the contact information below.

Clergy Financial Resources
11214 86th Avenue N.
Maple Grove, MN 55369

Tel: (888) 421-0101 
Fax: (888) 876-5101


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