A RISK & INSURANCE PRIMER FOR NONPROFIT ORGANIZATIONS

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1 CLIENT UPDATE A RISK & INSURANCE PRIMER FOR NONPROFIT ORGANIZATIONS An abundance of hazard, operational, financial, and strategic risks confront today s nonprofit organizations. To achieve seamless asset protection and to reduce the cost of enterprise-wide risk nonprofits need specialized guidance and advocacy. The Nonprofit Risk Landscape Financial Risk Cost of funds interest rate risk Investment market risk Reduced contract funding Declining charitable contributions Under-reporting of fundraising costs Use of restricted funds for purpose other than original intent Hazard Risk: Workplace injuries Property damage Injury or damage to third parties Environmental liability Employee dishonesty Foodborne pathogens Travel and security risk Terrorism Use of personal or rented vehicles Professional errors and omissions Special event liabilities Strategic Risk Legal challenges to nonprofit status Loss of reputation Macroeconomic risks Stakeholder/donor relations and others Operational Risk: Business resiliency Regulatory compliance Management decisions Inadequacy of internal controls Information security Insurer insolvency Intellectual property risk Media liability Sexual misconduct liability Staff turnover Succession planning Unionization of charitable workforce Use of outside contractors/vendors Scott R. Konrad Executive Director Nonprofit Practice Leader About Frank Crystal & Company Frank Crystal & Company is one of the largest privately held and family-managed insurance brokerage firms in the United States. Our company is headquartered in New York City, with 400 employees throughout our ten national offices. As the alternative in insurance brokerage, Frank Crystal & Company provides industryleading insurance services, solutions, and counsel to corporations as well as individuals. The company provides a highly consultative approach, leveraging its insurance advisory, claims management, risk control engineering, and administrative expertise to the benefit of its clients. Spring 2012 frankcrystal.com

2 The Discipline of Risk Management Commercial insurance is a valuable risk financing tool best employed in combination with other practical risk management strategies including: Avoidance & Reduction to avert and mitigate sources of loss Transfer through contractual hold harmless and insurance covenants that deflect risk to other parties Retention absorbing a level of loss which is reasonably predictable and affordable. Within the context of holistic risk management, insurance effectively becomes a court of last resort used to finance risk that cannot be fully avoided, reduced, transferred, or retained. The best commercial insurance program is one thoughtfully designed, aggressively negotiated, and diligently managed to address the broadest spectrum of risk exposures, provide ample protection, and maximize value. Nonprofit Insurance Solutions While nonprofit risks and insurance needs naturally vary by organization, the following areas deserve careful consideration: Core Protection: Vital for virtually any nonprofit organization, regardless of type or size Exposure Damage to tangible property and ensuing extra expenses and/or loss of business income Civil liability for bodily injury damage, or property damage to others Statutory responsibility for workplace injuries and civil liability under common law Catastrophic civil liability beyond the limits of basic insurance policies Loss through criminal acts, including employee dishonesty, computer fraud, funds transfer fraud, theft, burglary, robbery, acceptance of fraudulent money orders or counterfeit paper currency, and depositor s forgery or alteration Civil liability for management actions, including employment practices offenses and fiduciary responsibilities associated with group health and welfare plans Property insurance Insurance Remedy Commercial General Liability (CGL) insurance Workers Compensation & Employer s Liability insurance Umbrella/Excess Liability insurance Commercial Crime insurance Management Liability insurance, including Directors & Officers, Employment Practices, and Fiduciary Liability lines Spring 2012 Page 2 of 5

3 Specialty Protection: May be necessary depending on the nature and extent of a nonprofit s programming Exposure Civil liability for errors or omissions in the provision of professional services counseling, medical, pastoral, legal, and other specialties Civil liability for sexual abuse, molestation, or exploitation of vulnerable persons, including claims of negligent recruitment, training, supervision, and retention. Civil liability for libel, slander, defamation, copyright or trademark infringement, plagiarism, and piracy of other intellectual property arising through publication (oral, written, broadcast, and electronic) Disruption of the organization s IT network, damage to data, associated loss of business income, civil liability for breach of personal identifiable information or damage to others digital assets Civil liability for bodily injury or property damage arising from pollution, mold, or microbial matter, including remedial costs Damage to the organization s property abroad, responsibility for workplace injuries occurring abroad, and civil liability for bodily injury, property damage, or personal injury occurring abroad Business travel accident and sickness, including emergency medical response; injury to students, campers, and athletic participants Actual or threatened kidnap, ransom, extortion, hijacking, and related risks including political detention, emergency political evacuation, Confiscation, expropriation, or nationalization of assets by foreign governments, revocation of operating licenses, currency inconvertibility, political violence and war, and other risks of a political nature Insurance Remedy Professional Liability insurance Sexual Misconduct Liability insurance Media Liability insurance Network Security & Privacy Liability (Cyber Risk) insurance Environmental Liability insurance Foreign Property & Casualty insurance, including Foreign Property, Employer s Responsibility, General Liability, and Auto Liability lines. Note: Local insurance requirements vary by country and nonadmitted (alien) insurance is strictly prohibited in some jurisdictions. Special Risk insurance Special Contingency Risk insurance Political Risk insurance Spring 2012 Page 3 of 5

4 Taking Charge of Your Risks: A Practical Strategy We advocate a systematic approach including the following elements: Thorough risk identification, drawing upon the expertise of a cross-section of senior executives familiar with the organization s operations, finances, and governance Risk assessment and measurement, utilizing historical loss information and available industry benchmarking, as well as engaging the same corporate executives to consider the direct and indirect effects of risks upon the organization Consideration of measures that avoid and reduce loss, including property conservation and life safety programs, financial controls, human resource policies, and governance guidelines Review of key contracts (e.g., leases, purchase and sale agreements, contracts for specialized services such as construction, catering and event management, technology) to deflect risk to others wherever possible and ensure that the organization s own insurance program accommodates risk assumed by contract Examination of the organization s claims history to determine financial loss thresholds that can be reasonably predicted and assumed from the organization s treasury to reduce reliance on commercial insurance Development of a comprehensive insurance portfolio to safeguard the organization s assets when avoidance, reduction, transfer and retention strategies fall short Partnering with an expert corporate risk advisor and insurance broker. Engaging the Right Insurance Advocate Selecting an insurance broker and risk advisor is, in many respects, like choosing any other professional service provider. While cost is an undeniably important factor, the foremost consideration should be a firm s ability to understand your business and to create cost-effective, value-additive solutions for the risks that confront it. There are two basic approaches to broker selection: a traditional marketing competition, in which multiple intermediaries canvass the insurance marketplace to produce actionable premium quotations; and the conceptual selection process, through which multiple firms are screened and interviewed against various qualitative criteria, with a winner ultimately chosen to use the entire marketplace on its new client s behalf. Following are the characteristics of each strategy. Marketing Competition Pits multiple brokers against each other to quote Risks fragmenting a limited insurance marketplace for nonprofit risks Transactional focus emphasizes going-in premium instead of best qualification to manage long-term cost of risk May result in mismatch of the insurer/broker to the organization s needs Process must be carefully managed Demands thorough post-marketing analysis to compare offerings Conceptual Selection Results in selection of a single broker to represent the organization s interests Focuses on reducing long-term cost of risk Places greater weight on broker s resources and capabilities as a risk management partner Promotes consistent message in marketplace Maximizes negotiating leverage of the controlling broker Broker shoulders most of the work clean analysis Spring 2012 Page 4 of 5

5 Assuming a preference for the conceptual brokerage selection process, the organization must establish its selection criteria. Factors to consider include: Experience length of time in business, industry segment concentration, professional and educational credentials of frontline service personnel Scope and quality of market relationships number, diversity and financial stature of the firm s insurance company trading partners, and volume of business placed. Is the firm an agent (i.e., of the insurer) or a broker (accountable to the buyer) Creativity and resourcefulness the level of intellectual capital and ingenuity to offer fresh, tailored solutions instead of off-the-shelf products Execution measurable results achieved for similar clients Availability of value-additive services internal risk control, claim management, risk financing, and other specialized resources to reduce loss costs and optimize commercial risk transfer Client satisfaction client retention rate and references Cultural fit compatibility of the firm s business model and people with the organization s own Compensation type (commission paid by insurers or fee-for-service) and amount, willingness to consider multi-year and/or performance-based compensation arrangements, acceptance of supplemental compensation from insurers that could create conflicts of interest with the organization s own. The formality of the selection process (for example, use of a structured Request for Proposal) is a simple matter of preference and is often guided by an organization s professional procurement policy. We recommend being as forthcoming as possible in sharing copies of in-force insurance policies, exposure and loss data (subject to a nondisclosure agreement, if necessary to promote complete comfort), as greater transparency during the selection process is generally rewarded in more substantive structural recommendations, targeted service offerings, and fairer compensation proposals. A brokerage change may be transacted at any point during the policy year and does not need to coincide with the contract anniversary. In such an instance, the new firm is designated Broker of Record (by notifying insurers using standard verbiage reproduced on the organization s letterhead) and all incumbent insurer relationships are left intact. After a short right-of-rescission period, insurers recognize the new intermediary as the focal point for all future business conducted on the policyholder s behalf. Conclusion Today s global risk environment is dynamic and complex and buying insurance alone is no longer an adequate defense. A nonprofit organization must proactively identify, assess, and address the myriad threats to its wellbeing using a combination of strategies to achieve the lowest cost of risk. A knowledgeable, resourceful, and client-focused corporate insurance broker and risk advisor can be one of the organization s most powerful resources and most valuable strategic partners not merely a vendor. Thoughtful selection based upon the firm s proven ability to fill a value gap and its compatibility with the buying organization s mission, culture, personnel, and specific service requirements can ensure a successful relationship that will position the organization on the leading edge of risk and safeguard its assets for years to come. All content provided in this communication is based upon information which we believe to be reliable and should be understood to be general insurance information only. It is not intended to be taken as advice with respect to any individual situation and cannot be relied upon as such. It is further not intended to be legal or tax advice. In compliance with IRS requirements, should anything in this communication be understood or believed to be U.S. tax advice (although nothing contained herein is intended as such), the reader is hereby informed that no such advice is intended or written to be used by any taxpayer for the avoidance of U.S. tax penalties. Individuals should consult with the professional legal or tax advisors in the event they seek legal or tax advice. Spring 2012 Page 5 of 5