Few Places to Turn

Like many other small nonprofit organizations, Families of Children Under Stress (Focus) provides vital services that help people build strong and healthy communities, assisting families coping with the overwhelming struggles of parenting children with special needs.

Founded in 1983, the Atlanta-based agency provides information, educational resources, medical equipment, and recreational and social activities. By 1989 Focus was serving about 400 parents of children with significant developmental or physical disabilities. Today it serves more than 4,500. But last year Focus was nearly forced to close its doors.

“I got a call from our insurance broker that our insurer would no longer cover nonprofits,” says Joy Trotti, associate executive director at Focus. Trotti says the broker, Hamby and Aloisio, assured her that Focus had done nothing wrong. “We had no claims the prior year and have had only three claims over the past 25 years, each around a couple hundred dollars,” Trotti says. “She said she’d find us another insurer, but the premium would go up, again.”

The cost of the organization’s annual property and liability insurance package crept up from $9,000 in 2003 to $23,000 in 2019. A few weeks later, the broker called Trotti, who braced for another significant premium increase. “She said, ‘Joy, sit down. I have some pretty bad news,’” Trotti recalls.

Every insurer the broker contacted had presented such ridiculously high rates there was no reason to justify further talks. “We have such razor-thin margins, there was no way we could possibly afford the premium,” says Trotti. “And without proof of insurance to show the churches and colleges that provide us space, we’d have no place to go. I felt sick to my stomach.”

Focus is not an outlier. Hundreds of mostly small and midsize community and social-impact nonprofits across the country have heard a similar refrain from their brokers. Most of them have received nonrenewal notices from their incumbent carriers or a policy renewal offer with sharply reduced coverage terms and conditions and high double-digit premium increases.

“I received a strange email from our independent insurance agent in October 2019 that had the name of our organization on it along with the names of 15 other nonprofits in our area,” says Marcus Metcalf, executive director of Hights (Helping Inspire the Gift of Hope, Trust and Service), a nonprofit provider of mental health services to children and teenagers in poverty-stricken communities flecking western North Carolina’s Appalachian mountains. “It said we had 90 days before we’d all lose our insurance.”

Metcalf called the agent, who said he’d need 40 days to find another carrier. After reaching out to multiple carriers, the agent told Metcalf he found a single insurer that would provide Hights’ BOP-like property and liability insurance package. The premium was $120,000, $80,000 more than what the nonprofit had paid the prior year.

“There was no way we could come up with an additional $80,000,” Metcalf says. “It was as frightening as anything I’ve ever dealt with as a community leader. We’d have to shut our doors. I was helpless.”

A Brewing Insurance Crisis Redux

The insurance crisis confronting numerous 501(c)(3) nonprofits today is nothing new for Pamela Davis. In 1989, when that decade’s liability insurance crisis produced skyrocketing premium increases in the nonprofit sector, causing dozens to shut their doors, Davis took action to create a new insurance market.

She had long believed traditional insurance markets did not understand or appreciate the risks of nonprofits that provide foster care, childcare, group homes, and other community services, causing them to be overly conservative in their underwriting and pricing. Armed with funding from the Ford Foundation, Davis used a recently passed state law to create the Nonprofits Insurance Alliance of California (NIAC). She later expanded into other states with the Alliance of Nonprofits for Insurance, a risk retention group launched with grants from the Bill & Melinda Gates Foundation and the David and Lucile Packard Foundation. Together these organizations are known as the Nonprofits Insurance Alliance (NIA).

Like other retention groups, NIA is owned by its nonprofit members, who pool their risks and are regulated by one state, California. NIA presently provides liability insurance to more than 20,000 nonprofit organizations in 32 states and the District of Columbia and requires a fronting company to offer nonprofits property insurance and automobile physical damage coverage.

Through NIA, Focus and Hights ultimately were able to acquire property and liability insurance at the same premium they had paid previously at equal or better terms and conditions. Over the past year, hundreds of other nonprofits have turned to NIA in a last-ditch effort to do the same.

“The problems so many nonprofits are experiencing are similar to what was going on in the 1980s,” Davis says. “In a two-year period between 1984 and 1986, general liability premiums increased 200% or more for one out of every four charitable nonprofits in California. They just couldn’t afford the coverage from any insurer.”

The cause of the 1980s insurance crisis was linked to soaring tort liability claim verdicts that were disproportionate to traditional claims costs. In particular, those verdicts stemmed from professional liability lawsuits alleging acts of negligence by doctors, police officers, nurses, teachers and firefighters, among other professions. Punitive and “pain and suffering” damages were especially high, forcing insurers to dramatically increase premiums or decline to write certain classes of liability insurance, like charitable nonprofits. Another significant driver was insurance companies’ poor investing decisions, which produced a shrinking surplus. As Time magazine’s cover declared in March 1986, “Sorry, America. Your Insurance Has Been Canceled.”

The culprit in the current nonprofit insurance crisis is unsubstantiated insurer concern over high-frequency, high-severity child sexual abuse lawsuits. Since 2002, 48 states and the District of Columbia have amended their child abuse statutes of limitations, extending the time frame in which victims can file a criminal or civil lawsuit. Forty-four states have eliminated the statutes of limitations to file criminal lawsuits, and 12 states have eliminated the statues of limitations to file civil lawsuits. One state, Vermont, has completely eliminated both.

“The industry is concerned about the risk of nuclear verdicts, where the jury award is disconnected from the harm done,” says Matthew Burtt, executive vice president and profit center leader at insurance broker Brown & Brown.

That risk is much in the news, with jury verdicts in high-profile sexual abuse cases involving the Catholic Church, Bill Cosby, and former USA Gymnastics and Michigan State team doctor Larry Nasser. Insurers are concerned that plaintiff’s attorneys will file a fusillade of similar claims against community nonprofits, even those without clear risks. “They’re all being swept with the same broom,” Burtt says.

This seems to be the case. “I heard through the grapevine that the term limits on sex abuse cases in my state had been lifted and that a huge wave of lawsuits was coming,” Metcalf says. ”I didn’t think twice about it, since we pride ourselves on professional and responsible services.”

Leaders at other nonprofits heard the same thing and had the same response. “My broker”—Huntington Insurance—“said one of the half-dozen carriers he reached out to after our insurer nonrenewed cited concerns over high verdicts in sexual abuse claims,” says Joe Scrip, chief administrative officer of Arc Human Services, a southwestern Pennsylvania nonprofit provider of employment, training, housing and support services for people with intellectual and developmental disabilities and mental health challenges. “I didn’t see how that applied to us and told him that. When he inquired further, four of the carriers said they no longer insured nonprofits.”

Certainly, some nonprofits have been hit with lawsuits, including the Boy Scouts of America, which declared bankruptcy this year following the filing of hundreds of sexual abuse lawsuits.

“There’s no increase in sexual abuse lawsuit frequency—just an increase in public awareness,” Davis, of NIA, says. “The industry made a similar argument 30 years ago, pointing to sexual abuse risks as a factor in making nonprofits uninsurable. We proved they were wrong. There is a heightened awareness of the issue, and it is more difficult to settle these claims for reasonable amounts, but we haven’t seen the frequency increase.”

In 1989, before beginning to insure nonprofits, Davis put together the industry’s first affirmative sexual abuse policy. She also began offering general liability insurance to nonprofits at a 25% reduction from the ISO published rates at the time. “Over time, we have increased the credit to 50% and still returned about $45 million in premium as dividends to the membership,” she says. “Clearly, nonprofits were being overcharged.”

“The insurance industry missed out on this opportunity back then, and now it is doing the same thing,” she says. “The industry underwrites nonprofit risks with a sledgehammer instead of a scalpel. They broad brush all these small and midsize nonprofits because the Catholic Church, the Boy Scouts, and a few universities get hit with lawsuits. We didn’t believe that nonprofits were risky, and we were right.”

Conflicting Views

Not everyone in the insurance industry believes there is anything close to an insurance availability crisis for nonprofit organizations. The National Association of Mutual Insurance Companies (NAMIC) cites statistics indicating that 78% of the country’s 1.56 million nonprofits are 501(c)(3) organizations, by way of pointing out that NIA’s 20,000 members are a drop in the bucket.

“We’re not saying that some nonprofits can’t find available insurance,” says Andrew Pauley, NAMIC government affairs counsel. If a crisis truly existed, Pauley says, the National Association of Insurance Commissioners (NAIC) “would be all over it.”

He’s right that the NAIC, which represents state insurance regulators, sees little in the insurance market to inspire alarm. In January 2020 testimony to the U.S. House Committee on Financial Services, Chlora Lindley-Myers, director of the Missouri Department of Commerce and Insurance, agreed the Risk Retention Act addressed a widespread insurance availability crisis in the 1980s. But today, she testified, “no such crisis exists.”

State insurance departments, she added, “have received few, if any, complaints from nonprofit policyholders indicating that they are unable to obtain the coverage they require.” Through a spokesperson, Lindley-Myers declined to elaborate further.

Davis says the director’s statements fly in the face of reality. “We spend a lot of time listening to brokers like ABD, Brown & Brown, Gallagher, Marsh, and others who deal with nonprofits every day, and what these executives tell us and have publicly stated is that their clients face an insurance crisis,” she says.

Among these brokers is Peter Persuitti, global managing director and leader of Gallagher’s religious/nonprofit practice. “There’s no question that carriers are exiting certain classes of nonprofits or the entire sector overall,” Persuitti says.

Davis emailed an August survey by NIA of 279 insurance brokers and agents, in which nearly 70% expressed difficulty finding property and liability insurance for certain classes of nonprofits. Seventy-eight percent of the respondents experienced challenges finding insurance for foster family agencies, 63% reported challenges finding coverage for animal rescues, and 65% cited similar problems securing insurance for homeless shelters.

More than half the brokers in the survey—56%—said commercial carriers are nonrenewing classes of nonprofits without regard to loss experience. Nearly two thirds—63%—of insurers offering coverage increased the premium by at least 25%. By comparison, placing insurance for other classes of nonprofits is easy. One in five brokers acknowledged problems placing coverage for trade associations, and 17% reported the same with regard to homeowner associations. 

Asked to clarify which classes of nonprofits are having these difficulties, Davis pointed to 501(c)(3) nonprofits providing direct social services to communities. New York City’s venerable Henry Street Settlement fits this profile. Founded on the Lower East Side of Manhattan by Lillian Wald to care for the poor 127 years ago, Henry Street has since become a national leader in serving poverty-stricken children and families.

“Our property and liability insurance program cost around $400,000 a year, went up 15% in 2019, and was not renewed earlier this year,” says Josephine Lume, the nonprofit organization’s CFO. “We were given no reason and had 60 days to find a solution. Our broker [Gallagher] did everything they possibly could, but the bids were nearly double our previous premium.” Like the other nonprofits, Henry Street Settlement turned to NIA for its coverage.

A Contentious Solution Emerges

Like nearly all small businesses, nonprofit organizations seek the convenience, cost-effectiveness and efficiency of buying property and liability insurance in a package of coverages. The bundled insurance programs typically involve finding and buying insurance from a single company, instead of purchasing separate premiums for general liability, umbrella, automobile and property policies.

To offer the property insurance nonprofits needed, Davis put together a fronting arrangement backed by reinsurance to absorb fire, theft, weather and automobile physical damage losses. NIA absorbs a portion of the fronting carrier’s property through its Vermont captive, the National Alliance of Nonprofits for Insurance.

It’s a complicated arrangement but one that has worked well for many years. “We do all the underwriting, billing, premium collection and claims handling, take risk, and go through all these hoops because nonprofits need us,” Davis says. “Nonprofits have a viable recourse to insurance they otherwise would not. We’re creating capacity for underserved segments of our economy where virtually none exists.”

This insurance capacity may soon be lost. According to Davis, the fronting carrier has suggested it may discontinue the arrangement, which may result in NIA’s inability to provide property insurance to member nonprofits. Based on research by Guy Carpenter, commercial carriers do not offer the stand-alone property policy in one half of a BOP form that small and midsize nonprofits need. “If we lose this fronting program, thousands of struggling nonprofits can be forced into a commercial insurance market that has demonstrated it does not consistently offer the coverages they need,” Davis says.

To obviate this possibility, she supports the passage of a bill (HR 4523), now in the U.S. House Committee on Financial Services, permitting risk retention groups to underwrite and offer commercial property insurance to nonprofits—with limitations. The legislation would bar risk retention groups from providing property insurance if three or more admitted carriers in a state currently provide stand-alone property coverage and automobile physical damage coverage in a BOP-like form.

Joel Kopperud, vice president of government affairs at The Council, which supports passage of HR 4523, said the issue before the House is one of market failure—the commercial market has not developed the appropriate stand-alone property insurance product to address the needs of small nonprofits. “NIA provides capacity for organizations that are not well served elsewhere,” Kopperud says. “They are not trying to gain some sort of edge. They need to provide essential coverages for vulnerable nonprofits.”

If the bill does not pass and the fronting carrier ends its long-standing relationship with NIA, nonprofits whose policies were non-renewed or whose premiums soared to unreasonable heights could still buy liability insurance from the risk retention group. However, they would need to buy stand-alone property insurance from the admitted market. That, Davis says, is where the problem lies.

“Insurance brokers tell us that stand-alone property and stand-alone auto physical damage on a BOP form is simply not available from commercial carriers,” she says. “Brokers can’t even find package policies to cover them in this present market. Forcing them into a search for stand-alone property insurance would cause utter chaos and drive many nonprofits out of business.”

In her House testimony, Lindley-Myers, Missouri’s insurance director, appeared to concur about the challenges of securing stand-alone property insurance. “We are aware that monoline commercial property coverage is less common,” she testified. “The bundled product is the preferred approach in the market.”

Lindley-Myers’ opposition to the bill is rooted in regulators’ concerns that allowing risk retention groups to provide commercial property insurance would create more risks for the groups and their insureds—in part, she testified, because the groups “are subject to weaker regulatory requirements.” She advised nonprofits having insurance difficulties to reach out to their state insurance departments to address the issue.

NAMIC also opposes the legislation, as do other insurance trade groups. “We have no intention of slighting risk retention groups or nonprofits, believing everyone is important, but we think the admitted market is sufficient to absorb these risks,” Pauley says. “There is no insurance crisis. If there were, why aren’t we hearing about it from the lender community providing loans for commercial property?”

Davis counters that most community-based nonprofits experiencing insurance difficulties do not own any buildings. “Most people think about Red Cross and Salvation Army and Goodwill, but the vast number of nonprofits are very small and need property insurance for building contents only,” she says.

The bottom line is whether many classes of nonprofits confront an existential dilemma because of their insurability. The nonprofit leaders interviewed in this article certainly faced this fate. Do others? NAMIC and NAIC say it is unlikely. Davis, on the other hand, offered to set up additional interviews. “Honestly, how many do you need—20? 30? More?” she proposed.

One such nonprofit leader is Jack Chisum, the transportation director of the Northwest Arkansas Economic Development District (NWAEDD), founded in 1967 to retrain unemployed people to obtain needed skill sets and transport poor people to their chemotherapy sessions, among other services. NWAEDD’s broker also was a messenger of misery.

“It was the day after Christmas when we were talking—I’ll never forget that,” Chisum recalls. “My broker said he’d received a letter from our insurance company that said we had to get out of the transportation business or they would not renew the insurance. They were receiving an uptick in automobile claims and wanted out. We scrambled to find another insurer. Finally, my broker called to say he’d found one insurer interested in taking us on.”

The premium was $176,000, with a $10,000 deductible and a stipulation that NWAEDD set up a $30,000 escrow account to pay it. The nonprofit organization’s prior premium was $95,000. When Chisum declined, the broker turned to NIA for help. The BOP property and liability package costs $50,000 less than what the last-ditch commercial insurer offered, with the same deductible the organization previously had—no escrow needed.

“Unlike our previous carrier, they offer webinars to our minivan drivers on safety and risk management,” Chisum says of NIA. “We’re getting much more than insurance.”

Asked about the near doubling in insurance premiums for the Henry Street Settlement, Lume said the organization would need to “cut down on supplies or maybe charge more overhead. Honestly, I don’t like thinking about it. I can’t thank our broker enough for doing all the legwork in finding NIA.”

Kopperud is pragmatic about the standoff between different industry trade groups on HR 4523. “It’s not like there will be major market issues for insurers if this bill passes,” he says. “We’re talking about an extremely narrow carveout for community nonprofits, organizations that do the most good but have extremely thin margins.”

Kopperud says even a $500 increase in premium can keep a small nonprofit from furthering its mission. “They can’t buy a laptop to help kids read, put food on the table or drive people with mental and physical health disabilities to their doctor,” he says. “Brokers representing these organizations struggle to find affordable insurance, and when they can’t find it, they go to Pamela. She’s made it her life’s work to help nonprofits and has a great track record.”

“If we lose NIA,” he adds, “communities across America needing nonprofit services in the age of COVID lose, too.”