Nonprofit Groups Face Higher Insurance Costs and Limited Coverage

In mid-May, the Hemophilia Association of New York received a notice from its insurance company: Its commercial-liability

policy was due to expire August 1, and the company would not be renewing it.

“It took our longtime brokers two months to get us coverage,” said Thom Harrington, the association’s executive director. The brokers contacted 10 insurance companies that said they were no longer writing policies for nonprofit groups, especially in New York. “If that commercial-liability package, which includes fire and theft, had expired, we would have been in violation of our office lease, which requires us to carry liability insurance. We also have a contract with the state health department, and they require us to have certain coverages.”

On August 15 the association was finally able to obtain insurance, paying 43 percent more than its previous premium.

The Hemophilia Association’s difficulty in finding insurance is not unique. Nonprofit organizations are facing large premium increases and, in some regions, a dearth of insurance companies willing to provide coverage at any price. An analysis by the National Council of Nonprofit Associations, in Washington, found that insurance premiums for all policy holders — for-profit companies and nonprofit organizations alike — rose 25 to 300 percent in the past year.

Losses that insurers suffered on claims resulting from the September 11 terrorist attacks, combined with the weakened economy, have caused the insurance industry to raise prices and restrict coverage.

“The insurance market, like any other market, is cyclical,” said Peter Andrew, president of Council Services Plus, an insurance brokerage in Albany that is owned by the Council of Community Services, an umbrella group for nonprofit organizations in upstate New York.

Throughout the 1990s, Mr. Andrew said, insurance companies eased their underwriting practices to encourage the sale of as many policies as possible, regardless of whether that would mean having to pay more in claims. The companies were making so much money by investing the premiums in the booming stock market, he added, that the profits more than offset losses from claims.

Rising Costs

“Then the stock market began to dip and the recession hit in March of 2001, so the companies weren’t making all that money,” Mr. Andrew said. As a result, the insurance industry started tightening its underwriting practices, eliminating some policies and raising premiums.

Jeanne Salvatore, vice president for consumer affairs at the Insurance Information Institute — an industry-supported research organization in New York — agreed that the falling stock market was one key factor pushing up insurance prices. But she added that several others also are forcing insurers to raise premiums.

“Litigation costs are up, rebuilding costs are up for damaged properties, medical costs are up,” Ms. Salvatore said. “And depending on where an organization is located, there’s the new risk of terrorism.”

Nonprofit organizations, she added, are not being treated any differently than private companies. “Insurance costs are going up for everyone.”

‘Better-Than-Average Risks’

Some insurers, however, have stopped writing policies for nonprofit groups altogether, according to Mr. Andrew and Pamela Davis, chief executive officer of the Nonprofits’ Insurance Alliance of California, an insurance company that has covered California nonprofit organizations for 13 years.

“We believe nonprofits are better-than-average risks,” said Ms. Davis. But, she added, many insurance companies don’t understand what nonprofit groups do, leading the insurers to cancel coverage or charge artificially high premiums.

Mr. Andrew agreed. Insurers understand the risks involved in a manufacturing or retail business, he said, but they do not adequately understand the work of nonprofit groups, which includes such services as providing foster care and running museum galleries. “The insurance underwriters try to force nonprofits into an already-created rate for some other industry, rather than thinking through what they do, how often they do it, and how to underwrite the risk,” he said.

Nonprofit groups have had to cut their operating budgets to reflect the costs of higher insurance premiums. Lisa Hunter, finance manager at the Boys & Girls Clubs of Schenectady, in New York, said that the organization’s insurance costs jumped from about $100,000 to $120,000 this year — 9 percent of its $1.3-million budget.

“That’s $20,000 that could go to staffing and program services, but obviously you can’t be open without the insurance coverage,” Ms. Hunter said.

Michael Kotzin, executive vice president of the Jewish Federation of Metropolitan Chicago, said his group also saw its insurance premiums go up about 20 percent.

Ms. Davis said the increases in premiums for many nonprofit groups are unjustified. “We did not have any price increases in our entire 13 years. This year on average we are increasing renewal prices by 11 percent.”

Besides raising premiums, insurers have also placed new limits on what types of activities they will cover — with serious consequences for nonprofit groups. Mr. Andrew said that a nonprofit organization in Louisiana whose insurance his company arranged held an annual skeet-shooting fund-raising event at a gun club, but its insurer refused to cover the event any longer.

Nonprofit groups have also learned that insurers will not cover events inherently less dangerous than having dozens of people walking around with loaded guns.

The Hemophilia Association holds a fund-raising golf tournament each August that typically yields about $45,000, said Mr. Harrington, but it was forced to postpone that event because it is still negotiating with its new insurer over what events it will cover. “We’ve already revised our budget to reflect the $45,000 hole from that event alone,” he said.

“Nonprofits are caught in a vise of a much tougher fund-raising environment because of the slumping economy and increased costs for insurance,” noted John Small, president of the Nonprofit Coordinating Committee of New York, which helps its 1,100 members deal with government policy and other issues in the state. “If you save a nonprofit a dollar on insurance, that’s like you’ve written them a check.”

Weighing Solutions

While the U.S. Chamber of Commerce and other business groups have been pushing Congress for legislation to underwrite some of the costs of terrorism insurance coverage, Mr. Andrew argued that even if a bill now before a Senate committee passes, it won’t solve the fundamental problems facing the insurance industry. “This isn’t going to go away quickly because it’s not just one thing that we have to fix. We’ve got to get the economy righted, we’ve got to get the stock market righted, we’ve got to get some of the terrorism worries to go away.”

One partial solution may be the creation of more nonprofit insurers like Ms. Davis’s company. Last year she formed the Alliance of Nonprofits for Insurance, Risk Retention Group, a company that has written policies for about 300 groups in 12 states.

The Nonprofit Coordinating Committee of New York and the Council of Community Services, in Albany, are also trying to set up a nonprofit insurance company, called Good Causes, to provide coverage for charities in that state.

“We’ve already got the broker networks, the supporting associations, and the underwriting forms,” Mr. Andrew said. All that’s missing, he added, is the money to start the company. The group is trying to persuade foundations to put up $5-million to $7-million in financing.

Mr. Small said having insurance companies that are geared to serving nonprofit groups may be the best solution. “We think having that kind of company would result in better service, more appropriate coverage, and lower rates,” he said.