Pandemic-Disrupted Nonprofit Insurance

As we all know, this year has been a bit less stellar than we hoped because of COVID-19. Not only has the world had to deal with a destructive pandemic, but the economic fallout is significant. Tens of millions of people, including in the nonprofit sector, lost jobs. And as a result of stay-at-home orders, the U.S. economy took a severe hit. Of course, families have been affected as well with the pandemic losses or recoveries of their families and friends — that goes without saying.

Nonprofits are in a position of having to bridge the needs of many more people than those they serve in any other year. That’s especially true of nonprofits in the social service sector, such as food pantries and homeless organizations. The demands on nonprofits have increased tremendously. However, because of the stay-at-home orders, loss of jobs and the economy, fundraising revenue has decreased. I am, however, optimistic that nonprofits have time to turn it around this year, and many are doing so by holding virtual fundraisers. However, as fundraising revenue declined, many nonprofits looked at their insurance policies and filed claims, only to be denied. Consequently, many nonprofit leaders are surprised that they find themselves without the money they thought they would get from their insurers.

From this situation, a weighty legal topic of who bears the responsibility for COVID-19-related losses arose.

Nonprofit Insurance & COVID-19

As I mentioned, once COVID-19 took root in the U.S. and social distancing started, many nonprofit organizations found themselves with substantial economic losses. For instance, countless galas and in-person fundraising events got canceled, which had a direct impact on fundraising revenue.

Naturally, nonprofit leaders started to look at their insurance policies to file claims. Unfortunately, insurance companies have denied many of those claims.

Commercial Insurance Used

As we know, many nonprofits have fundraising events, and one type of insurance that they rely on is Event Cancellation Insurance. Because of COVID-19, however, countless events got canceled. Yet, as some nonprofit leaders discovered, there are limitations to the coverage. For instance, some policies do not cover infectious diseases, and additionally, major insurance companies in the U.S. affected policies in January 2020, excluding COVID-19 from plans that took effect after that time.

Another form of insurance nonprofit leaders thought they could depend on is Business Interruption Insurance. Because of the stay-at-home orders, which interrupted their operations, nonprofit leaders sought to make claims against their policies using this type of coverage. The basis of this kind of insurance is indemnification, so leaders thought insurance companies would pay to replace the revenue they lost due to the disruption. Instead, insurance companies have taken an opposing position and claim that a “direct physical loss of or damage to” nonprofit property did not occur with COVID-19. In other words, a virus and pandemic are not “direct” and “physical” loss to property, such as a fire would be.

There are other types of insurance that nonprofits have tried to use to reclaim losses. Those include Workers’ Compensation, Directors’ & Officers’ Liability Insurance, and Commercial Liability Insurance. However, insurance companies continue to push back against nonprofits, and also for-profit businesses, claiming that all events surrounding COVID-19 are not their responsibility and not covered in insurance policies.

What To Do Concerning Insurance

Nonprofit leaders and boards of directors should already have carefully reviewed all of their insurance policies. Of course, in light of COVID-19, any new plans must be carefully examined by nonprofit attorneys and understood by the organizational leaders. It would be best if you familiarize yourself with the kinds of insurance-related issues concerning COVID-19, as explained in this article, and also in other resources. As mentioned, nonprofits and for-profit businesses have already started to file claims, and this is an essential topic for the state and federal courts. For starters, to further familiarize yourself with the types of nonprofit insurance, as it relates to COVID-19, take a look at the Nonprofit Management Risk Center.

Although at the moment, insurers are pushing back against claims, as an attorney, I would say that nonprofit leaders should go ahead and file claims depending on their policies. If claims get denied — the chances are high they will be — then your attorneys could judge how other cases are getting adjudicated. In other words, if more judges hold that insurance companies have to pay for COVID-19-
related losses, your chances improve in court for a ruling in your favor. As a nonprofit leader, you might want to get familiar with the work that the Business Interruption Group is doing. Initially started for those in the restaurant industry, it has since expanded. Now, this group includes thousands of for-profit and nonprofit leaders seeking to get insurance companies to pay for COVID-related losses and damages. Aside from the courts, this group is also seeking relief and support from Congress to ensure that the insurance industry covers losses.

In short, the implications of COVID-19 and who suffers the losses, whether it be the insurance companies or businesses, including nonprofits, is an important legal topic. The chances are high that this topic, the economic disruption of a pandemic, will change how the insurance industry operates — and what it covers or doesn’t — for its customers.

Finally, it’s also crucially important for nonprofit leaders to understand the issues related to this kind of disruption, not only for the present, but also for unforeseen events well into the future.

Editor's Note: This Legal Matters column was originally published in the July/August print edition of NonProfit PRO.