What insurance limits should our charity buy?
Just how much insurance should you buy for your charity? What should be the limits of cover you need to purchase? Of course, there are certain risks you need to insure against, but up to what level of vulnerability?
The idea of insurance is to safeguard the ability of your charity to keep operating after a significant incident, which will involve a financial dimension. This means you should have a good idea, from your own knowledge of the way your charity operates, of the money you need to get back from your insurer if a particular risk is triggered and for how long after the incident you will require support.
There are certain factors that need to be considered so as to help you choose the right Insurance limits or levels for your charity. At the same time, while of course each charity will be different even if they have similar activities, operational risks for charities can be broken down into 5 key areas:
- Loss of revenue.
- Physical assets.
- Directors and officers liability.
- Cyber risks.
LIABILITY. This encompasses injury to your employees and volunteers, the public and damage to third party property.
The Employers Liability (Compulsory Insurance) Act 1969 requires that employers carry insurance against the personal injury of their employees and volunteers. The Act calls for a minimum limit of £5,000,000. However, the market standard is to provide a limit of £10,000,000.
Public liability insurance provides cover for injury to third party individuals and/or damage to third party property, arising out of actual or alleged negligence. The limit required will depend on a number of factors including the type and location of activities undertaken or services provided and to whom. However, one would recommend a minimum limit of £5,000,000 although many local authority or government bodies will insist on at least £10,000,000, for instance if your charity is undertaking work for them or holding an event on their land or premises.
When arranging both employers and public liability insurance; charities using volunteers should seek clarity from the insurer under which section they fall as it is likely additional information will need to be provided in order to ensure they are covered
One of the most significant events that has bought into question the adequacy of limits for both employers and public liability for many organisations was the decision by the Lord Chancellor to reduce the “Discount Rate” applied by insurers to personal injury awards to allow for investment returns. This has dramatically increased the cost of claims to insurers and prompted many organisations to review their limits of indemnity.
LOSS OF REVENUE. This cover replaces future loss of income or extra expenses following insured damage to property e.g. a fire at your main premises. There are two key factors to consider:
- What revenue is at risk? Revenue may not be wholly reliant on premises and/or property (e.g. grants, funding etc), therefore rather than insure for the total annual revenue you may want to consider a “First Loss” limit based on the estimated maximum probable loss.
- Revenue is insured over a period of time after the loss has occurred, known as an Indemnity Period, during which benefits under the policy continue to be paid. This period should be adequate for the charity to fully recover from a loss and for revenue be returned to its pre-loss level.
It is important to consider future revenues and that a loss can occur on the last day of your insurance policy (a year since the sum insured was set). You should also consider how long it would take to rebuild property, install new IT systems, source any specialist equipment and so on when considering the length of Indemnity Period.
If your charity owns premises or is responsible for damage to buildings under the terms of a lease, then a minimum period of 18-24 months would be recommended..
BUILDINGS AND CONTENTS. Up to 20% of insurance claims are underinsured, which in most cases will result in insurers reducing the claim proportionately in line with the level of underinsurance. Buildings should be formally valued every 3 to 5 years by a RICS qualified surveyor and contents sums insured should be regularly reviewed in conjunction with an up to date asset register.
DIRECTORS AND OFFICERS (OR TRUSTEES) LIABILITY. Directors, officers and trustees are in a position of trust and owe a fiduciary duty to stakeholders to carry out their affairs with due care, skill and diligence.
Legal claims can arise following allegations of mismanagement, accounting errors or mis-statements or generally misdirecting the charity. Claims can be bought against individual directors, officers or trustees (meaning their personal assets are at risk) as well as against the charity itself.
Limits generally start at £250,000 and can go as high as £5,000,000. Additional covers such as employment practices liability can also be included.
CYBER RISKS. Cyber liability is an increasingly important area of insurance for charities, due to the inherently sensitive nature of the data many hold and the advent of the impending General Data Protection Regulations.
Data risks are complex in nature and the insurance market offers many variations of cover. Risks include first party costs, third party costs, systems damage, fines and penalties and reputational damage.
So your charity needs to focus on these five areas of insurance and think carefully about the limits or levels of cover required.