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Contractual Liability: How Nonprofits Can Protect Themselves and Their Communities

First Republic Bank
March 31, 2021

The COVID-19 pandemic has created new challenges for nonprofit organizations around contractual liability. Fortunately, there are steps that decision-makers at nonprofits can take to help protect their organization and the communities they serve.

First Republic is proud to share tips from the Nonprofits Insurance Alliance, which provides guidance and thought leadership on insurance for organizations. 

We spoke with Brian Johnson, Chief Underwriting Officer, of the Nonprofits Insurance Alliance, regarding best practices that nonprofits can implement before signing contracts with local municipalities.

How contract liability between nonprofits and municipalities has changed during COVID-19

Depending on how your nonprofit carries out its programs, a contract with your local municipality could cover anything from the work your nonprofit is doing for the community (for example, if you run childcare services or a food bank) to simply using public space for a fundraising event (for example, a walk for the cure in a local park).

“Even before COVID-19 became a public health concern, contract wording often pushed all liability onto the nonprofit, and in many cases, inappropriately so,” Johnson says. “That trend has continued. Immediately after COVID-19 emergency orders went into effect, we began to see wording being added to various contracts that shifted liability for any COVID-19 claims from the municipalities to the nonprofits. And for nonprofits that expanded their programming to assist their municipalities in COVID-19 relief efforts, we saw the addition of even broader language shifting liability onto those organizations.”

Often, municipalities want the help from nonprofits to address issues in the community, but local government agencies try to pass off as much of the liability as they can to nonprofit partners as a way to control costs, according to Johnson: “So it's important for decision-makers at nonprofits to understand what risks they are taking when partnering with municipalities, and to only agree to assume liability for things the nonprofit has control over.”

Top 3 ways to protect your nonprofit from additional liability

While COVID-19 presents a new risk for nonprofits in terms of liability, there are still fundamental best practices that can help protect your organization from taking on responsibility for events beyond your control. Johnson shared three things you should look for in any indemnification clause for a contract you are going to sign:

  1. Make sure the wording refers to claims caused by your actions and not "arising out of" anything. The "arising out of" wording is too broad and could lead to liability being assigned to you that is out of your control. Don't agree to take on liability for things outside your control.
  2. If you are agreeing to indemnify another party via a written agreement, ask that that party agree to also indemnify you (mutual indemnification). That way everyone is liable for the things over which they have control.
  3. You should ask that any "sole negligence" wording be removed. This type of wording will almost always lead to the indemnitor being responsible for all losses. Instead nonprofits should ask that indemnification for a claim will be allocated proportionally by the contribution of either party to that claim.

Before you sign any contract, Johnson advises, it is always a good idea to have your broker review it to ensure your organization will be compliant with the indemnification and insurance clauses.

Every organization’s situation is different; to learn more, visit the Nonprofits Insurance Alliance website.

At First Republic, we take a holistic approach to helping mission-driven organizations manage their finances. The nonprofits we serve with benefit from quality financial services, unparalleled service, thought leadership, and professional development opportunities. If your organization is looking for a financial partner that provides value to nonprofit organizations beyond banking, please get in touch.

 

The views of the interviewee of this article do not necessarily represent the views of First Republic Bank. This information is governed by our Terms and Conditions of Use

First Republic does not provide tax or legal advice. Clients’ tax and legal affairs are their own responsibility. Clients should consult their own attorneys or other tax advisors in order to understand the tax and legal consequences of any strategies mentioned in this article.