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The growth and development of the charity sector has brought with it a new generation of liabilities.

Giving advice, employing staff and having a board of trustees all carry risks, which could become expensive without the right insurance cover.

These risks along with changing trends in the voluntary sector are driving increased insurance purchase.

Yet charities are still at the mercy of price fluctuations and old prejudices.

Professional approach

Historically, insurance companies did not consider it attractive to provide cover for charities.

They were considered inherently risky and loosely managed. “There was a perception that they are not able to spend enough time on risk management in order to keep claims down,” says Gary McCulloch, until recently the chair of AIRMIC (Association of Insurance and Risk Managers) Charities Group.

“In the past, when the voluntary sector was much smaller and less diverse than it is now, it was the case that insurers knew little about what charities did,” adds AdviceUK CEO Steve Johnson.

“There was little information about claims experiences and there was concern that many such charities worked in run-down, high crime areas and/or with high risk individuals. Insurers therefore tended to err on the side of caution so quoted premiums were often very high.”

This perception has slowly begun to change. The insurance industry is beginning to catch on to the sector’s improving professionalism and see the increasing demand for its products as a sign that the “third sector” is becoming better managed, and as a result, more risk aware.

“As informal, volunteer-only organisations become more established and more formal, their awareness of risks and the benefits or necessity of insuring against them tends to develop,” says Johnson.

In response to more demand from the voluntary sector, a number of insurers have recently entered the charity sector.

This is a good thing, as it increases the amount of choice and capacity available to charities, which in theory should bring prices down.

Charity insurance premiums have been coming down, but this is not just a reflection of positive claims experience, it is also due to the fall of prices in the wider insurance industry. And new entrants don’t always stay in the industry explains McCulloch.

“If they feel there’s less of a profit there they may exit the market again.”

The good news is that increasingly, charities are no longer at the mercy of these large and somewhat fickle private insurance companies. There are a growing number of specialist providers.

Long established is Ansvar, an ethical general insurance company that provides insurance for churches and charities and VCS, a charity insurer run by AdviceUK. There is also a wide network of specialist brokers who advise companies on what products best fit their particular needs.

A charity’s insurance requirements vary significantly depending on the size and the nature of the business.

Whilst the products available are typical to any type of business, they are tailored in order to be more in tune with the needs of charities.

Professional indemnity insurance protects charities that provide knowledge or advice, while public liability covers third-party claims.

Charities which employ staff need employers’ liability insurance and since the Charity Act 2006 was introduced, it is now also possible to purchase trustee indemnity cover (see below).

“None of these types of insurance is unique to the voluntary sector but the policy wordings for voluntary sector organisations will often need to be tailored to their particular circumstances,” explains Johnson.

Of particular importance to charities is the protection afforded to voluntary workers. UK charities collectively employ over 600,000 staff but perhaps more significantly, over 16 million people regularly volunteer.

“With employers’ liability and public liability for example you have to careful that those covers include things like volunteers and the events activity of that charity,” says McCulloch.

While the bigger players in the voluntary sector are getting bigger, the smaller charities are getting smaller, according to Ansvar’s head of insurance operations Mark Ingram.

There are over 200,000 charities in the UK but the top 700 of these represent 50 per cent of the sector’s income. What this means is the two different groups have different needs.

Increasingly, smaller charities are looking for packaged – or inclusive – insurance solutions, whereas very large charities are exploring more specialist options.

All risks great and small

At a Charity Forum in London hosted by Ansvar, two very different charities gave their perspectives on the risks they faced.

Vivienne Evans, CEO of Adfam, the charity for families affected by drug and alcohol abuse, has only two full time staff

The charity is focused on trying to generate an income and increasingly bids for local authority contracts in partnership with other charities.

The intention is to ultimately become more of an umbrellatype organisation and this could affect its insurance needs.

“More and more, charities have to earn their own income so they must become more commercial in their approach,” explains Ingram.

“The government wants to use the third sector increasingly to deliver public services and charities are beginning to club together to bid for projects. Therefore the sector is becoming more competitive and more professional.”

This increasing government involvement has had an impact on insurance take-up. “Quite often [government] will stipulate certain levels of insurance cover,” explains McCulloch.

“Those levels can often be way beyond what is already purchased by the charity being outsourced to.”

At the other end of the spectrum, David Rice, assistant secretary for business administration (risk and research) at the Salvation Army, explains his very different insurance needs.

Unlike Adfam, a niche, single-issue organisation without a benefactor, the Salvation Army is a massive multi-national church and registered charity.

It is one of the biggest providers of social services in the UK after government with programmes from drug rehabilitation centres to hospitals and medical centres.

One example of the Salvation Army’s unique risk exposures is Hadleigh Farm. Open to the public, the farm in Essex will host the London 2012 Olympics’ mountain bike cross-country events.

“We are a larger organisation which has to be acutely aware of risk,” explains Rice. With thousands of staff and a very international approach, the Salvation Army has board level risk owners who attend risk workshops at the CASS Business School at City University. It even had its own captive insurance company, SAGIC.

Using a captive is an alternative risk transfer solution for a large company that can afford to set up and run its own insurance company.

This is an increasingly popular option in a hard market (when insurance prices are high), explains McCulloch.

Despite the massive strides in professionalism in the charity sector, challenges still remain. Insurers still consider some liabilities to be too risky. Abuse cover for example is often excluded from policies, with an option to buy it back as an extension.

The problem is that these extensions often don’t afford the same level of cover as was originally available and as a result it becomes diluted.

Another challenge is ensuring that prices are not subject to the fluctuations in the wider insurance industry.

Johnson says that AdviceUK’s motivation in creating its own insurer was to try and insulate the charity sector from these external dynamics, which became most apparent following the World Trade Center attacks.

“In the year after 9/11 all insurance premiums rose enormously,” he explains. “Even in areas of cover (like ours) totally unrelated to that event. That year, we were being quoted at 60 per cent to 100 per cent increase on the previous year.”

Most of the increase had to be passed on to members. With current turmoil afflicting the global financial markets, the concern is that the cost of insurance could once again go up.

The collapse of investment banks is expected to cause a flood of professional liability claims in the wider insurance arena.

But it’s not all bad news. As charities become more professional and commercially minded, so they become savvier insurance customers, more aware of their risks and exposures and better equipped to negotiate in tougher markets.

Trustees indemnity insurance – for and against

The Charities Act 2006 has made it possible for charities to insure the people who sit on their board of trustees. It covers them from having to personally pay out when claims are made against them, as long as the mistake was honestly made and not the result of wilful misconduct.

The Act allows trustees to take out trustee indemnity insurance using the charity’s funds without our permission, as long as there’s no provision in the charity’s governing document which specifically forbids this.

“The Act expressly allows the charity to buy trustees indemnity insurance, which was formerly a grey area under the Companies Act,” explains McCulloch.

“In the past it was it was viewed as being a perk to the benefit of the trustee and required the approval of the Charity Commission unless the charity’ governing document provided express permission for such insurance to be bought.”

While there has been a good take-up of the insurance, so far there have not been substantial claims. But there can still be large legal bills even if claims are settled amicably out of court.

“The policies do also cover defence costs and defence costs would have to be paid even where there’s a spurious claim made,” adds McCulloch. “Having the cover also a reassurance to the trustees – they are staking their personal wealth when they become a trustee.”

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