For many church leaders, insurance coverage and terms can be confusing and complex. When purchasing or reviewing coverage, it is helpful to understand the key terms you will encounter. Consider these core terms and topics below.
The Insurance Contract: Most church insurance policies follow a similar format and structure that includes declarations, common conditions, and specific forms for each line of coverage. The declarations contain basic information about the policy, including the name of the insured, the inception and termination dates of the policy, the policy number, and the amount of the premium. The common conditions include information that applies to several categories of coverage such as property and liability. That way the information does not have to be repeated for each line of coverage that is purchased. Finally, forms are then used to address the specific provisions for each line of insurance.
Endorsements (sometimes called riders in health and life insurance policies): Used to change the insurance policy. An endorsement can expand coverage, reduce coverage, add a new provision to the policy, or modify an existing provision of the policy. An endorsement can be handwritten, typed, or in preprinted form. If legal, an endorsement takes precedence over the standard policy.
Deductibles: The amount the insured must first pay before the insurance company becomes liable for financing the loss. For example, if the church has a $2,500 deductible and has an insured loss of $10,000, then the church pays the first $2,500 and the insurance company pays the balance of $7,500. As the deductible increases, the premium for the policy decreases. The deductible applies to each occurrence.
Duties in the event of a loss: The reporting requirements of the insured in the event a loss occurs. Generally, the insured must report the loss in a timely way and safeguard the property following a loss. Failure to properly notify the insurance company can void the coverage.
Property Insurance
Generally, this is the insurance of buildings and contents. Property insurance has levels of complexity because of what is included or excluded in the policy. As a result, leaders must be very careful to understand the “forms” that are used to write the policy, including special form, basic form, and broad form.
The Special Form: covers everything that the policy does not specifically exclude; it provides the broadest coverage available, and as a result is often selected.
The Basic Form and the Broad Form: more limited and cover only those perils that are specifically named in the policy; leaders should ask the insurance agent to explain the purpose of each form, what the form covers, and what is not covered.
Within these forms, take time to understand the coverage provided for each of the following areas:
Perils insured/causes of loss: Have the agent explain basic form, broad form, special form, earthquake form, flood insurance, and other additional considerations. Know what is covered and what is excluded. If something is excluded, ask if it is covered on a different form, and then review the specifics of that coverage to determine if it is something you need.
Buildings and contents: Make sure you have a clear written definition of what is included in your building coverage. Built-in items such as a pipe organ, pews, sound systems, and other permanently installed equipment are actually a part of the building in the valuation of your property. Review such items with your agent to determine what is valued as part of the building and what is valued as part of the contents. Also, property that is taken off the premises may not be covered. Consider having an independent replacement cost appraisal for both the building and its contents. You want to make sure you are adequately insured.
Personal business property: Be aware that items of personal business property such as musical instruments, pieces of art, computers, and so on may require separate coverage. Review this concern with your agent. Discuss how personal property is defined, when and where it is covered, and for how much.
The personal property of others: Know what coverage exists for property left on church premises by staff, church members, and others. For example, what would happen if an expensive coat were stolen during a church service? Would it be covered by the church’s insurance?
Debris removal: Often debris is left after a natural peril such as a hurricane, earthquake, tornado, or even a strong storm. Know what coverage is provided.
Coverage extensions: Review with the agent all valuable furnishings, musical instruments, jewelry, silverware, antiques, artifacts, art, cameras, sound studios, TV studios, valuable papers, outdoor property, libraries, stained glass, bell towers, carillons, and other unique items that may require special coverage.
Business interruption: This coverage insures loss of income and pays expenses during a recovery period following a loss. For example, a church building may be destroyed by fire and render the congregation unable to meet for several weeks. The church’s income may dwindle during the recovery period. This insurance helps to cover those shortfalls.
Note: Property coverage is provided on a per occurrence basis. That means that each individual claim is covered up to the limits of the policy.
Note: Examine how changing the deductible affects the cost of the premium. Know how and when the deductible is to be paid. Ask how the deductible is affected by the coinsurance clause (discussed below).
The valuation of property: If a property loss occurs, the valuation is based on one of two options: actual cash value or replacement cost. The actual cash value is based on the depreciated value of the property. A church that has a policy with actual cash value would not be able to replace the lost property with new property without incurring additional expense. On the other hand, replacement cost provides funds to replace the property. Most policyholders prefer replacement cost over actual cash value. In some cases, a church may own a facility that is too large for the needs of the congregation. For example, many inner city churches have older, ornate buildings that are costly to maintain and too large for existing space demands. In such cases a congregation may choose functional replacement cost that would enable them to build a smaller facility.
Note: If a church has expensive stained glass windows, they should be insured separately. In addition, attention should be given to other specialized property concerns such as carillons, chimes, pipe organs, steeples, bell towers, and fountains.
Inflation guard: Some policies contain an inflation guard provision where the amount of the insurance coverage is automatically increased to account for changes in value due to inflation.
Coinsurance and agreed value: Ask the agent to review whether your policy contains a coinsurance clause or uses an agreed value. If present, the coinsurance clause is an important part of the policy, and one that is not well understood by church leaders. Here is how it works.
In exchange for a reduction in the premium, the insurance company requires that the church maintain coverage equal to a specified percentage of the property’s value, generally between 80 percent and 100 percent. If the church fails to maintain the specified level of coverage and a loss should occur, then the benefit is lowered based on the formula demonstrated in this example:
First Church is required to insure its building for 80 percent of its actual value in exchange for a premium discount. The building has a fire and the loss is calculated at $900,000. The value of the building is determined to be $2,000 000. Based on the coinsurance clause the church should have the building insured for at least 80 percent of its value or $1,600,000 ($2,000,000 x .80). First Church has the building insured for $1,500,000. Based on the coinsurance clause the insurance company would pay the following amount for the loss:
$1,500,000 / $1,600,000 x $900,000 = $843,750
Church leaders need to monitor both the value of the building and the amount of their insurance coverage to make sure it is adequate. For coinsurance, the value of the building is calculated at the time of the loss and not at the time the insurance is purchased.
Tip. When comparing the policies of two or more insurance companies, see if the deductible applies before or after the coinsurance penalty is calculated.
Another option is to remove the co-insurance penalty through an endorsement of agreed value. With agreed value, a penalty clause does not exist and the insurance company pays up to the limit of the policy. This reduces the potential for conflict if a claim does occur.
Liability Insurance
Provides coverage for civil claims; generally divided into general liability, automobile liability, and workers’ compensation and employers liability. Each area is written as a separate policy. Some additional liability coverages are important for churches, including directors and officers insurance, counseling or professional liability, sexual misconduct coverage, and corporal punishment and excess medical claims.
General liability is connected to the following areas of exposure:
Premises liability. A church may be responsible if a person is injured or if property is damaged as the result of some condition arising from the premises. The theory is so general that almost any cause can be argued as causing an injury. For example, failure to keep a playground in safe condition could lead to premises liability.
Conduct of operations. Liability can arise out of the normal conduct of operations by employees or volunteers, either on the property or away from it. For example, a volunteer driving a church or school van may cause an accident in which people are injured.
Completed operations. Liability can arise out of some work that has been performed but turns out to be defective. For example, a church could build a soccer goal that later falls on and injures a child because it is not properly balanced.
Contract liability. A church could, on the basis of a contract, become liable for the actions of another person. For example, a subcontractor doing work for the church may require the church to indemnify the subcontractor for any claims that arise out of the work that is performed.
Automobile liability: provides coverage for losses involving automobiles. Churches should seek comprehensive liability coverage that covers any auto, whether the church owns them or not, as well as coverage for both paid staff and volunteer drivers. In addition, churches may also purchase coverage for physical damages for both owned vehicles and non-owned vehicles. Attention must also be given to medical payments on uninsured or underinsured motorists. Review each option with your insurance agent.
Workers’ compensation and employment practices: handled as separate policies; vital for churches. Workers’ compensation insurance covers the costs of workers’ compensation benefits. Employment practices coverage provides protection against employment-related litigation involving wrongful termination, discrimination, and other such claims.
Additional liability coverage
Directors and officers insurance: It is a good practice for churches to obtain directors and officers insurance for the members of their governing board, for the following reasons:
- Board members who receive any form of compensation are not protected by state and federal laws that extend “limited immunity” to officers and directors of churches and other nonprofit organizations, and therefore it is much easier for these board members to be sued personally. Directors and officers insurance will provide the board members with a legal defense to any lawsuit involving a covered claim, and pay any judgment or settlement up to the policy limits.
- Board members who engage in gross negligence or willful and wanton misconduct are not protected by state and federal laws that extend “limited immunity” to officers and directors of churches and other nonprofit organizations.
- Directors and officers insurance may cover certain claims that are excluded under the church’s general liability policy.
Counseling or professional liability: This provides coverage for counseling activities. It is best to choose a “blanket format” that covers all individuals, paid or unpaid, who provide counseling services. The other option, “position” coverage, is limited to listed positions such as a pastor or a staff counselor.
Sexual misconduct coverage: This provides coverage if a claim of sexual misconduct occurs. These claims can be very expensive, and no church should be without this coverage. It is in the interest of every organization to reduce this risk through proper screening and supervision, and to maximize the insurance coverage available.
Corporal punishment and excess medical claims: Another special area of concern is insurance coverage for churches that operate schools or day care facilities. Coverage for corporal punishment and excess medical payments should be discussed with the insurance agent.
Excess or Umbrella Insurance: additional insurance that goes beyond the limits of the basic policies; advisable for churches.
This article is adapted from The Risk Management Handbook for Churches and Schools by James F. Cobble, Jr., and Richard R. Hammar. To learn more about how to get the right insurance coverage to protect your ministry, purchase the downloadable resource Your Helpful Guide to Church Insurance, available on ChurchLawAndTaxStore.com.
