LIABILITY INSURANCE AND THE CHILD CARE CENTER
Carol Volker, Ph.D.
Human Development and Family Studies
Iowa State University
Operating a business involves risk. Child care centers face situations that expose the owners or operators to financial loss if the center were to be found liable or responsible for the injury or death of a child or
the child's parent, if the parent were on the premises. Therefore, it is important to increase your awareness and take preventive measures to guard yourself and your business from possible legal liability. Providing a safe environment at all times, following requirements for applicable licensing, and purchasing liability insurance are all important preventive measures to protect yourself and your program.
As caretakers of children, you and your staff have the duty to act with reasonable care while caring for children in your custody. Sometimes children get hurt in accidents even when they are under the best of care. For example, they may trip over another child, get poked in the eye, get their hand caught in a door, or they may fall from or get hit by a swing. However, if a child is injured while under the care of your program, the parents might sue the center if they believe the injury was the result of the negligence of the center or the staff. Negligence, in legal terms, means that a person who was under a legal duty to act with reasonable care failed to perform that duty. If the court decides that you are "liable," (that your negligence caused the child's injury) you will be required to pay compensation. Parents may ask you to pay medical expenses as well as damages to compensate for pain, loss (such as eyesight), and mental suffering. Often the medical expenses are the smallest of the four.
This article will help you: (1) evaluate insurance options for your child care center, and (2) evaluate and compare liability insurance policies.
If you have liability insurance, the insurance company will defend you if you are sued, whether due to neglect, injury, accident, or allegation, if there is specific coverage in your policy for the particular situation. If you are found to have been negligent, and thus, "liable," the insurance company will pay the judgment up to the limits of the policy. Liability insurance also may include coverage to pay expenses related to claims of child abuse, but coverage is limited. Many states require that child care centers carry liability insurance.
Standard general liability insurance policies cover four basic types of costs when the insurance company is reasonably convinced negligence existed.
In addition to the coverage available in a general liability policy, there are many other risks you may want to investigate insuring against, depending on your needs. It may be necessary to purchase a separate policy for some. Other risks may be covered by adding a series of endorsements to your general liability policy. The endorsements also may amend policy limits, deductibles, or terms of cancellation or nonrenewal. You will pay increased premiums for endorsements that broaden your coverage.
PERSONAL INJURY: Although a general liability policy covers claims relating to bodily injury and property damage, personal injury liability coverage provides protection for a libel, slander, or invasion of privacy lawsuit. In a personal injury, the injury is to a person's reputation or feelings. This may occur if a child care worker is involved in a a child custody case or reports suspected child abuse.
PRODUCT LIABILITY: Suppose a child gets sick from eating the potato salad served at lunch. Product liability insurance would protect you in claims related to food you serve, or food or toys you might sell at a fund-raising activity. The premium for coverage at a fundraiser is usually based on gross receipts, so if there are no sales or only small-scale sales, a minimum premium is charged.
FIRE LEGAL LIABILITY: A general liability policy generally will not pay for damages to property that is in your care, custody, or control. Therefore, it would not pay for any damage that occurs to the portion of the building which you rent or occupy. Therefore, if you are a renter, it would be advisable to purchase some form of fire liability insurance. Although your landlord may have fire insurance, if you are the cause of a fire on the premises, your landlord's insurance company will attempt to collect the cost of repair from you. Thus, a fire liability insurance policy will cover such damage if it was the result of your negligence.
Because this booklet is about liability insurance, insurance on damage to your own property will not be discussed. However, remember that if you own the building or equipment, you will want to protect your investment against risks of fire, wind, theft, and other damage. You do this through property insurance. Portable outdoor play equipment may need special property insurance coverage.
VEHICLE INSURANCE covers accidents in cars and vans. A policy separate from your center liability policy is most often needed for vehicles. If your center owns or leases any vehicles, automobile insurance is necessary. You will want bodily injury and property damage coverage and uninsured motorist protection. Coverage should include a minimum of $300,000 for bodily injury and property damage. Increasing coverage to $1,000,000 generally costs only 25 percent more.
If employees', parents', or volunteers' autos are used to transport children, the center should still have insurance protection, for even if the owner/driver has insurance, in the event of a serious accident, it is likely the center would be named as a defendant along with the driver. The car owner's insurance won't cover any portion of liability that could be ascribed to the center. For example, if the driver became distracted because the van was crowded, fault may lie with the center.
To protect the center when using noncenter-owned vehicles, first make certain drivers do not have an accident history and that their car is insured. Certificates of insurance should be required. Second, consider purchasing insurance to cover the center if it is named in a lawsuit involving a vehicle owned by an employee or volunteer. Many legal experts advise against use of noncenter-owned vehicles altogether, because of the exposure to risk.
OFFICERS' AND DIRECTORS' LIABILITY INSURANCE covers those individuals when they are acting in their official capacities. If you operate with a board of directors, as many nonprofit centers do, the potential for claims against the board members can significantly affect your program. Volunteers with limited personal resources can be very vulnerable to legal action. Defense costs alone can be sizeable even if there is no liability award. Concern about lack of protection can reduce the willingness of parents or community members to serve.
ERRORS AND OMISSIONS COVERAGE protects against the potential cost of claims against teachers or program directors for violation of professional standards of conduct. Hiring highly trained personnel tends to minimize risks and improve program operation. On the other hand, because of their expertise and training, such individuals are themselves very vulnerable to legal action if something does go wrong because they are held to a higher standard of conduct than a nonexpert. As with board members, there is the issue of defense costs even where there may be no liability.
EXCESS LIABILITY COVERAGE extends the limits of coverage that are provided in the general liability policy. The limits state the most the company will pay regardless of the number of children insured or the number of claims or suits brought. Increased limits can be purchased with an endorsement or in a separate policy that covers an additional amount. The separate policy may be a "straight excess" policy or an umbrella policy.
MEDICAL OR ACCIDENT INSURANCE is low cost and worthwhile to consider. Many accidents are not anyone's fault, so no liability is involved. An accident insurance policy generally covers medical expenses for any injury caused by a covered accident which occurs at the child care center or while on a field trip. For example, if a child stumbles on the playground and breaks an arm or needs stitches, accident/medical insurance will cover the initial doctor and emergency room bills incurred as a result of the accident. This is rather inexpensive insurance. Advantages to the center are that it allows the bills to be paid immediately. That assures the child's family that you are concerned, relieves their tension, and may avoid confrontations. Most accident insurance policies list the types of accidents that would be covered. Many companies offer a discount on liability insurance premiums if an accident policy is also written.
To explore liability and accident insurance for your child care center, follow these guidelines.
Liability insurance is a part of property/casualty insurance. However, the majority of property/casualty companies are not major carriers of child care liability insurance.
Several companies have created packages especially for child care centers. Information may be obtained from the National Association for the Education of Young Children (NAEYC), 1834 Connecticut Avenue, N.W.,
Washington, D.C. 20009-5786. You also may be able to purchase a policy from a property/casualty local agent.
There are some admitted carriers (see glossary) that serve child care centers. The majority, however, of commercial liability policies are written in the excess and surplus lines (E & S) market, often by insurance companies that are not required to meet state licensing standards. The companies may be financially sound and reputable but choose not to be licensed in a a particular state. Although most states make some effort to ensure that E & S carriers are approved in some manner, such as not being on the National Association of Insurance Commissioners' "watch" list, these carriers may not be regulated as closely as admitted carriers and are not covered by the state's insurance guaranty fund. A guaranty fund would pay the claims of consumers up to certain limits (such as $100,000 per claim) if an admitted company became insolvent. Thus, as in all insurance decisions, it is important to learn all that you can about the insurance company before buying coverage.
All insurance companies have underwriting guidelines that you must meet before a policy can be purchased. Underwriting guidelines are conditions that must be present before the company will accept you as a client. It probably will be necessary for you to meet licensing regulations for the state in which you live, and to be licensed. To purchase certain policies you may be required to be a member of an organization such as National Association for the Education of Young Children (NAEYC) and meet NAEYC accreditation standards (particularly safety features such as smoke detectors). There may be certain other safety requirements with respect to your facilities, equipment, and procedures. The insurance company may want to do an on-site inspection. Some policies have staffing requirements in terms of training, numbers, and ages of staff and directors. A previous history of frequent or severe accidents may disqualify you.
Most standard liability insurance policies today are occurrence form rather than claims made form. The distinction is an important one. If you purchase an occurrence form policy, the company will entertain claims made after the policy has expired or after you have gone out of business if the incident occurred while the policy was in force. Under a claims made policy, the claim must be made during the policy period.
An example will help explain the important difference between the two types of policies. If a child in the care of your center were injured in June of this year, only the claims you filed between June and the end of your policy year would be paid by a claims made form policy. If the policy were occurrence form, claims related to that child's injury and filed next year or even several years from now would be paid, even if you no longer had the insurance policy. A variation is a "modified claims made policy," which covers claims made for a specified number of years after the policy is no longer in effect. This differs from a pure claims made policy because the claim does not actually have to be made during the policy period. It is important to ask your agent to clarify reporting rules.
You should ask several other questions about a policy's coverage. Are activities covered that occur away from the center, such as while visiting a park or the fire station? Are accidents covered that occur while children are being transported? Are claims covered that are related to products such as food served to a child or food or products sold? Is risk for center-caused fire or other damages to rented property covered?
Policies may cover sexual abuse claims. However, the liability limit is usually lower and is intended to pay only for legal defense costs. Policies generally don't pay judgments related to child abuse that might be awarded to a child and his/her family.
You should also ask questions about coverage for staff and directors. Are errors and omissions covered to protect against the potential cost of claims against teachers or program directors for violation of professional standards of conduct? Are officers and directors covered against potential claims? A separate policy is generally needed for officers and directors.
Pay special attention to sections of the policy that refer to "exclusions." The most common exclusion is for child abuse or molestation. Other common exclusions include: injuries in automobiles; medical or accident payments; injuries incurred when away from the center, such as on field trips; injuries occurring in loading and unloading children from center vehicles (often excluded from standard liability policies and vehicle insurance policies); kidnapping (which sometimes is part of a child custody dispute); damages resulting from food products (product liability); and damages resulting from pollution. Go through the exclusions with the agent. If you cannot find coverage for a particular risk, you might consider the advisability of setting aside funds for self-insuring for that particular risk.
A policy limit is the maximum amount the policy will pay if there is a claim. Usually the limit is stated per claim or per person injured. There also may be an aggregate limit - a total amount the policy will pay in any one year regardless of the number of claims filed or persons injured. Find out if the aggregate limit is a limit for just your business, or for all participants in a single group policy. If there is an aggregate limit for a group of care givers, a very large claim by one center might exhaust the limits and you would be without coverage. Some states require minimum liability insurance coverage for child care centers. Their minimum liability limits are generally $100,000 bodily injury per person and $300,000 per occurrence. Other states set the minimum coverage as high as $500,000 per occurrence. These figures are not unreasonable.
Premiums are related to the number of children cared for in the center. The larger the capacity, the higher the premium. Expect higher premiums when you choose higher liability limits.
Findings from a June 1989 survey of private and nonprofit child care directors and professionals conducted by the Child Care Information Exchange Magazine show that the average annual premium for liability insurance paid by child care centers was $35.78 per child per year.
Look for ways to lower premiums without exposing yourself to a potential catastrophic loss. Do you need coverage for certain exposures where the magnitude of loss would be small? Can you increase certain deductibles? A deductible is the amount of the claim that you pay. For example, if you had a $300 medical claim with a $200 deductible, you would pay the first $200. By choosing the highest deductible you believe you can afford, you can lower your premiums.
Ask to see a copy of a claim form and ask where you would send or take the form to file a claim. The company should pay the expenses directly. You should never pay a potential liability claim. Be certain to ask enough questions to understand the claim process before buying the policy.
Check *Best's Insurance Reports* in your public library. Companies rated A or A+ are financially the strongest. If the company is not rated, check with the state department of insurance.
Ask managers or owners of businesses who have had experience with the insurance companies you are considering. Ask your state department of insurance about the complaints received against various companies. The department may be able to provide the complaint ratio of each company. The complaint ratio is the number of complaints reported in relation to the number of policies sold. Ask professional child care organizations if they are aware of complaints about any companies.
Is she/he willing to work with you? Listen carefully to the agent's answers to your questions. Look for an agent who can answer your questions and seems interested in finding the best arrangement for your situation.
Well-run programs have extremely low accident rates. However, you will want to evaluate potential areas of liability and strengthen your program by reducing the risk of injury to children, parents, visitors, and property. Examine your facilities and equipment to eliminate hazards that may be potential risks. Fence you playground. Eliminate any swimming pool or pet hazard, especially dogs. Check playground equipment daily. Post rules about hand washing and sanitation and enforce the rules. Include first aid training and equipment. Obtain written authorizations from parents for emergency medical treatment. Keep a log on who is authorized to pick up children, and check closely. Adhere closely to licensing standards.
Deal with a good insurance agent or certified insurance counselor. A good agent will know which insurance companies are sound. Make sure your agent is experienced in selling this type of insurance.
Ask your agent to review your program. The agent might look for high-risk activities and review your health and safety procedures and staff training safety program. Make suggested improvements to lessen risk exposure. Document your health and safety procedures.
Insurance is not easy to understand. Always carefully review policies, coverage, and premiums. Don't hesitate to contact the insurance department in your state for answers to questions.
ADMITTED CARRIERS: Companies licensed and authorized to do business in a particular state. They are regulated by the state's insurance department (or commission) and benefit from the protection of the state's guaranty fund.
CLAIMS MADE POLICY: A policy for which claims are paid only if they occurred and were filed while the policy was in force.
DECLARATIONS: A section of an insurance policy that provides basic descriptive information about the insured person and/or property, the premium to be paid, the time period of the coverage, and the policy limits.
ENDORSEMENT: An amendment or addition to the policy; also sometimes known as a rider. An endorsement may expand coverage over that of the basic "stock" policy. However, often it is also used to exclude certain kinds of coverage.
ERRORS AND OMISSIONS: Insurance for the liability of a professional for losses that occurred because of his or her errors or oversights.
EXCESS AND SURPLUS (E & S) LINES CARRIERS: Insurance carriers that provide insurance to cover risks admitted carriers choose not to cover, and thus relatively unattainable through admitted carriers. These companies do not file their rates and forms with the states' insurance departments, and they usually do not conduct business nationwide. States may regulate these companies, but not as completely as they regulate admitted carriers. Most state insurance departments keep a list of companies licensed to do business on a nonadmitted basis. E & S companies are generally not allowed to participate in the state guaranty fund.
EXCLUSIONS: Clauses that narrow the focus and eliminate specific coverages broadly stated in the insurance policy.
INDEPENDENT AGENT: An agent who is authorized to write insurance for more than one insurance company.
LIABILITY: Legal responsibility for damage or injury. The responsibility is usually financial and usually due to negligence. Negligence occurs when there is a breach of the duty owed an individual that causes injury or damages.
LIABILITY LIMITS: The maximum dollar amount that the insurance company will pay for claims on the particular policy.
ADMITTED INSURANCE COMPANY: A company licensed by your state, required to file rates and policies with the state, and backed by the state insurance guaranty fund if the company becomes insolvent.
OCCURRENCE FORM: A policy for which claims are paid after the policy has expired or you have gone out of business, if the incident precipitating the claim occurred while the policy was in force.
PREMIUM: The amount of money charged a policy holder for an insurance policy.
SELF-INSURANCE: An arrangement through which some firms and individuals plan to assume all or a portion of their own losses. Self-insurers often establish special funds for this purpose and obtain insurance to cover losses in excess of predetermined amounts. Operations sponsored by a large employer sometimes choose this option for a portion of their insurance.
UNDERWRITER: An employee of an insurance company, who prices and assesses the risk of accepting insurance applications submitted to the company.
Use this worksheet to compare policies.
How does the company limit its risks?
- Maximum number of children?
- Membership in professional association required?
- Underwriting guidelines (pools, fences, smoke detectors, etc.?)
What is and is not covered by the policy?
- Activities away from the center?
- Transporting children?
- Loading and unloading children?
- Mental, physical, and/or sexual abuse?
- Product liability?
- Giving medications?
- Directors and officers?
- Errors and omissions?
- Damage to property of others?
- Personal injury?
Is the policy and occurrence form or a claims made form?
What are the liability and accident insurance (or medical payment) limits?
- Per claim?
- Per year?
Are the stated limits applicable to your center, alone, or to other centers insured with aggregate limits under the same policy?
What is the deductible?
What is the premium?
What is the company's reputation?
What did I learn from:
- Best's Insurance Reports?
- State Department of Insurance?
- Professional associations?
- Other child care operators?
- Other sources?
How do I file a claim?
Is the agent knowledgeable and helpful?
Below are the addresses and telephone numbers you can use to contact your state department of insurance.
Department of Insurance
320 W. Washington
Springfield, Ill. 62767
Department of Insurance
311 W. Washington
Indianapolis, Ind. 46204-2787
(317) 232-2395 or (800) 622-4461
Department of Insurance
Lucas State Office Building
Des Moines, Iowa 50319
Kansas Insurance Department
420 S. W. 9th
Topeka, Kans. 66612
(913) 296-7801 or (800) 432-2484
Michigan Insurance Bureau
P.O. Box 30220
Lansing, Mich. 48909
133 E. 7th Street
St. Paul, Minn. 55101
(612) 296-2594 or (800) 652-9747
Missouri Division of Insurance
301 W. High Street, Room 630
P.O. Box 690
Jefferson City, Mo. 65102
(314) 751-4126 or (800) 726-7390
Department of Insurance
941 O Street, Suite 400
Lincoln, Neb. 68508
North Dakota Insurance Department
Capitol Building, 5th Floor
600 E. Boulevard Avenue
Bismark, N.D. 58505-0320
(701) 224-2440 or (800) 247-0560
Department of Insurance
2100 Stella Court
Columbus, Ohio 43266-0566
(614) 644-2673 or (800) 686-1526
South Dakota Division of Insurance
910 E. Sioux Avenue
Pierre, S.D. 57501-3940
P.O. Box 7873
Madison, Wis. 53507-7873
(608) 266-3585 or (800) 236-8517
For more information:
Insurance Information Institute
100 William Street
New York, N.Y. 10038
North Central Regional Extension Publications are subject to peer review and prepared as a part of the 13 land-grant universities of the 12 North Central States, in cooperation with the Extension Service - U.S.
Department of Agriculture, Washington D.C. The following states cooperated in making this publication available:
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Kansas State University
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Michigan State University
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East Lansing, Michigan 48824-1039
University of Missouri
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