Directors and Officers Liability

Non-Profit, including Associations and Unions

Non-profit organizations need directors and officers (D&O) coverage to protect a range of individuals from lawsuits, and this specialty insurance segment can be a significant opportunity for new agency sales. All types of non-profit organizations need D&O coverage to protect their officers, directors and volunteers from lawsuits and the associated costly litigation. Some non-profit organizations still do not purchase coverage and many organizations do not have the broadest coverage available.

Non-profit D&O policy forms can vary greatly. Some policy forms provide D&O only, but many forms have been extended to provide employment practices liability coverage (EPL) and professional liability coverage (errors & omissions or E&O) . Note that while the policy form may incorporate the additional EPL and E&O coverages, the forms are often referred to as "non-profit D&O." It is imperative that the insured review the form that is proposed or provided to ensure that the coverage is consistent with operational needs and the coverage desired.

The types of non-profit organizations that coverage can be provided for is quite broad. Example include:

Directors and officers of non-profit organizations owe a number of duties to a variety of constituencies. The duties are varied depending upon the type of organization and include fiduciary, employment and other duties. The constituencies these various individuals have duties to is very broad. These constituencies include the organization itself, the general public and the organization's members and employees.

Exposure

Do non-profit organizations have claims? Yes, but infrequently. Most non-profits have very low exposure and therefore have infrequent claims. However, there are a number of types of non-profit organizations with higher exposure, and these more unique higher risk non-profit organizations can have significantly higher claims frequency and severity. This increased exposure can arise from a variety of operating characteristics, such as the provision of medical services. As with many specialty lines segments, the loss exposures vary by the type of operation and operating characteristics.

Many of the non-profit D&O claims made today are employment related. Some experts have estimated that up to 90% of all claims made against or involving non-profit organizations are employment related. This is consistent with the general trend of increased employment related claims, to which non-profit organizations are not immune. In many situations, non-profit organizations are generating a higher rate of employment related claims than for-profit organizations. While the reasons behind this are unknown, there is widespread agreement among non-profit D&O underwriters that one of the causes may be the result of some non-profits' part-time and informal management approach.

While the higher rate of employment related claims among non-profits persist, this may be changing. Many non-profit organizations have become more aware of their employment-related exposures and have taken appropriate risk management steps to mitigate them. If this is, in fact, the case, the impact over time should be reduced claims and lower premiums.

Other types of non-profit D&O claims include:

Some states have "safe harbor" statutes designed to protect directors and officers of certain non-profit organizations from lawsuits. In no way should these statutes be a substitute for D&O coverage. These protections vary by state and are usually narrow in nature as to the requirements for the statutory protection. Most importantly, they do not protect the directors from lawsuits, but only, if the fact situation qualifies, from damages to a plaintiff in the lawsuit. Generally, legal defense costs are still significant from the claim filed. And additionally, plaintiff attorneys have become adept at writing complaints to ensure that the complaint is not dismissed in a summary judgement motion on the safe harbor protection.

Because of the charitable nature of the organizations, claims for wrongful actions in a non-profit organization can become extremely divisive and personal. A claim situation of this type can be difficult for the parties to resolve on a reasonable basis, leading to longer time frames, higher defense costs and ultimately litigation. In addition, non-profit claims situations are typically significant burdens on volunteer members due to the substantial time requirements of the process.

Insurance

D&O (directors & officers) coverage for non-profit organizations is not the same coverage as for-profit D&O coverage. Often the non-profit D&O coverage is broader than for profit D&O coverage, and will frequently incorporate specific coverage provisions for the specialty nature of non-profit organizations.

Non-profit D&O policy forms can vary greatly. Some policy forms provide D&O only, but many forms have been extended to provide employment practices liability coverage (EPL) and professional liability coverage (errors & omissions or E&O). Not only do the basic coverages provided vary from policy to policy, but also the specific coverage provisions within each base coverage vary significantly. Additionally, one particular form is not necessarily better than another in all cases. Note that while the policy form may incorporate the additional EPL and E&O coverages, the forms are often referred to as "non-profit D&O." It is imperative that the insured review the form that is provided to ensure that the coverage consistent with operational needs and the coverage desired.

A non-profit D&O policy typically protects both the non-profit organization and key individuals against claims for wrongful or negligent acts allegedly committed by them in performing their duties. The insurance can cover the loss if the non-profit or its covered individuals are legally obligated to pay as a result of the wrongful or negligent act in serving the non-profit. The non-profit D&O policy also covers legal fees for defense, even if the case is settled out of court.

The non-profit D&O forms that incorporate EPL coverage typically protect the entity and the directors and officers (the Ds & Os) from wrongful termination, discrimination, and sexual harassment allegations.

Non-profit D&O insurance is available from a wide range of specialty lines insurers on both a licensed (admitted) and surplus lines (non-admitted or E&S) basis. Coverage and pricing vary greatly depending upon the type of organization, the specific purpose of the organization and its size and location. Coverage and pricing also vary considerably between insurers since each has its own particular approach, preferences and underwriting considerations.

Specific coverage provisions are important for this coverage. For example, some organizations prefer to purchase the EPL and E&O coverages separately, and some are required to do so because of the unique nature of their organization. For example, a trade association that is directly providing insurance to its members will typically be required to purchase insurance agents E&O coverage separately (if coverage is desired).

Coverage is provided on a claims-made basis. Limits and deductibles vary with the size and type of insured. Standard limits for most small to medium sized non-profit organizations start at $1.0 million. Policy forms vary significantly, and can include EPL and E&O for certain types of non-profit organizations. Defense costs may be included within the limit and deductibles, or may be outside the limits.

Coverage is normally provided on an annual basis with multi year policies available for certain types of accounts. Multi year policies are provided for two or three years with either up-front or annual installment payment plans. When up-front multi year policies are offered, the premium is typically discounted for the pre-payment.

Premiums vary significantly based on the type of organization, its member services or benefits and other operating characteristics in addition to coverage terms. Minimum premiums vary by market and can be as low as $700.

Most policies have a list of exclusions that include illegal acts, acts which are uninsurable based on public policy and claims for losses involving bodily injury or pollution. These exclusions are typically found on all policies.

Examples:

Mercator Risk Services Inc. ("Mercator" or "Mercator Risk Services") has provided proposals to a wide range of non-profit organizations, including social service organizations, trade associations, private clubs, religious organizations and other types of professional or special interest groups. We can provide very inexpensive, standard non-profit D&O coverage or highly customized coverage, depending upon the client's needs.

Mercator Risk Services provides coverage for a wide range of non-profits. Please let us know your client's needs and we will provide you with information and assistance with your particular situation or account, and professional liability coverage.

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