Exempt - Winter 2008 - (Page 14)

INSURANCE continued from page 13 mate should be based on assets of the organization. A second question asks what limits of coverage are needed to support the mission or retain a qualiﬁed board member. Lockwood Herman gave the example of an organization with a budget of $1 million that held a $5 million D&O policy. “I asked whether a member of the board was a valuable contributor and wouldn’t serve without that coverage,” she said. “That alone warrants a higher limit of the policy and may justify the cost.” What limit does the agent or broker advise? Herman explained that the answer could come from the broker’s experience or could come from his wanting a higher commission. Nonproﬁts have to be wary and shop around. “What is the worst possible case scenario?” she asked. The answer could determine the ﬁgure you want to seek. Do you expect a possible legal action because 10 employees were laid off and those claims might hit within the same year? “You might only realize you had too much coverage if you faced the worst case scenario, lost during the trial, and the total cost was far below the limits of the policy,” she said. “Until that day comes, you won’t know.” D&O policies cover claims that deal with the governance or management of an organization. Generally policies cover “wrongful acts.” The deﬁnition of “wrongful acts” could focus on omissions, misleading statements, errors, and neglect or breach of duty. Today, employment practices liability (EPL) is considered the most signiﬁcant area of D&O. About 95 percent of the frequency and severity of claims are connected to employment practices. Employment practice is a mixture of wrongful termination, harassment, and discrimination, often occurring with an overlapping of the three. Organizations are looking to increase rather than decrease the limits, according to Eric Shapiro, vice president of Socius Insurance Services, a wholesale broker in Tampa, Fla. “A main issue in deciding on the coverage comes from the net worth of the individuals on the board,” he said. “D&O was created to protect the board as they can be held personally liable even if the organization indemniﬁes them.” This factor can lead to problems if the organization doesn’t have enough money to indemnify the board. “The D&O is there to backstop that problem,” he said. Nonproﬁts face increasing legal threats. The notoriety or reputation of the organization could become an issue as the nonproﬁt becomes a target for attorneys. Also, the deﬁnition of employee is becoming broader. “The deﬁnition of a claim is broad enough so you could have a third-party liability issue,” he said. One of the largest new coverage issues arises from wage and hour claims, according to Shapiro. These actions are violations of the fair labor standards act. “Employers are increasingly targeted in class actions and government audits on wage and hour issues,” he said. He pointed out that lawyers try to obtain former or current employees to join a “class,” which would challenge the court to gain overtime liability. Often large monetary awards are awarded for the class members. A positive trend appears from a softening of the market. The market is down around 20 to 25 percent during the past few years. “Competition has made premiums go down with nonproﬁts getting more coverage for less,” he said. “Exclusions are less onerous -- coverage is granted like third party discrimination or harassment that is built into the policy.” Having too broad a coverage isn’t a major problem, according to Pamela Davis, president and CEO of the Nonproﬁts Insurance Alliance Group in Santa Cruz, Calif. “The ﬁrst $100,000 is where the major expense lies,” she said. “Additional coverage isn’t incrementally more expensive.” The alliance helps community-based nonproﬁts with issuing the policy and paying the claims. Most nonproﬁts dealing with the alliance have a budget of around $10 million or less. Around 95 percent of the small nonproﬁts have coverage for $1 million, with some up to $5 million. On one hand, the amount of necessary coverage could appear less than most nonproﬁts seek. “In 20 years of insuring nonproﬁts, the two largest claims were $1 million and $400,000,” she said. “The claim for $1 million happened with a board member who acted extremely badly so that wasn’t a usual case.” The more typical claims averaged $29,000 for defense and $44,000 for pay-outs. “We know that one in 10 cases will have some chance of costing more than $100,000.” Because employee-related claims constitute the bulk of the casework, the alliance recognizes that the employee part of D&O might not be needed by organizations that operate without a staff. “We minimize costs by charging a small organization without employees a ﬂat $600 amount for $1 million of coverage,” she said. Ways exist to minimize employee claims with having proper termination procedures and employee 14 | Exempt | Winter 2008

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Exempt - Winter 2008

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