Packages Make Sense For Non-Profits

By Joseph J. Perschy

Faced with a faltering economy and shrinking insurance budgets, more and more companies are turning to package policies to meet their coverage needs. One particular area where demand for package policies has increased significantly is executive liability.

The market for these products is estimated at $500-600 million and shows no signs of decreasing anytime soon, according to The Betterley Report (published by Betterley Risk Consultants in Sterling, Mass.)

Largely ignored in this area, however, has been the non-profit organization. The commercial insurance sector currently comprises more than 20 different carriers that offer myriad product and coverage options from which a for-profit company can choose. Non-profit organizations, however, have been largely overlooked.

Why the burgeoning demand for package policies in the first place?

These products offer risk managers affordable and creative solutions for securing appropriate coverage.

This is especially true in the executive liability arena, where coverages such as directors and officers liability, employment practices liability, fiduciary liability, crime, and kidnap and ransom are important, but not statutorily required.

Combining coverages in one policy allows both insurer and purchaser to enjoy economies of scale, resulting in more affordable premiums.

A package policy, in addition, can actually facilitate the claim handling process by consolidating policyholder dealings with one insurer. Furthermore, having only one set of terms and conditions reduces the potential for confusion in terms of coverage.

Finally, the application process is typically more efficient with a package policy because duplicate information requested in multiple coverage applications is eliminated.

Non-profit organizations are particularly well suited to benefit from the package policy. Since non-profit organizations face many of the same management liability exposures as commercial entities, they have similar insurance needs.

Moreover, non-profits generally labor under tight budgetary constraints and uncertain funding. An executive liability package policy that bundles essential management liability coverages makes it easy and cost effective for non-profits to get the coverage they need.

The core of executive liability package policies for non-profits is directors and officers coverage. The responsibilities of individuals serving on a non-profit board of directors are identical to those of directors of profit-making companies.

Each board member is expected to:

Perform his or her duties with diligence, obedience and loyalty.

Act in good faith with the best interests of the organization in mind.

Act within the scope of his or her authority.

No matter the size of an organization or the activities in which it engages, the directors and officers are legally liable for their actions. When considering that directors and officers of non-profit organizations face personal liability, it is easy to see why D&O is a crucial piece of the insurance package that no organization should forgo.

Many executives believe they are protected by other insurance or by statute, especially if they are involved with a non-profit entity. This simply is not the case.

Most general liability policies, although a staple in any companys insurance portfolio, do not respond to claims involving directors and officers in their professional capacity. Furthermore, state immunity statutes often provide only threadbare protection, if any at all.

Even the Volunteer Protection Act, signed into law in 1997, is not much of a safety net. This law does not protect a volunteer if the act or omission is caused by gross negligence or willful, criminal, or reckless misconduct. Moreover, it neither protects those who receive compensation, such as employees and officers of the organization, nor does it protect the organization itself.

A D&O policy for non-profit or private organizations typically protects the directors and officers personal assets as well as those of the organization. This is commonly referred to as “entity” coverage. The policy also should provide for defense expenses.

The average defense cost for claims in 1996 and 1997 was $114,000, according to the Watson Wyatt Worldwide Nonprofit Organization D&O Liability Survey. This figure does not take into account the non-economic costs of a lawsuit, such as the time and energy it takes to manage the suit and the shift of the directors' and officers' attention from the mission of the organization to the handling of the case.

Since most D&O coverage is written on a “duty-to-defend” basis, non-profits can rest easy knowing the insurer will manage the claim, allowing the organization to continue the work it was founded to do.

This coverage is critical for non-profits since they often have strict budgets and limited resources, with little cushion to respond to expensive litigation or damage awards. With the organization named as a defendant in 95 percent of D&O claims, according to Watson Wyatt's survey, non-profit entities need to seriously consider whether they can afford not to carry D&O coverage.

Another vital element of executive liability coverage is employment practices liability, which affords protection to the directors, officers, employees, volunteers, committee members and the entity against employment practices claims.

Employment practices claims are at an all-time high, representing approximately 80 percent of all claims against non-profit organizations, according to Watson Wyatt's survey.

Of these claims, wrongful termination and discrimination represent the largest exposures. Defense expenses for these claims can mount quickly and pose a severe financial hardship to an organization that is simply trying to carry out its mission of helping others. Adding EPL coverage to its insurance portfolio will help the non-profit organization protect its assets in the event of employment-related claims.

Unfortunately, these are not the only exposures that present risk to non-profit organizations. Those that provide medical benefits to their employees or sponsor a pension plan face additional exposure. The Employee Retirement Income Security Act of 1974 imposes personal liability on plan fiduciaries who breach their duties.

With the stock market languishing and pension plan woes in the news on what seems like a daily basis, this is increasingly becoming an area of exposure.

Fiduciary liability insurance can help protect those responsible for maintaining benefit plans by providing defense and indemnity coverage for wrongful acts involving the plan. As with D&O, fiduciary liability also protects the organization from claims.

As if this weren't enough, non-profits also should be concerned about financial loss due to dishonesty of employees or volunteersa peril that costs American businesses approximately $600 billion each year, according to fraud statistics of the Association of Certified Fraud Examiners.

In addition, if a non-profits activities require its staff to travel, there is the risk of kidnapping as the world political climate becomes more complex. Crime and kidnap and ransom coverages can help protect an organization from these exposures.

With all of these potential exposures, protecting a non-profit organizations assets easily, affordably and adequately may seem impossible. This is where package policies for non-profit organizations can help.

Combining all of these coveragesD&O, EPL, fiduciary liability, crime, and kidnap and ransominto one policy provides comprehensive coverage that can be customized to fit an organizations unique needs. Various deductible and limit options are available to empower the organization to construct the best policy for their exposures, at a premium that is affordable.

To fully protect a non-profit so that it may focus on carrying out its mission, it is more important than ever to consider adding executive liability coverage to the organizations existing insurance portfolio. And with all of the economic and budgetary constraints facing non-profits, the most economically sensible vehicle to include these important coverages is a package executive liability policy.

Joseph J. Perschy is a senior manager for Travelers Bond.

Reproduced from National Underwriter Edition, June 16, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.

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Packages Make Sense For Non-Profits

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