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 meettheir coverage needs. One particular area where demand for packagepolicies has increased significantly is executive liability.

|

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

|

Largely ignored in this area, however, has been the non-profitorganization. The commercial insurance sector currently comprisesmore than 20 different carriers that offer myriad product andcoverage options from which a for-profit company can choose.Non-profit organizations, however, have been largelyoverlooked.

|

Why the burgeoning demand for package policies in the firstplace?

|

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

|

This is especially true in the executive liability arena, wherecoverages such as directors and officers liability, employmentpractices liability, fiduciary liability, crime, and kidnap andransom are important, but not statutorily required.

|

Combining coverages in one policy allows both insurer andpurchaser to enjoy economies of scale, resulting in more affordablepremiums.

|

A package policy, in addition, can actually facilitate the claimhandling process by consolidating policyholder dealings with oneinsurer. Furthermore, having only one set of terms and conditionsreduces the potential for confusion in terms of coverage.

|

Finally, the application process is typically more efficientwith a package policy because duplicate information requested inmultiple coverage applications is eliminated.

|

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

|

Moreover, non-profits generally labor under tight budgetaryconstraints and uncertain funding. An executive liability packagepolicy that bundles essential management liability coverages makesit easy and cost effective for non-profits to get the coverage theyneed.

|

The core of executive liability package policies for non-profitsis directors and officers coverage. The responsibilities ofindividuals serving on a non-profit board of directors areidentical to those of directors of profit-making companies.

|

Each board member is expected to:

|

Perform his or her duties with diligence, obedience andloyalty.

|

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

|

Act within the scope of his or her authority.

|

No matter the size of an organization or the activities in whichit engages, the directors and officers are legally liable for theiractions. When considering that directors and officers of non-profitorganizations face personal liability, it is easy to see whyD&O is a crucial piece of the insurance package that noorganization should forgo.

|

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

|

Most general liability policies, although a staple in anycompanys insurance portfolio, do not respond to claims involvingdirectors 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, isnot much of a safety net. This law does not protect a volunteer ifthe act or omission is caused by gross negligence or willful,criminal, or reckless misconduct. Moreover, it neither protectsthose who receive compensation, such as employees and officers ofthe organization, nor does it protect the organization itself.

|

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

|

The average defense cost for claims in 1996 and 1997 was$114,000, according to the Watson Wyatt Worldwide NonprofitOrganization D&O Liability Survey. This figure does not takeinto account the non-economic costs of a lawsuit, such as the timeand energy it takes to manage the suit and the shift of thedirectors' and officers' attention from the mission of theorganization 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 managethe claim, allowing the organization to continue the work it wasfounded to do.

|

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

|

Another vital element of executive liability coverage isemployment practices liability, which affords protection to thedirectors, officers, employees, volunteers, committee members andthe entity against employment practices claims.

|

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

|

Of these claims, wrongful termination and discriminationrepresent the largest exposures. Defense expenses for these claimscan mount quickly and pose a severe financial hardship to anorganization that is simply trying to carry out its mission ofhelping others. Adding EPL coverage to its insurance portfolio willhelp the non-profit organization protect its assets in the event ofemployment-related claims.

|

Unfortunately, these are not the only exposures that presentrisk to non-profit organizations. Those that provide medicalbenefits to their employees or sponsor a pension plan faceadditional exposure. The Employee Retirement Income Security Act of1974 imposes personal liability on plan fiduciaries who breachtheir duties.

|

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

|

Fiduciary liability insurance can help protect those responsiblefor maintaining benefit plans by providing defense and indemnitycoverage 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 concernedabout financial loss due to dishonesty of employees or volunteersaperil that costs American businesses approximately $600 billioneach year, according to fraud statistics of the Association ofCertified Fraud Examiners.

|

In addition, if a non-profits activities require its staff totravel, there is the risk of kidnapping as the world politicalclimate becomes more complex. Crime and kidnap and ransom coveragescan help protect an organization from these exposures.

|

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

|

Combining all of these coveragesD&O, EPL, fiduciaryliability, crime, and kidnap and ransominto one policy providescomprehensive coverage that can be customized to fit anorganizations unique needs. Various deductible and limit optionsare available to empower the organization to construct the bestpolicy for their exposures, at a premium that is affordable.

|

To fully protect a non-profit so that it may focus on carryingout its mission, it is more important than ever to consider addingexecutive liability coverage to the organizations existinginsurance portfolio. And with all of the economic and budgetaryconstraints facing non-profits, the most economically sensiblevehicle to include these important coverages is a package executiveliability policy.

|

Joseph J. Perschy is a senior manager for TravelersBond.


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


Want to continue reading?
Become a Free PropertyCasualty360 Digital Reader

  • All PropertyCasualty360.com news coverage, best practices, and in-depth analysis.
  • Educational webcasts, resources from industry leaders, and informative newsletters.
  • Other award-winning websites including BenefitsPRO.com and ThinkAdvisor.com.
NOT FOR REPRINT

© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.