Tag Archives: fiduciary liability

The Need to Educate on General Liability

In a perfect world, insurance buyers would understand their products just as well their insurance agents. This would save a few headaches for everyone involved, and it would probably streamline the process on all ends. However, the reality is that most business owners don’t understand the extent of the insurance products they purchase. Then again, no one should expect them to.

Insurance products are highly complex vehicles. Few business owners have the time to invest in becoming experts in the field or in the products they purchase. Even the best insurance agents spend years learning about the products they sell, many of which change frequently as the economy changes.

That being said, no business owner should simply buy a product without understanding the most important aspects regarding what it does and does not cover. In truth, a highly skilled insurance agent should never let them, either. Here’s where there can be a gap between how much insurance a business purchases and how much it actually needs, showing why educating business owners on the extent of their insurance really matters.

False Perceptions of General Liability Are Common

Many customers tend to believe their insurance covers more than it actually does. This situation could probably be applied to any insurance product, but general liability policies are often the most frequently misunderstood by buyers.

See also: What to Expect on Management Liability  

To put it simply, far too many businesses are purchasing less insurance coverage than they should. In a sense, many are taking a huge gamble, believing their risk exposure is less than what it actually is or that their preventative measures, such as employee training, can shield them from those risks. While risk prevention definitely helps, it’s ultimately far from the bulletproof shield many companies think it is. Most companies do it to help themselves get a better rate on their insurance, while maintaining the false perception that their general liability coverage protects them against a multitude of risks not actually defined in the policy.

As a company scales in size, so, too, does its likelihood of experiencing losses related to cyber liability, employee fraud, fiduciary liability, directors and officers (D&O) or workplace violence. Yet many companies seem not to realize their exposure.

This would, of course, be less troubling if companies were purchasing policies that actually covered those kind of risks. Overwhelmingly, they’re choosing to avoid those insurance products altogether. According to Chubb’s survey on private company risk, non-purchasers believed their general liability policy covered:

  • Directors and Officers Liability (65%)
  • Employment Practices Liability (60%)
  • Errors & Omissions Liability (52%)
  • Fiduciary Liability (51%)
  • Cyber Liability (39%)

Businesses aren’t failing to purchase enough liability coverage because they’re unnecessary risk takers. Most, it seems, simply have false perceptions about what their general liability will and won’t do.

A small business may think its general liability policy covers a server hack. Yet, lo and behold, when a server gets hacked and the ensuing liability claims start pouring in, that small business may quickly find itself underwater. In fact, the U.S National Cyber Security Alliance found that the 60% of small companies went out of business within six months of a cyber attack. This seems extreme, but the average cost for a small business to clean up after a hack is $690,000, according to the Ponemon Institute. How many small- or medium-sized businesses can easily absorb that kind of cost without insurance coverage? Not many.

Similarly, mid-sized companies may believe their general liability policy covers directors and officers, leaving the company with unnecessary risk exposures should an incident occur. If, for example, a company begins operating internationally and fails to effectively meet one of the federal regulations governing its industry, a general liability policy won’t help protect the company from impending lawsuits. Any directors held personally responsible may find their own personal assets at risk. Given what we learned from the Chubb survey, it’s quite likely that most directors may think they’re fine with the minimal coverage they receive from a general liability policy. A costly mistake, to be sure.

Who’s to Blame?

We’ll leave the finger pointing aside for now and settle on this: The customer is always right, but he’s not always well-informed. As every insurance agent knows, the amount of time it takes to fully understand an insurance product can be extensive. Business owners, in general, lack the time to invest in fully understanding the products they purchase. It should come as no surprise, then, that misunderstandings arise over what general liability policies actually cover and what risks they simply won’t mitigate.

See also: ISO Form Changes Commercial General Liability  

Insurance agents have a responsibility to use their knowledge to help business owners better understand and sift through those misconceptions. More needs to be done to help decision-makers understand what they are and are not getting from their insurance.

Helping businesses better understand the ins and outs of their general liability policy is a win-win all around.

Fiduciary Liability Insurance in the Nonprofit Sector – What You Need to Know

As a national insurer of nonprofits we are often asked what do their directors and officers need to know about their fiduciary responsibilities and can they insure for their errors or omissions. Just do an Internet search on “fiduciary duties of nonprofit directors and officers” and be treated to 150,000 articles describing the responsibilities, but only a few that drill down very deeply on the insurance issues.

You’ll frequently see references to the duties of care, loyalty and obedience, how the “business judgment” rule can work both for and against directors and officers, and how indemnification is achieved. So once you’re up to speed on all that, let’s look at how the insurance mechanism fits in.

What It Is, What It Isn’t
Fiduciary liability insurance (FLI) is not fidelity bonding that would respond to claims of embezzlement or other criminal activity. For that you need a fidelity bond or employee and volunteer dishonesty coverage.

FLI can cover ERISA liabilities, although ERISA coverage is more commonly found in the bond market.

For the most part, FLI protects the organization, its directors, officers, and employees. It is common in the nonprofit sector for coverage to extend to volunteers and in some cases even to interns and students-in-training. The coverage will attach if a claim is made that the organization or an insured person breached its duty as a fiduciary. Some carriers use the Side A (insured person), Side B (each claim) approach, while others combine all insureds into one form.

There are also a variety of exclusions related to claims by one insured against another. For example, some forms exclude claims brought by or on behalf of the “Organization” (usually a defined term). Others exclude claims by or on behalf of an individual “insured person” (also defined).

In underwriting fiduciary liability coverage in the nonprofit sector, carriers require certain controls be in place including, but not limited to:

  • Articles of Incorporation filed with the respective state
  • Bylaws have been accepted by the Board of Directors
  • Board meetings are held at regular intervals and minutes are on file
  • 501(c)(3) status has been granted by the IRS
  • State tax exemption status has been granted
  • Filing has been completed, where required, with the Registry of Charitable Trusts or similar state entity
  • Payroll and other taxes are timely paid
  • Workers’ compensation is in place for employees
  • Reports to regulatory and funding agencies are submitted timely
  • Regular review of financial and business dealings to protect the organization’s tax exempt status
  • Full disclosure of any self-dealing transactions
  • Annual review and approval of budget
  • Review periodic financial reports at least quarterly
  • Annual review of executive compensation
  • Ensure that appropriate internal controls are in place

Some of the more common exclusions include:

  • Breach of contract (typically found in CGL forms or endorsements)
  • Fines, penalties and sanctions
  • Punitive damages (unless insurable in the respective jurisdiction)
  • Personal profit or advantage
  • Fraud or dishonesty
  • Costs of complying with equitable relief, including but not limited to, injunctions, restraining orders or restitution

It is this last exclusion that can be the most troublesome. While fiduciary claims are rare in the nonprofit sector (see below), the most common involve audits or investigations by grantors and funding agencies that conclude funds were improperly used or distributed. If the claim is for restitution, the agency will need to manage that with its own funds.

And From The Claims Files
Data from over 23 years of directors and officers claims files at the Nonprofits Insurance Alliance Group indicates the very low frequency of fiduciary liability claims.

Of the 1,633 claims reported during that time, 85% involved employment liability claims, including ADA discrimination. That’s a whole other article.

Another 7% were breach of contract claims, for which we provide defense costs only coverage.

Wage and hour claims totaled 5%, for which we also provide defense costs only coverage.

A mere 3% (52 claims over 23 years) were for fiduciary liability. Interestingly, many of those involved investigations by state attorneys general. None of those involved any loss payments and only one involved defense costs over $5,000. Only one claim required a loss payment to a client who had improperly been denied services.

So In Conclusion
In order to attract responsible board members, nonprofit agencies need to have directors and officers liability coverage in place that includes fiduciary liability. We recommend that such coverage also include:

  • Defense costs payable as they are incurred (rather than through a reimbursement mechanism)
  • Defense costs in addition to the liability limits
  • Broad definition of who is an insured
  • Broad employment practices liability coverage
  • No deductible (other than for large nonprofits)
  • Broad definition of what constitutes a “claim”
  • Event trigger or occurrence basis rather than claims made

With that said and in place, the good news based on our data is that fiduciary liability claims are very infrequent in the nonprofit sector and generally cost little to defend.