Tag Archives: nonprofits

D&O Coverage: A Low-Cost Alternative for Nonprofits

Who needs nonprofit directors and officers (D&O) coverage when you have volunteer immunity and homeowners insurance? Not so fast. It is possible to find some coverage, or form of immunity, under your homeowner’s policy, and there are attorneys that find ways to wedge things into coverage when there are no other remedies available.  However, that doesn’t mean you should ignore the availability of the proper insurance. Rather than hope to fit a round peg into a square hole, buyers should look to purchase coverage for any exposure that keeps them up at night.

There are people who wrongly believe that if they are performing charity work they can’t be sued, won’t be sued, or have some form of mythical immunity or free insurance somewhere to protect them. Let’s explore those theories in more detail.

Isn't there a federal law that grants immunity?
In 1997, our government passed the federal Volunteer Protection Act (VPA) to promote volunteerism for nonprofit organizations. There is more to the act than can be summarized in this article, and any legal advice should come from an attorney, but it’s important to know that there is a federal law designed to provide protection to volunteers. Also, note that the immunity applies to volunteers, and not necessarily the nonprofit organization or compensated employees/executives. With that knowledge, it’s important to be aware of other limitations of the act.

Exceptions from the federal law include:

  • Acts of violence
  • Acts of international terrorism
  • Hate crimes
  • Sexual offenses
  • Civil rights violations
  • Claims involving use of alcohol or drugs

In the absence of a definition of “Civil Rights” in the act, all sorts of common problems could be exempt. Three instances that immediately come to mind are discrimination, sexual harassment and privacy rights. Those are common allegations in claims we see made against volunteers, nonprofit organizations and their leaders.

Volunteers may also lose their potential immunity in these situations if:

  • the volunteer is acting outside the scope of his or her responsibilities to the organization
  • the volunteer was unlicensed if required or appropriate
  • the harm was caused by gross negligence rather than ordinary or simple negligence
  • the harm was a result of operating a vehicle, vessel or aircraft that requires a license or insurance
  • the volunteer receives compensation or anything other than compensation that is worth over $500
  • the charity loses its nonprofit status

The VPA has provisions indicating that immunity provided by the act cannot be reduced by state laws, but can be broadened by state law. The federal law will apply to volunteers unless a state opts out of the law, which is permitted.  New Hampshire, for example, opted out in instances where everyone involved is a state resident and a New Hampshire state court is used.

Can we find immunity provided by state laws?
Many states do have immunity laws available to volunteers providing services to nonprofits. Every state has its own advantages and limitations. Again, seeking the advice of an attorney licensed in the relevant state is appropriate. When seeking the advice of counsel as to the immunity provided by state law, there are some questions to ask:

  • Does the state law only protect volunteers, D&O or both?
  • Will the state law prevail if the plaintiffs are from a different state?
  • What material limitations exist?
  • How is immunity impacted by willful or negligent activities?
  • Is the nonprofit organization immune from vicarious liability arising from the conduct of the volunteers?
  • Can an organization subrogate against a volunteer for costs associated with vicarious liability?

Will a personal homeowner's insurance or personal umbrella policy protect me?
The easy answer is that an insured might find some coverage, but not for all situations. Not all homeowners policies are the same and some may have special D&O enhancements. If you review what is generally covered, you will see coverage for bodily injury and property damage on those policies. It is also important to keep in mind that these are personal policies and any coverage provided would not be shared with the nonprofit organization or any other person affiliated with the organization. So if a homeowners policy or personal umbrella is designed to only cover bodily injury or property damage and is limited to protecting only one individual, is this the best solution for a nonprofit organization and all its leaders, employees and volunteers? That’s easy – no.

How about buying the proper insurance?
There is a policy specifically designed to protect the directors, officers, employees, trustees, volunteers, committee members, interns, domestic partners and the organizational entity.  Note that the coverage isn’t limited to just the directors and officers. Those other individuals are also protected by this insurance.  A typical D&O policy pays on behalf of the nonprofit organization when that organization is obligated to indemnify the individuals for their actions on behalf of the organization, as outlined in the organization’s bylaws.  The organization itself is also generally covered for alleged wrongful acts. D&O policies are broadly written to cover claims alleging any error, act or omission arising from activities on behalf of a nonprofit organization. The policy won’t cover bodily injury, property damage, pollution, workers’ compensation or issues arising from the administration of benefit plans. Those items should be covered on other policies specifically designed for those exposures.  You should also find coverage for the individuals and entity for things like discrimination, harassment, wrongful termination and other personal injury violations such as invasion of privacy, wrongful imprisonment and, in some cases, copyright violations.

Similar to personal lines policies, no two D&O policies are the same. Each one needs to be closely reviewed to identify limitations as well as unique coverage enhancements. Some limitations to avoid are antitrust exclusions, third party discrimination exclusions, or overly broad insured versus insured exclusions. There are enhancements to negotiate such as coverage for immigration claims, wage and hour claims, lifetime personal extended reporting provisions, publishers liability, public relations expense coverage, priority of payments, punitive damages coverage, where insurable, and more.

Considering the relatively low cost for a properly constructed D&O policy for a nonprofit organization, it makes a lot more sense to buy the coverage than try to hide behind limited immunity or wedge coverage into the wrong insurance policy.

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.

Skiing The Slippery Slope Of Employment Practices Liability In The Nonprofit Sector

One of your employees has been out on disability with a workers’ compensation injury and you have been getting great advice and service from your workers’ compensation carrier regarding managing the employee while out on leave. Ultimately, you are advised that it has been determined in the workers’ compensation case that the employee has reached maximum medical improvement (known as permanent and stationary in some states) and cannot return to her job due to a permanent disability. With regret, you terminate the employee since she is now receiving workers’ compensation vocational rehabilitation benefits and you have heard that workers’ compensation is the exclusive legal remedy for employees suffering workplace injuries.

Not so fast! If an employer has 15 or more employees, it is subject to the Americans with Disabilities Act (ADA) and/or a state disability accommodation law with a different threshold for applicability. In this instance, even though you acted appropriately in terms of not discriminating based on a work-related injury in violation of workers’ compensation law, you have violated the Americans with Disabilities Act for failing to engage in the interactive process to determine if there is any reasonable accommodation that would have allowed the employee to return to work for you — perhaps in a different job. Failing to engage in the interactive process prior to terminating a disabled employee is a violation of the Americans with Disabilities Act and would subject you to legal liability resulting from the termination.

Okay, so maybe you knew about that issue. But what about the other employment law moguls out there just waiting for you? Let’s explore some of the common — and maybe not so common — employment practices law issues that face nonprofits, how to guard against mistakes, what it can cost if you do err, and how insurance fits into the picture.

Timing Really Is Everything
Culled from the claims files of the Nonprofits’ Insurance Alliance of California (NIAC) and the Alliance of Nonprofits for Insurance (ANI), member companies in the Nonprofits Insurance Alliance Group (NIA Group) that insures over 11,500 nonprofits around the country, here are just a few examples of seemingly appropriate terminations by 501(c)(3) nonprofits that failed to withstand scrutiny because of their timing.

  • A couple of disruptive employees whose paychecks had been withheld for failure to have reports done on time filed a complaint about not being paid and were then terminated. (Two strikes on this one!) First, most states prohibit withholding paychecks just for poor performance. Second, terminating these two employees after they complained resulted in valid claims under the state’s “whistleblower” laws.
  • A poorly performing employee complained of sexual harassment. A thorough investigation concluded no harassment had taken place. The employee was then terminated on performance grounds alone. Problem — no contemporaneous documentation of the alleged poor performance existed, so it appeared to the state administrative agency that the termination was a result of the harassment allegation because it followed closely behind the report of it.
  • A long-term employee of an elder daycare facility, who was a “mandatory reporter” under state law, filed a report with the state about inadequate staffing at the facility when an elderly client was left unattended and was found wandering around in traffic. She was terminated for not following “internal reporting procedures” (in this case a warning was the appropriate remedy, not immediate termination).

So What’s An Employer To Do?
Let’s start with the exposures under Employment Practices Liability (EPL) that give rise to liability claims. Both federal — and most state — laws proscribe the most commonly known unfair employment practices of wrongful termination, sexual harassment, discrimination and ADA violations. Embedded in each of those categories, however, are some lesser known prohibitions and strict liabilities.

By now most everyone knows that in most jurisdictions you can’t terminate someone based on age, race, gender, or sexual preference. But what if a poor performing employee is the only one working for your nonprofit that’s in a protected category? Termination here may have the appearance of discrimination sufficient to subject you to administrative or civil exposure.

You know that sexual harassment is illegal and that procedures need to be in place to train supervisory and management personnel about its ins and outs. But what if you’re in a state that imposes strict liability on an employer, even if the employer didn’t know the harassment was occurring? Or what about a delivery person that’s been making inappropriate suggestions to your receptionist, or if the delivery person believes that one of your employees has been harassing him or her? That can get you into as much trouble as the typical case.

So, what to do? Defense of Employment Practices Liability claims starts with your agency having documented procedures in place that you and your counsel can use to demonstrate to an administrative agency or a court that you intended to be — and were — in compliance. This is best accomplished from the beginning with a robust personnel handbook that includes policy statements and procedures around at least 12 key subjects.

Twelve Components of a Model Personnel Handbook

Following are twelve components that we recommend all personnel handbooks contain:

  • Introductory Statements
  • Nondiscrimination and Sexual Harassment
  • Organization and Structure
  • Training and Orientation
  • Employee Classifications and Categories
  • Employment Policies, Including Wage and Hour Regulations
  • Benefits Disclaimer
  • Leaves of Absence and Time Off
  • Standards of Performance
  • Workplace Violence Prevention and Safety
  • Search and Inspection
  • Drug-Free Workplace

At a minimum, the handbook should include statements regarding at-will employment, probationary, introductory or benefit waiting periods, and examples of disciplinary offenses (always prefaced with “including, but not limited to” language). Always have employees sign a written acknowledgment that they have read and understand the policies, or you might as well not have created them in the first place.

Next comes training and adherence. Regardless of size, every nonprofit needs to train its management personnel about the employment laws relevant to their jurisdiction and the policies and procedures the agency has adopted. Include here any state mandates such as sexual harassment training for supervisory personnel. Then, walk the talk! Follow those policies and procedures diligently — every day. Oh, and did you remember to include your board members in the training? They are at risk as much as the Executive Director because they are ultimately responsible for the agency’s overall management.

The Old “Ounce Of Prevention”
The last, and most overlooked, step in Employment Practices Liability claim prevention is checking in with experienced employment counsel before taking a significant personnel action. A poorly drafted employment offer letter can bind you for a lot more than you thought. So can the improperly announced new personnel policy or procedure — even if it’s meant to be a “positive” for employees.

More than anything else, however, is every Employment Practices Liability defense lawyer’s wish that you consult counsel before termination. There would be obvious questions about clear documentation of performance issues, protected classes of employees, and compliance with your own policies and procedures, but some circumstances might require some “drill down” inquiry. Suppose a health issue, disclosed or not, is involved. Is the employee perhaps entitled to an ADA accommodation? What about Family and Medical Leave Act entitlement, or workers’ compensation benefits?

Always, always, check with counsel experienced in employment law. Some are available on a pro bono basis — check with your local bar association. A number of Directors and Officers and Employment Practices Liability insurance carriers provide this service to their policyholders, although sometimes on a limited basis. So ask them if they do. If they don’t, ask them for a referral. At ANI-RRG and NIAC, we feel so strongly about the importance of our members getting good advice before they take an important employment action that we have three experienced labor law attorneys dedicated solely to providing preventative advice on this subject to our member-insureds.

And The New “Pound of Flesh”
If you haven’t heard or read about it, employment practices law is one of the latest and greatest fertile fields for aggressive plaintiff’s attorneys. It matters not that you are a charitable nonprofit (particularly if you have good insurance limits). Six-figure jury verdicts have become more frequent, particularly in metropolitan areas where the majority of the nonprofit sector does its work. Need convincing? Think about this data from ten recent years of our closed claim files:

  • One out of every 100 nonprofits (regardless of size) will have an EPL claim this year
  • 97% of all claims against directors’ and officers’ policies are in the EPL category
  • The average cost to defend when a claim has some merit is $29,000 and the average loss on those claims is $44,000 — a combined average of $73,000
  • 40% of EPL claims have some merit and when they do, one in ten will cost more than $100,000
  • When claims do not have merit, the average cost to defend is only $5,000, thanks to early intervention by our experienced employment defense counsel
  • The two largest claims cost $1 million and $400,000 respectively

Did You Say Something About Insurance?
Unless you have tens or even hundreds of thousands of dollars just sitting around, you probably want to think about how your agency can protect itself in this vulnerable area and one other that directors and officers should be concerned about.

When Employment Practices Liability claims first came into vogue years ago, the insurance industry’s “knee jerk” reaction was to find a way to exclude the exposure. Smarter heads prevailed, fortunately, so that today EPL coverage is readily available. But like many things, it comes in different shapes and sizes, and not always where you think it is.

Let’s talk first about Employment Practices Liability as a stand-alone coverage. It’s available and commonly protects the nonprofit from damages claimed as a result of an adverse employment action. The defense component provides for payment of attorney fees and costs, and the indemnification component provides for payment of actual damages, if any. There are exclusions as discussed below.

It is more common, however, to find EPL coverage as either an attachment to, or embedded in, the nonprofit’s Directors and Officers (D&O) coverage. The components are generally the same as described above. Key issues to consider are detailed below, but look out for some tricky provisions such as the one that requires your consent before the carrier settles a claim, but makes you responsible for all the ongoing legal expenses if you don’t accept the carrier’s recommendation.

Typical exclusions include fines, penalties and sanctions (these are uninsurable risks), back wages, multiplied damages and plaintiff’s attorney’s fees. Wage and hour claims are one of the biggest uncovered liabilities that a nonprofit faces. Properly classifying an employee as exempt from the overtime requirements of the Fair Standards Labor Act (or similar state laws) can be tricky business and sometimes requires extra sensory powers of hindsight. To be properly classified as exempt, an employee must make a threshold salary as defined by federal and state law and pass the duties test of either the professional, executive or administrative exemptions. While most insurance policies do not cover payment of back wages and penalties, a few at least provide some defense costs to cover wage and hour claims.

So what are the key EPL components of a good D&O policy? At a minimum, expect the following:

Adequate policy limits

  • $1 million is generally adequate for small to mid-size nonprofits. Larger agencies should consider higher limits or an umbrella policy.

Broad definition of who is an insured

  • Is the nonprofit agency itself insured in addition to its directors and officers?
  • What about prior directors and officers?
  • Committee members?
  • Employees and volunteers? (Volunteers don’t have all the federal or state immunities you may think.)

Broad coverage for employment practices liability

  • Either by endorsement or imbedded in the D&O policy itself

Duty to defend

  • Does it extend to administrative proceedings (where most EPL claims start) or just to suits in civil courts?

Advancing of defense costs

  • The carrier should pay for defense costs as incurred, not after the nonprofit has paid for them and is seeking reimbursement

Anything Else?
Make sure that you understand your policy before you need to use it. For example, be sure that you understand when you need to report facts that may result in employment practices liability. For example, you may decide not to report to the insurer an employee grievance filed with your Human Resources Department pertaining to the employee’s termination, perhaps thinking that a legal claim may not develop from it. Unbeknownst to you, your policy may require you to report potential claims, including grievances filed with your HR Department. By the time the terminated employee files a legal complaint with the district court, the reporting period has passed and your insurer may deny coverage.

Don’t be disappointed if your insurance carrier insists on using defense counsel of its own choosing. It has the right to do so and generally has developed over time a panel of attorneys experienced in employment law defense who understand the nonprofit sector better than most.

While not directly EPL-related, make sure your Directors & Officers policy also protects you for fiduciary liability claims such as failure to properly account for grant funds.

If unsure about the nature and extent of your Employment Practices Liability coverage, by all means consult with your insurance agent or broker. They are usually paid commissions when they place your coverage, and providing appropriate advice is part of what they are paid for — and a service you have a right to expect.

Happy skiing!