Good Samaritans Beware
Serving on boards of some non-profit organizations can create more problems than you would expect. We read recently of a Syracuse, New York, executive who agreed to serve on the Board of an agency that provided training for disadvantaged and disabled persons. In this agency, the Executive Director was apparently hiding huge losses and, in fact, the agency was absolutely broke, but the Board didn't know it. In actuality, the employees hadn't been paid for some time and they were looking for someone to sue after they realized the agency was insolvent. So they sued the only ones they would find that had money - the Board - for over $10 million in back pay and damages. Fortunately, in this suit, insurance handled these claims and eventually settled the claim for about $443,000 (including the plaintiffs' attorneys' fees), but the Board still had to close the agency and our Syracuse executive spent 600 hours over the next two years on paperwork involving tax and payroll forms.
Towers Perrin/Tillinghast is a national actuarial consulting firm that conducts an annual survey of Directors & Officers liability claims and insurance. They estimate that 96% of all Directors & Officers suits against non-profits come from employees. This compares to about 23% of Directors & Officers claims by employees in public companies and 48% for privately held for-profit companies.
Directors & Officers insurance maintained by the agencies they serve on cover most Board members, and some are also told to explore coverage in their own Homeowner and Personal Umbrella Liability policies. Although many such policies will cover service on a non-profit Board, they usually only cover bodily injury, property damage and personal injury (slander, false arrest, invasion of privacy, etc.), making their coverage incomplete, at best.
Many people, when tapped to join the Board of a for-profit company, look into the availability and scope of Directors & Officers coverage. When it's a non-profit Board, however, the individual may see it more as an honor or an element of community service, and asking about insurance is somehow bad form. It's your personal assets that are on the line, whether the organization operates for profit or not and, while there may be statutes limiting your liability in connection with a non-profit, they do not eliminate it completely. And even if you are completely exonerated, the legal bills alone could be devastating. You should always ask about the organization's Directors & Officers insurance.
-- James B. Hood, Jr., CPCU
Vol. XVIII, No. 6
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We didn't set out to do it, but this issue seems to deal with several aspects of executive protection. We conclude the topic begun in the last issue regarding Kidnap & Ransom coverage, there is an article on the perils of serving on a non-profit Board, and we also discuss the impact of certain corporate prosecutions on Directors & Officers coverage, particularly the type of coverage you may want to have in place. That is not to say, however, that nothing else has been happening in the insurance industry since our last issue in September. Reaction from the industry to Hurricanes Katrina, Rita and Wilma has been mixed, and we do not have the final toll of insured losses yet. Needless to say, it's not going to be pretty. This will be remembered as the first hurricane season in decades when we ran out of names for all the tropical storms. This was also the hurricane season when Mississippi Attorney General Jim Hood (no relation to our Jim Hood) tried to rewrite thousands of insurance contracts to cover flooding, when it was never a peril the companies intended to cover, nor did they underwrite for it. Political grandstanding never goes out of season. --- Ed.
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