Why Directors and Officers Coverage is Essential for all Nonprofit Organizations

Being a volunteer on a board of directors is not as easy as it once was. While the position used to be one people chose to make a difference, it has become one that could very well hurt a person’s finances and livelihood today. From negligence to wrongful acts, there are several different allegations these individuals often face. This also places others they work with in compromised positions, so directors and officers liability coverage is essential. There are many reasons a claim on this type of policy would be made, but there are a few that are especially common.

Fundraising And Grants Most nonprofit organizations rely on grants for their funding. People often voice concerns about how the money is being used, and this may result in lawsuits. Organizations should always consider the requirements associated with any grant before applying for it. Any promises made should be reasonable and attainable. If an organization is targeted for mismanaging funds, it could be targeted through legal action, adverse publicity or loss of grant funds.

Financial Oversight Or Fraud In recent years, the media has been focusing more on nonprofit fraud incidents than for-profit fraud incidents. Some large organizations have failed to provide proper oversight of funding control, which means the money is vulnerable to abuse. Lack of oversight is a breach of fiduciary duty. In addition to grant recipients facing lawsuits, foundations that make the grants may also be targeted in some cases.

Employment Practices Directors and officers policies for nonprofit organizations usually include coverage for employment-related claims. Employment practice liability claims rank highest as the cause of directors and officers claims toward nonprofit organizations. They also make up a significant amount of the overall liability issues these individuals face. Researchers found that there were nearly 10,000 discrimination charges filed in 2010 against nonprofit and for-profit organizations. This figure includes both actual and alleged acts of retaliation, harassment, discrimination and wrongful termination. Employment-related lawsuits have increased since the Civil Rights Act passed, which gave people the right to punitive damages and jury trials for emotional stress and anguish. While employment practice liability coverage is included in most nonprofit directors and officers policies, it should be supplemented with other forms of coverage. There should be risk management strategies implemented to keep future claims from happening. This should start at the level of the board of directors, and they should be the ones to question the executive director as well as other officials about policies. They should always know whether there is uniformity throughout the organization and if the policies are being carried out properly. The board should have a system set to accurately analyze the effectiveness of the policies.

Liability risks faced by nonprofit boards are serious issues to consider, and they are issues that continue changing as time passes. In the past, charities were seen as innately good, so there were rarely lawsuits brought against them. However, accountability, higher transparency and the growth of a litigious society took its toll on board members. To keep an organization healthy today, every nonprofit should have a good directors and officers policy in place. Directors and officers coverage was expensive in the past, but insurance is much more affordable today. It is not a product that is uniform for every policyholder. Protection varies based on exclusions and limitations.  If your organization would like to discuss your options, call ACBI at 203-259-7580.

How Prepared Is Your Business For A Cyber Attack?

Only 36% of public companies purchased cyber liability insurance in 2012, and only 6% of private companies had cyber liability insurance in 2010.

Why don’t more companies purchase cyber insurance?

Chubb Insurance asked nonbuyers this question, and the #1 response—from 47% of private company respondents and 37% of public company respondents—was “low risk/no exposure.”*

FBI Director Robert Mueller might have had corporate denial in mind when he told a conference of security professionals earlier this year: “There are only two types of companies: those that have been hacked, and those that will be. Even that is merging into one category: those that have been hacked and will be again.” (Source: CNNMoney)

Facts are well-known

A well-publicized Ponemon Institute study** reported that the typical data breach in 2011 resulted in:

  • 28,349 breached records.
  • Total costs of $194 per record (including notification, call centers, forensics and other direct expenses).
  • $561,495 in notification costs.
  • $5.5 million in total organizational costs.

Furthermore, 46 states have enacted legislation requiring companies to notify customers if their personal information may have been compromised.

Cyber risks—and awareness—are growing

Cyber exposures are growing, and awareness of those risks seems to be growing, as well, as indicated by the fact that purchase rates of cyber insurance are slowly rising. More companies are realizing that they may be vulnerable to potentially costly cyber exposures, including cyber liability and cyber crime expense.

The same maybe true for directors and officers (D&O) liability, thanks in part to the October 2011 SEC guidance that companies must consider information security when disclosing risks to investors. As attorney Kevin LeCroix, executive vice president, RT ProExec, said in his blog, The D&O Diary (September 24, 2012), “With increasing scrutiny on companies’ cybersecurity preparedness and disclosure comes the increasing possibility that companies experiencing cybersecurity incidents-and their directors and officers-may face claims from shareholders and other constituencies that they failed to implement appropriate cybersecurity measures or made misrepresentations about their cybersecurity preparedness.”

Although most companies aren’t yet buying cyber insurance, a majority of public companies are at least taking notice, according to Chubb’s survey:

  • Public company decision makers cited cyber risk as their #1 concern from a list of exposures, with 63% expressing some level of concern.
  • 71% of the public companies have an incident response plan (IRP) for an electronic security breach.***
  • 52% of the companies are allocating more financial or human resources toward mitigating the risk of a cyber breach than they did a year ago. Only 3% are allocating fewer resources for this purpose.
  • 24% of respondents said it was likely the company would experience a cyber event sometime in the next 12 months.

ACBI can help you protect your business from this debilitating threat.  We have options for public and private companies, large businesses or small, professional services and non-profits.  Contact us today to find out how we can help.

The Cost Drivers of Directors & Officers Liability Insurance

Directors and Officers Liability (D&O) insurance is a fundamental component of any company’s risk management program. A lack of D&O insurance may dissuade talented individuals from seeking an executive position at your company, as they don’t want to put their personal assets at risk in the event of a lawsuit.

As a savvy business owner looking to protect your bottom line, how do you weigh the cost of insurance to protect your senior leadership with the potential risk of a lawsuit? As regulatory investigations and defense expenses increase, prices for D&O insurance have gone up as well. Corporate indemnification provides the first line of liability protection; but certain circumstances—most notably, if the company goes bankrupt— necessitates that additional protection is offered to directors and officers.

A variety of factors determine the price of a company’s D&O insurance. Some low-risk companies pay pennies on the dollar; others pay a lot more, but they understand it’s a lot less than the expenses they’d incur in a lawsuit. Recognizing the cost drivers of D&O insurance—a company’s exposures, legislation and trends in D&O lawsuits—can help you decide what coverage your company needs to mitigate its unique exposures.

Company Characteristics and Exposures

Public, private and nonprofit corporations with assets of all sizes purchase D&O Liability insurance. To determine the cost of premiums and the limits of coverage, insurers review several facets of the company’s structure and price D&O insurance accordingly. Some of these attributes include the following:

  1. Is the company mature or young and developing? Companies with less experience and a shorter history of proven effective management can be a riskier policy to underwrite than well-developed companies that have experienced directors and officers.
  2. Is the company planning on going public soon? Initial public offerings, the most common way to  the company’s performance fails to meet expectations, are significant risks for directors and officers during this process.
  3. Does your company have employees? From nonprofits to large, publicly held companies, employment-related claims are the primary cause of lawsuits against an organization’s directors and officers.
  4. Does the company operate in foreign markets? Conducting business internationally can complicate the D&O insurance needed. For example, in addition to domestic laws, European countries have their own set of regulations to follow.
  5. What is the company’s history of past litigation?  Insurers will analyze a company’s history of pervious lawsuits and any adverse business developments and executive management changes.
  1. What industry is the company involved in? Operating in certain industries, such as investment banking and securities, may expose their executive management to more risks than those for the board members of a small nonprofit.
  2. Is the company financially stable? Insurers consider the amount of debt a company has. Corporate indemnification usually protects directors’ and officers’ personal assets. However, if the company’s finances are unstable, they have an increased chance of becoming insolvent during a lawsuit.

Current and New Legislation

Securities Exchange Commission (SEC) regulations continue to impact the cost of D&O insurance. Publicly held companies especially must be cognizant and keep current on SEC disclosure obligations and provisions in the Sarbanes-Oxley (SOX) Act of 2002, which was enacted in response to the corporate scandals of Enron, Tyco, WorldCom and others.

Also recent changes to the Dodd-Frank Wall Street Reform and Consumer Protection Act have caused a spike in whistleblower reporting, bringing to light many D&O claims and increasing the need for D&O insurance. The new whistleblower provision in the Act now gives whistleblowers a “bounty,” or monetary compensation

if the lawsuit results in more than $1 million in monetary sanctions. Given this new incentive, there has already been an increase in the number of whistleblowers that have emerged since the Act added the provisions in early 2011.

Trends in D&O Lawsuits

Even after a thorough assessment of a company’s risks, D&O insurance continues to be a high-severity product, as carriers are often hit unexpectedly with catastrophic claims. It’s no surprise that as litigation increases, the price of D&O insurance increases as well. In addition, as the litigation process grows lengthier and if multiple lawsuits erupt from a single transaction, a company can quickly exhaust its primary layer of D&O coverage.

Some types of lawsuits occur less often, but result in catastrophic losses. Other types result in smaller payouts, but occur more frequently. Nonetheless, defense expenses can cost millions of dollars, even if the director or officer is not found liable. Some of the types of lawsuits that affect directors and officers include:

  • Breach of fiduciary duty lawsuits
  • Employee Retirement Income Security Act (ERISA) lawsuits
  • Employment-related lawsuits
  • Mergers and acquisitions (M&A) and “merger objection” lawsuits
  • Securities class-action lawsuits
  • Shareholder derivative suits

Within the last few years, there has been an increase in M&A lawsuits. In 2011, there were more than 350 lawsuits regarding M&A. Some M&A cases involve multiple lawsuits and a lengthy litigation process, which can deeply cut into a company’s primary D&O policy.

Know What Your Policy Covers

While many companies usually focus on the cost of their D&O policy, understanding the scope of the policy is even more critical. Most D&O policies are renewed yearly, and the terms and conditions can change. Read through your policy carefully. Be aware of the following:

  • Look at the limits of your liability. Are they enough to cover your exposures? Companies with a lot of risk exposures usually find that they need more than just the primary coverage, and purchase excess insurance as well.
  • Be aware of exclusions; most D&O policies do not cover claims that arise from fraudulent or criminal acts.
  • For some insurance carriers, Employment Practices Liability (EPL) insurance and Fiduciary Liability insurance are policies that are purchased separately from primary D&O insurance. Don’t assume they are automatically included in your D&O policy.

For more information on D&O coverage options for your company, contact Associated Community Brokers, Inc. today.