BOSTON (MainStreet) — No good deed goes unpunished. That old cliche reflects a danger faced by those who volunteer their time and expertise to nonprofit boards.
Whether it is a charity, civic organization, church or library, serving on a nonprofit board can jeopardize your personal property and assets if lawsuits arise.
Legal claims — citing such matters as wrongful termination, sexual harassment, discrimination or on-site injury — may affect not just the organization’s ledger sheet. Board members who assume they are protected from lawsuits and personal liability could be in for a rude awakening.
Some states offer immunity for board members who get no salary or compensation should civil damages arise from actions performed in an official capacity. But even that protection only goes so far and doesn’t extend to “intentional conduct, wanton or willful conduct or gross negligence.” Interpreting that level of egregiousness isn’t always easy, though, and a board member’s viewpoint may ultimately not be shared by a plaintiff, judge or jury.
Retirement Plans for Nonprofits Get Makeover
“Gross negligence” could rear its head as a result of either actions or inaction, and lack of oversight can come back to haunt a board. If a background check slips through the cracks for an employee or volunteer that works with kids, the board may find themselves in deep trouble if a sexual assault takes place. A mix-up that delays getting a contractor to fix a loose handrail is an accident — and lawsuit — waiting to happen. Letting a donor have one glass of wine too many at an event sets the stage for a costly accident.
With these hazards in mind, many nonprofit organizations buy Directors and Officers Insurance. These policies, and related products, can help insulate board members — often volunteers tasked with important decisions — from unexpected grabs at their personal property and money.

“Where we see a lot of the exposure for nonprofits is in how they are handling money,” says Carl Godziek, a client executive with RJ Ahmann, a Minnesota-based insurance and risk management firm that specializes in D&O and other nonprofit policies. “It can be a big issue if they have restricted funds. They can run into allegations that they are sending money in the wrong pace.”
A large donor, for example, may disagree with a financial decision and sue board members individually for financial mismanagement of the organization.
Soured business relationships can also pose a direct liability risk.
“Nonprofits have other businesses relying on them,” Godziek says. “They’ve got suppliers and all these different partnerships. If there is mismanagement of the organization that causes strain on those affiliated partners, they may be bringing suit against the nonprofit that has caused them hardship.”
A director or officer of a nonprofit corporation is particularly at risk if they take a personal role in a loan or debt, especially if they commingle their assets with those of the nonprofit (an error of judgment that could also lead to criminal prosecution).
10 Nonprofits That Act Like For-Profits
Board members also have a fiduciary responsibility to the organization and its employees. Specifically, that responsibility centers on taxes. Not only are all the taxes relating to wages expected to be handled accurately; the IRS also demands that board members make sure that all of the organization’s efforts and decisions are within the scope of their tax-exempt status.
Even those requirements can prove to be a matter of interpretation. For example, if the IRS deems executive compensation to be egregiously high at an organization, board members may be blamed for allowing it.

As is often the case with legal disputes, even when an organization or one of its overseers believe they did nothing wrong, a judge or jury may see things otherwise. A legal battle, even when vindicated, can be very costly.

“Defense costs are another reason why directors and officers want liability coverage,” Godziek says. “The defense of claims often costs more than the payouts. There can easily be six figures worth of defense costs.”
The broad scope of what might be considered “wrongful acts” is another concern, he says. A community member with no direct association with the organization might sue board members individually due to a decision to eliminate a specific program.
Think of a hockey player who suffers a traumatic injury during a game whose financially devastated family sues the association and its board members for damages.
“That gets back to management issues and is something, potentially, that a D&O policy helps with,” Godziek says. “The family may try to claim the organization didn’t properly train its people, or that they didn’t ensure that there were enough referees on the ice. There are all sorts of things can tie back to mismanagement.”
“I think there are a lot of reasons why people choose not to volunteer to be on a board that go beyond liability risks,” Godziek says.
Nevertheless, he thinks an organization that takes steps to protect its board members will be better positioned to attract the talent and expertise it needs.
Retirement-Plan Firms See Money in Nonprofits
“One of the reasons they might come to someone like us [for a D&O policy] is that they get a new board member with a high net worth and they want to make sure they are protected,” he says. “A lot of times too, maybe for larger nonprofits, they are looking to attract sophisticated individuals. They want to make sure they have protection for them so that they can attract quality board members.”
— Written by Joe Mont in Boston.
>To contact the writer of this article, click here: Joe Mont.
>To follow the writer on Twitter, go to http://twitter.com/josephmont.

By Meg Green
A.M. Best Company, Inc.

The economic downturn and the resulting legal issues plaguing some company leaders, have many companies upping their directors and officers insurance limits. Tony Galban, senior vice president and product manager for Chubb Group of Insurance Cos.’ directors and officers liability lines, talked to Meg Green, senior associate editor at Best’s News Service, about the ways the recession has changed D&O and created opportunities at the same time.

Q: A recent survey I’d like to speak to you about by Towers Watson found that corporate directors and officers are showing more interest in their D&O coverage. And they’re seeing an uptick in questions companies are asking. Are you seeing an increase of interest in the product?

A: Absolutely. Particularly since any time we finish up with scandals and recessions and things like that, directors in particular are very interested in the product and how it’s maintained.

Q: Are there specific issues that are driving that interest? What are they asking you about?

A: Well, they want to know how much to buy. Which, frankly, brokers give them a lot of help with. They want to know how much they can buy and they want to know who it’s protecting. In other words, is it protecting insiders only or outsiders or both of them and how is the coverage built? So there is much more education out there now than there’s ever been before about the programs that they buy.

Q: That survey found one in four public companies and 14% of private companies have increased their D&O limits. Is that what you’re seeing?

A: Yes. And that’s fairly typical as the size of the settlements get more and more publicized people begin to realize that the amount of D&O capacity may not be as large as people thought it once was. Ever since about 10 years ago—the Enron, WorldCom days—these settlements in the billions of dollars have completely changed the face of how people think about D&O limits.

Q: And how would you describe the market today?

A: Transitional. You know it’s been soft for a long period of time and we’re now seeing it begin to sort of turn another way but it’s not a dramatic shift. It’s nothing radical. It’s just the gradual turning that takes place after years and years of price aggressiveness and decreases.

Q: There’s some concern from outside directors and independent directors that they may not have adequate coverage. Could you give us an overview of what that means?

A: One of the biggest disconnects in the business is that independent directors don’t necessarily understand the way they’re protected under D&O programs. A-side insurance is insurance which applies for non-indemnifiable loss, kind of a last stand for directors. A lot of independent directors believe that A-side insurance is purchased on their behalf exclusively and that it functions like independent director insurance, dedicated layers. In fact, they share that insurance with the inside offices. And so I think that there’s a basic educational disconnect that most independent directors think — I buy A-side, it’s for us. And the answer is — not really. You share with the insiders. And as you know, in most of these really strong criminal frauds that money will be long spent before the outsiders see it. So there’s an educational opportunity for us and a sales opportunity perhaps, but a lot of directors misconstrue A-side as being something exclusively for independents. In fact, it rarely is.

Q: And now that would cover fraudulent activity?

A: Well, it wouldn’t cover the people that are finally adjudicated but it certainly defends individuals what are being accused of that kind of activity. Most policies have a final adjudication trigger for fraud and illegal personal profit that stipulates the coverage ceases or stops or isn’t applicable if and when they are finally non-appealingly adjudicated.

Q: OK. But those independent directors might be out of luck if all the money was spent, if any, on the inside directors.

A: It has happened. These defense bills can get very, very large and, again, they’re likely the last to see the policy because typically criminal matters against insiders come before negligent oversight claims against independent directors. So, one of the opportunities, as I mentioned, is for us to understand collectively that independent directors are not as protected as they might think they are by A-side purchasing. I’ve been to enough situations with directors where I’ve had to sort of clarify that for them for me to believe there is a disconnect there.

Q: Do you offer a stand-alone policy for the independent director?

A: Yes, we have, but it’s fairly infrequently purchased. We basically make the policy applicable to independent directors only. It goes on the top of a program and it works the way a lot of them think it all should work. But we don’t sell as much of it as you might think and certainly not as much of it as the independents think they’re buying.

Q: And how about a director or an officer from a public company who is encouraged to volunteer on a nonprofit board? Are they covered by that corporate policy?

A: It’s another sort of undiscussed aspect of the business that probably deserves more attention, which is called ODL or outside directorship liability. It’s typical for companies to ask people to sit on other boards. It could be an affiliate board. It could be a joint venture. It could be a local charity. It could be a local Little League. Whatever it is, they can, in many situations as part of their community outreach, ask individuals to sit on various boards, nonprofit or for profit. The first thing that people don’t understand is that outside directorship service is covered as part of the basic D&O contract. So those seats also apply against the limit of liability. Not discussed much. Not really focused on. It doesn’t come up a lot, but it is sitting there in the weeds, so to speak, that all that sitting applies against the limit. Now, the other thing I would tell you is that you need a good program to keep track of this stuff. So good companies that have good internal controls will have a very strong sense of who’s sitting where, confirmation that it’s with our written consent or at our direction and that we govern who we want to cover for these situations and who we don’t.

There are disconnects here, too. Individuals that are employees that might hear the company espoused the virtues of a local charity or a local cause will go ahead and sit in that void in the belief that because the company sponsors it or because the company is in favor or speaks highly, that they’re covered. They actually aren’t covered for that sitting unless the company gives you their written consent or knowledge, knows about it or actually authorizes it in some way.

Q: And is that also an opportunity to do more business for companies like Chubb? Can you sell more coverage based on that?

A: Not so much. It’s more of just having good internal control practices which does have an underwriting value for Chubb. It’s not like there’s a lot of product in this because it’s endorsements to policies. You can charge in these situations but it’s not common to charge a lot. It’s really more common to underwrite the situation. Is the outside entity in a good financial state? If they go bankrupt does that present additional risk to our insured or the “mother ship” as we call it? So all of that exposure needs to be properly corralled and brought into a risk management process.

Q: Are there other trends you’re seeing in the line?

A: The only other trend which has been a key is, of course, we’ve seen a lot of claim activity in the mergers and acquisitions area and that’s generally well publicized. It’s been more recent that we’ve seen an uptick in those claims. We’re watching it. We’re paying a lot of attention to it. It’s been an area where the plaintiff’s bars have been very much attracted to, so generally speaking for companies that are in the midst of either being acquired or doing some acquiring, there’s more exposure today than there might have been say, five years ago. It’s something to watch. It’s something we’re keeping track of, but we don’t know yet what the long-term implications are going to be.

Video portions of the interview with Galban are available at http://www.ambest.com/media/MA.asp?vid=galban1312 Copyright: (c) 2012 A.M. Best Company, Inc.
Wordcount: 1426

You need a better guide than somebody’s brother-in-law

By Harold P. Reichwald, co-chair of the Financial Services and Banking practice group at law firm Manatt, Phelps & Phillips, LLP

Consider the following hypothetical:

The Chair calls the bank board meeting to order and after approval of the agenda, the Chair asks for a report on the negotiations for renewal of the director’s and officer’s insurance policy, soon to expire. The Chief Financial Officer (or perhaps the chief risk officer) reports that through the efforts of the bank’s insurance broker, who happens to be a relative of the Chair, the negotiations for the renewal of the policy have been successful, at no appreciable increase in premium. Amidst positive murmurs from the members of the board, and after referring to the one-page summary of the proposed renewal coverage, the Chair moves for approval of the renewal terms, which is quickly seconded and unanimously approved. The meeting moves on to a discussion of other items of seemingly greater importance.

This summary may be pure hyperbole but it serves to point out that in the past consideration of the issues associated with D&O insurance often have been left to others–not the insured parties–others whose interests may not coincide completely with those of the board members. At the same time, board approval may have been given on a less-than-encompassing understanding of the issues.

FDIC continues to pursue claims against former directors of failed banks, and this has shone a spotlight on the nitty-gritty details of director’s and officer’s insurance policy terms and the extent of the depth and breadth of D&O coverage. This, in turn, has led to questions about what members of the bank board actually know about the extent of the coverage supposedly protecting them from liability–and the importance of an effective D&O risk strategy.

So, let’s examine the issues associated with D&O insurance that a board of directors should consider when faced with a new or renewing policy situation:

1. On whose expertise should the board rely?
2. What are the key initial considerations?
3. What are the potential obstacles to coverage?
4. What are the sometimes knotty issues in confirming coverage?

1. D&O insurance expertise
Not surprisingly, the terms and conditions of today’s D&O insurance policies can be dense and hard for the layman to navigate.

All the more reason to have a knowledgeable broker handling negotiations with the carrier for the board members. The broker has to understand not only the insurance concepts involved but also the current insurance marketplace, the recent claims experience of the carriers, and court cases affecting coverage rights. The board members would be well-advised to have knowledgeable counsel involved at this stage, as well, so that the broker and independent counsel can work together to avoid coverage surprises.

These advisers should be present in the boardroom, assist in the presentation of policy terms to the board members, and answer questions on site before the final approval of the insurance package by the board. The broker and counsel should have an opportunity to present their recommendations in writing to executive management and to the board as a whole, not merely to the company’s chief risk manager or head of insurance. This process should allow board members to get comfortable with the coverage as a whole and to provide feedback to executive management.

The D&O job doesn’t end there, however.

Just as important as the preliminaries is the ongoing interaction by board members, at least quarterly, with bank management to determine whether any events have occurred which might be considered a claim for insurance reporting purposes and to consult with independent counsel about the attendant reporting requirements.

2. Key initial considerations
Initially, there should be significant negotiation over the key elements of the coverage and the exclusions. For example, at the outset, there should be sufficiently high limits to cover the costs of defense counsel and potential liability, given today’s high cost of litigation. Strong severability provisions are extremely important–so that each individual director is treated separately and is not tarred by misstatements or misconduct of any other director.

Claims reporting requirements should be clear, coupled with the very narrowest definition of “claims” for reporting purposes but the broadest definition of “claims,” including formally initiated “investigations,” for coverage purposes.

Absent a failed-bank scenario, there is likely to be–or there should be–corporate indemnification provisions in place. This means that attention should be given to the sometimes murky interplay of corporate advancement of defense costs and the indemnification undertakings. Insurance coverage to cover gaps in indemnification protection must be considered.

3. Potential obstacles to coverage
D&O insurance contracts continuously evolve in a dynamic and changing economic environment. There is no standard form of policy and the thorny issues are numerous. Some of these require very close scrutiny and understanding of the legal implications.

The exclusions contained in the policy outline those claims for which no coverage will be available. Given the financial turmoil of the last four years, it is not surprising that claims against directors that arise out of actions taken by regulatory agencies–either banking or securities–are generally excluded. So, if a policy is in place with this type of exclusion and FDIC asserts a claim against one or more directors, no coverage will be available, either to cover defense costs or actual liability.

Additionally, D&O policies typically exclude coverage for fraudulent acts or actions giving rise to personal profit. Another example is the so-called insured v. insured exclusion which precludes an institution from submitting a claim under a D&O policy for losses caused by negligent actions by an officer. In this latter context, the question arises as to whether FDIC would be considered as the “insured” if the bank fails.

Finally, the question of whether coverage exists for “special investigations,” particularly when undertaken by a governmental authority, has received increasing attention given the costs attendant upon such activities. The importance of having that coverage cannot be underestimated.

4. Issues of confirming coverage
D&O insurance policies contain provisions requiring the insured to notify the carrier not only in the event of the assertion of claim but if circumstances arise of which the bank is aware that could lead to the assertion of a claim.

Thus, not only do the insureds have the obligation to notify the carrier promptly if and when a claim is asserted but also if some event occurs that could lead to a later claim. For example, say a bank is made the subject of a regulatory enforcement action of some kind. Those responsible for the management of the insurance coverage must be made aware of that event and immediately take steps to notify the carrier or otherwise risk the loss of the coverage or the possibility that the carrier will assert that it has a right to endorse the policy to reduce coverage after the fact.

This is another reason for involving the bank’s insurance broker and independent counsel on a regular basis so that these events can be analyzed and appropriate notice given to preclude the carrier from using such a failure to deny coverage.

Enterprise risk management
An effective D&O risk strategy hinges on more than your insurance coverage. Board members must promote an integrated framework of enterprise risk management within the bank.

To that end, the effort should be to focus on a series of components. Among them:

• The organization’s internal environment, culture, and values.

• Establishment of key objectives with which to align risk process with the organization’s mission.

• Risk assessment and response, which entails establishment of mechanisms to control identified risks.

• Internal controls reflecting the adequacy of information and monitoring of risk management.

Thus, enterprise risk management can provide a significant level of protection to directors and officers from claims of outside stakeholders because it enables these decision-makers to minimize or eliminate potential regulatory issues, court battles, and expensive litigation and reputation costs and settlement expense. Given its importance, a separate risk management committee of a board of directors is highly recommended, which would include board level attention to matters of D&O coverage for board members.

[This article was posted on March 16, 2012, on the website of ABA Banking Journal, www.ababj.com, and is copyright 2012 by the American Bankers Association.]