Nonprofits face huge D&O risk — and might not know it

The insurance market for directors and officers liability for private and nonprofit companies offers huge potential for growth, but many of these organizations may be unaware of the significant need for and benefit of the coverage, according to several speakers at Advisen’s Management Liability Insights Conference.

Private and nonprofit companies may feel they aren’t at risk for the shareholder lawsuits, but as the experts revealed, any individual or entity who has an interest of some kind in a company could theoretically be a “shareholder.” In a public company, noted Ziad Kubursi, senior vice president and head of management and professional liability at Philadelphia Insurance, investors buy into a company.

“For a nonprofit, you’re going out and selling them a belief and people buy into it,” he said. That structure can give rise to any number of lawsuits.

Ellen Willmott, general counsel and corporate secretary for Susan G. Komen, commented, “It’s a daunting task sometimes, because you don’t know where your next risk is.”

Liz Olsson, senior vice president of the professional risk group at Wells Fargo Insurance Services, cited the case of Corcoran Art Gallery in Washington, D.C. The gallery was formed in the mid-1800s to serve the public need for art, but in the present day, the museum has been financially mismanaged and is currently on the brink of being dismantled. A group called “Save the Corcoran” petitioned to be allowed to intervene in the court proceedings and succeeded. Even a nonprofit organization can find that it can be beholden to many more interested parties than anticipated.

“The stakeholders just become wider and wider and wider,” Olsson said.

Willmott and Olsson explained that nonprofits, particularly charities, run the risk of being held responsible for failure to properly provide oversight, even for third parties not owned by the business. Olsson cited a large charity that contracted with a staffing firm to help take donations after a natural disaster. Two employees of the firm diverted funds, with much of the negative publicity and liability falling on the better-known charity.

“Even with a very large, well-run organization … they were pulled into some very serious liability issues,” said Olsson.

Willmott agreed on the specter of imputed liability, saying that in the heavily-regulated nonprofit world, “If a third party gets something wrong, on sales promotion, with the state regulatory scheme, it’s the charity that gets hauled into the AG’s office.”

Steven Cohen, senior vice president of Victor O. Schinnerer & Company, also cited the case of restricted donations to nonprofits that are put to the wrong use as a chance for liability.

Maintaining and Managing

Avoiding any type of action against directors and officers in a private company requires maintaining internal controls, according to other panelists. For nonprofits, board members must be selected with an eye toward some knowledge of the organization and the appropriate way to manage it.

“As your organization grows, you need to maintain some level of consistency so that those policies and controls extrapolate throughout the organization,” stated Kubursi.

According to panelists, insurers generally offer loss control assistance and human resources that can help businesses perhaps even more effectively than purely transferring the risk via insurance. Preventing a claim is generally preferable to having to pay one. However, most insureds don’t take advantage of the services that insurers offer.

These services can include free two-hour consultations with an attorney, risk assessment, employee handbooks or advice for supervisors.

“I strongly encourage you to use them because we pay for them and they’re not cheap,” said Kubursi. He said out of 30,000 insureds, about 200 of them might call in about the services.

Cohen added that the employee at a nonprofit tasked with the job of “risk manager” might be wearing several other hats, leaving little time for actual risk management. Those free hours of counseling can avoid a claim down the road.

“When I see claims come in, a lot of them could have been avoided by having one page of guidelines on how to handle yourself in the workplace,” he said.

Olsson recommended reaching out and educating insureds at times other than renewal, turning a typically low-touch policy into something more interactive and informative.

Willmott agreed that insurer-provided resources help, but recommended that insurers go a step further in risk assessment. She encouraged them to attend their clients’ events, see the “unique risk liability” firsthand.

“Come live in my house for awhile,” she said.

Olsson noted that on the industry side, this could help customers identify where they are overinsured, to “right-size” those needs.

Directors and officers everywhere should be sitting down with their underwriter or broker for a “risk identification review,” said Cohen.

“There are a lot of off-the-shelf policies out there and that worries me, because it suggests there are a lot of people who aren’t really looking at their risk,” he said.

In fact, many nonprofits simply don’t purchase D&O liability coverage, despite a clear need. Olsson said many directors just don’t realize the chance for personal liability.

Cohen commented that anyone in the insurance industry would make certain that a D&O policy is in place before accepting a role on any board. However, that isn’t the first instinct for everyone.

“It’s scary to see the number of organizations who are not new, but are just coming to the market, to see their assets at risk,” he said. “The reality is, in this marketplace, any nonprofit can afford it.”