Being one of our greatest generations, the Baby Boomers, are in the age of retirement. In our experience, we see Society benefiting from their work experience by taking them on as volunteers in For-Profit ventures as well as Not-For-Profit organizations that are of such benefit to our communities.
As volunteers, they too fall into exposures by “giving back” to their community. We hope the discussion below will shed light on some of the exposures one may be open to as a Business Owner, Volunteer or a Board Member for the previously mentioned For or Non Profit Organizations. This coverage is mostly known as D&O/EPLI. When elected, it can also protect the Board/Organizations against lawsuits brought against them by an organization’s volunteers.
Private Company D & O Coverage
Even if you are a small business with one owner, the company is still exposed to costly potential litigation from outside shareholders (i.e. family members that are shareholders), employees, customers, suppliers, competitors, government agencies, creditors and potential merger or acquisition partners.
In fact, only about 25% of Directors and Officers Liability (D&O) claims against privately-held companies are made by shareholders.
- A customer, competitor or investor sues your company and its executives for a misrepresentation or Breach of Duty?
- An employee sues your company for discrimination, harassment or retaliation?
- A retiree or employee sues your company and its plan fiduciaries for a breach in fiduciary duty?
- Do you want to use funds intended to grow your business on paying for attorneys and settling the lawsuit? (Average defense costs alone on D&O claims is $267,000, not to mention the ultimate settlement or judgment.)
- Can you afford to pay the cost out-of pocket?
Note the following examples of your potential exposures:
Terminated Acquisition (D&O):
Company X was looking to purchase Company Y, a competitor. After several meetings and reviewing confidential information on the company products and customers, Company X decided not to move forward with the acquisition. Several months later, Company Y alleged that Company X was never interested in purchasing their company but was looking to gain access to their sensitive trade secrets so they could gain an advantage in the marketplace.
Violation of a Non-Compete Agreement (D&O):
A company recruited a top sales executive from a competitor. The competitor sued the company and its President, alleging they had violated the sales executive’s non-compete clause. The competitor stated that by hiring this top sales executive they had improperly taken and used trade secrets.
ERISA Plan Mismanagement (Fiduciary Liability):
For the past two years, the company was not able to make the required contribution into the retirement plan based on the plan’s present and future liabilities, resulting in the plan being underfunded. Upon finding this out, several employees brought a suit against officers of the company, the plan fiduciaries and the company itself as the plan sponsor.
NonProfit Organizations Coverage
Non-profit organizations (NPOs) provide a helping hand to individuals in need and enrich the communities in which they serve. Youth sports leagues, senior recreation centers, churches, community theaters, museums, and historical societies touch the lives of so many while asking for little in return.
This selfless service, however, does not mean they are immune to liability risks similar to for-profit businesses. While their focus isn’t on making a financial profit, NPOs are still often complex organizations with property, employees, equipment, board of directors, and exposures. Many NPOs run on a very tight budget and one broken wrist, fire or lawsuit, could cripple the charity without proper GL coverage. That’s why it’s important for NPOs to resist the urge to skimp on insurance – saving a few hundred dollars on premiums today could have disastrous results down the road.
Accidents and injuries account for 90 percent of reported claims by NPOs, so even if an organization doesn’t have a physical location of its own, it is still liable for injury or damages brought forth by either its associates or third party claims (Davis, 2008). While nearly all claims are of the slip-and-fall variety, the costliest claims are wrongful termination lawsuits which allege the NPO’s board of directors permitted such action. This is why Directors’ and Officers’ liability insurance (D&O) is essential for NPOs.
If a civil suit was filed, D&O insurance can often protect individual board members as well as the employees, volunteers, and the NPO itself. The Nonprofits Insurance Alliance Group reports that the average D&O claim costs $35,000 to resolve, and one in ten claims will cost more than $100,000 to resolve (Davis, 2008). General Liability and Directors and Officers insurance are the core coverage for NPOs, and based on the organization’s services and structure, additional coverage may also be necessary to manage risks.
RESOURCES: Atlantic Specialty Lines of Florida Davis, P. (2008). A board member’s guide to nonprofit insurance. Blue Avocado: A Magazine of American Nonprofits. Retrieved from http://www.blueavocado.org/content/board-members-guide-nonprofit-insurance