FOCUS TODAY - September 2002

DIRECTORS AND OFFICERS LIABILITY AND EMPLOYMENT PRACTICES LIABILITY

Mary M. Keenan, CPCU

The D&O insurance market in 2001 faced the largest premium increases since the hard D&O market of the 1980�s.  Premium increases averaged nearly 29% and buyers had to deal with more stringent underwriting. 

In 2002, premiums are increasing anywhere from 30 percent to 300 percent.  Deductibles are increasing and the availability of higher limits is decreasing.  These premium increases are not entirely unexpected, given the premium and losses of the past several years.  Most D&O insurers reinsure a large portion of their coverage.  Following the events of September 11^th, Reinsurers substantially increased their reinsurance costs for many commercial lines of insurance.

Employment driven lawsuits became a hot topic in the nineties.  Each year in that decade, the frequency and severity of employment claims increased.  Claims by employees comprise over 20 percent of all lawsuits filed against director and officers.

Finally, the latest issue causing D&O insurers to limit coverage, increase deductible and increase prices is the Enron and Worldcom scandals.

The good news for clubs is that the largest increases in D&O and Employment Practices Liability (EPL) are occurring in the �for-profit� companies.  Most golf clubs are �non-profit� entities and the rate increases have been much smaller than the rate increases for the �for-profit� companies.

The largest number of claims that clubs experience are employment related claims and discrimination claims from members and/or potential members.

What do underwriters look for when underwriting Clubs for D&O and EPL?

The main underwriting factors are:

�        Profitability (Financials)

�        Claims history

�        Employment and hiring practices

- Written procedures

- Employee demographics

- Turnover and termination rates

- Claim history

- Plans for staff reductions and layoffs

- Number of employees

- Nature and composition of professional staff  

�       Membership and admission standards

�       Indemnification agreements (the extent to which the club has agreed to indemnify its directors, officers, and employees)

�       Exchange of information (i.e. publishing activities/dissemination of information)

Profitability, Claims History, Indemnification Agreements and Exchange of Information are self explanatory.  Listed below are some questions that the underwriter will ask concerning Employment and Hiring Practices, Membership Standards and Professional Staff.

Employment and Hiring Practices

Listed below are some questions that the underwriter will ask in order to determine if they want to provide coverage:

Does the club have qualification standards that specify the various positions within the club?  Written standards will help to forestall allegations of discriminatory hiring practices.

Does the club conduct regular performance reviews for employees?  Are these reviews documented in writing?  Does the club provide written notice to employees when their performance is unsatisfactory?  Does the club have written performance standards and procedures?

What process does the club use to terminate employees?  Does the club have written termination procedures?

The club should have written procedures for the following areas:

Salary administration; employee benefits, employment-at-will statements, performance appraisal, discipline, discharge, interviewing, hiring, work assignments, post-employment offers of medical coverage, providing of references, grievance procedures and sexual harassment.

Please note that there is a Web site (www.conphin.com) that provides sample forms and information about various written policies and procedures.

Membership Standards

Underwriters will want to see the club�s policies and procedures concerning membership standards and admissions.  Clubs are often sued when an individual is denied membership on the basis of factors that the claimants allege are unrelated to the purposes of the club (i.e. race, sex, religion, national origin, age).

While private clubs may legally refuse membership to an applicant, a rejected candidate may file charges of defamation of character, discrimination, libel, or slander. Similar allegations may be made by a member or a guest who is asked to leave the club. The underwriter will want to review the club's by-laws.

Listed below are some questions the underwriter will ask in order to determine if they want to provide coverage:

What is the club's written policy regarding requirements for membership and grounds for dismissal?

Does the club have written membership standards and policies?

Are members governed by a written behavior code?

Professional Staff

Does the club have a full-time professional staff?  Often, nonprofit organizations are vulnerable to claims when staff members work on a part-time/volunteer basis.

Coordinating Nonprofit D&O Insurance with Other Coverages

To avoid gaps or overlaps of coverage between policies, the club�s D&O policy must be reviewed and coordinated with the club�s other standard liability lines of insurance.  For clubs there are three areas in which gaps or overlaps may occur between coverages.   They are:  Third Party Discrimination, Fiduciary Liability Exposures, and Professional liability exposures.

Third party discrimination claims involve claims submitted from someone other than an employee (also considered Non-employment related discrimination).  Coverage for third party discrimination can be found in either a D&O policy form or the general liability policy form.  It is important to review both policies to make sure you have coverage in at least one of these policy forms.  If coverage exists in both forms, it is preferable to have one of the policies cover the third party discrimination versus having both policy forms covering this exposure.

If your D&O policy does not include fiduciary liability coverage within their insuring agreements, either a separate fiduciary liability policy must be purchased or you should request your D&O carrier to endorse the D&O policy to include fiduciary liability coverage.  Most D&O carriers will not provide fiduciary liability coverage but there are a few carriers that will endorse the D&O policy to include this coverage.

If you have any professional exposures, check your D&O policy to see if it contains specific exclusions for the professional exposure that you have.  If the professional exposure is specifically excluded, you should consider purchasing separate coverage.

Coordinating EPL Insurance with Other Coverages

In recent years, it has become increasingly difficult to secure coverage for any employment related claims in the general liability policy.  Most general liability policies have a standardized exclusionary endorsement that bars coverage for �Employment Related Practices�.  Basically, the exclusion precludes coverage for bodily injury and personal injury resulting from refusal to employ, termination of employment, coercion, demotion, evaluation, reassignment, discipline, defamation, harassment, humiliation, discrimination or other employment-related practices, policies, acts or omissions.  

Other issues to consider when purchasing D&O and EPL Coverage

Most D&O policy forms are developed by the individual insurance carriers.  Listed below are some key areas to address:

�        Are there separate limits of liability for D&O and EPL claims?  If not, the club could run into the problem of the aggregate limit being depleted on one or two claims.

�        Are the defense costs outside of the limit of liability for D&O and EPL?  If not, consider purchasing higher limits as defense costs are generally the largest part of the claims and will deplete the aggregate limit.

�        Is there defense coverage for non-monetary claims?

�        Is there a �Full Prior Acts� provision in the policy?

�        Does the policy exclude punitive damages?

�        Is there coverage for wrongful employment acts involving the use of the Internet and e-mail?

�        Is there an �Intentional Acts� exclusion on EPL claims?

�        Review the definition of harassment.  Does it include harassment including sexual harassment and other workplace harassment?

�        Does the policy provide excess coverage for libel, slander and defamation?

�        Is there an �Unlimited Extended Reporting Period� for former directors & officers?

�        Does the policy have a �Spousal Extension� included?

�        Does the policy definition of �Insured� and �Individual Insureds� include the following:  the organization, directors, trustees, officers, employees, volunteers or committee members of the club -  including their estates, heirs, legal representatives or assigns in the event of their death, incapacity or bankruptcy?  Does the coverage extend to individuals after they have ceased to hold the position and to individuals who will occupy these positions in the future?

�        Is the policy non-cancelable except for non-payment?

�        Does the policy have a �SIR� � Self-Insured Retention?  Check all quotes.

�        Does the policy provide an option to add fiduciary liability coverage?

�        Will the policy be issued on �Admitted� or �Surplus Lines� paper?

�        What is the financial rating of the insurance carrier?  (Should be rated �A� or better).

If you obtain several quotations for D&O and EPL coverage, it is extremely important to make sure you know what coverages are provided for each quotation.  The lowest price probably is not the best coverage and may not be adequate for your club.  Concerning the limit of coverage to purchase, there are three major areas you should check. 

1.      Is defense cost included in the limit.  If so, you may want to purchase higher limits.  Most D&O and EPL claims costs are primarily �defense costs�.  One claim could deplete the annual aggregate limit.

2.      Are there separate limits for D&O and EPL?  If not, you may want to purchase higher limits as one claim could deplete the annual aggregate limit.

3.      Is the club covered under the policy in addition to the directors and officers?  If so, you may want to purchase higher limits as one claim brought against the club could deplete the annual aggregate limit with little or no aggregate limit left for another claim against a director or officer.

Your agent or broker should provide a comparison of the various quotes and point out the differences.  For comparison purposes, there are several non-profit D&O coverage checklists and Employment Practices Liability coverage checklists available that will make the process of reviewing various forms easier.

Mary M. Keenan, CPCU

Director of Underwriting

Venture Programs, West Chester, PA

Administrator of �The Preferred Club Program�

800-282-6247 (ext. 234)

[email protected]