Tip of the Month - April 2004

AVOID UNEXPECTED COSTS OF DIRECTORS, OFFICERS AND ORGANIZATIONAL LIABILITY

by Helen Ryan Savaiano

Anyone who has ever created a budget for their organization knows that even with reliable financial data, a clear mission and well-articulated strategies the unpredictable often creeps in.

Unexpected legal fees, settlements and litigation expenses can hobble an otherwise successful organization. Avoiding potentially expensive liability exposure may mean the difference between keeping or losing paid staff and executing or terminating projects. Thus, an organization’s very survival may depend on effective risk management.

While it’s impossible to predict and control all of your organization’s potential financial and management liability risk, the two-step approach of risk transfer and risk assessment is key to protecting the assets of your organization.

Directors and Officers Liability Insurance (“D&O”) is a risk-transfer vehicle used to protect the assets of a nonprofit organization and its individual directors, officers and employees from expenses arising from legal claims and litigation expenses. It addresses a variety of claims alleging breach of the legal duties of care, obedience and loyalty to the organization. While not all claims brought against an organization are covered under D&O insurance policies, it is one of the best ways to protect the organization from such claims.

Consider the following recent D&O liability claims: 

1. A former employee of a nonprofit organization filed a sexual harassment claim against the organization and a co-worker. The organization responded that that the co-worker made one off-color remark and that the claimant simply could not get along with others. Expenses paid to date to resolve the matter before litigation: $10,000.

2. An executive was terminated after the organization found that $55,000 in grant money was misappropriated for his own use. The nonprofit filed suit against the executive to recover the funds. The executive counter-sued the organization and several individual board members for breach of contract, defamation and copyright infringement. The organization’s cost to date to defend itself: $47,077.

3. A nonprofit’s economic coordinator was terminated for failing to reach stated goals. The former employee asserted that certain members of the organization advised him to engage in financial wrongdoing and that his termination was in retaliation for refusing to do so. Verdict against the nonprofit: $872,000.

4. The defendant foundation de-funded a project after the first year of a three-year grant commitment citing program failure. Verdict rendered against the foundation: $2 million. An appeal is pending.

Based upon these examples, it’s not a surprise that about 80% of all D&O claims against organizations are brought by employees. Most of those claims are for wrongful termination, harassment or discrimination. Service providers and donors are also common claimants against nonprofits.

Given these facts, organizations should ask themselves the following: Which one of these claims can we afford? What is our appetite for risk? Unless an organization has determined that it’s financially able to absorb almost all of its D&O risk, a risk transfer tool like a broad form D&O Liability Insurance policy is essential.

The most effective risk management approach requires not only risk transfer but also a thorough assessment of the organization so that, to the extent possible, wrongful acts and liability are reduced or even eliminated. One cost-effective resource for doing so is the Nonprofit Risk Management Center, where you will find online tutorials, workshops and assistance (www.nonprofitrisk.org). The Minnesota Council of Nonprofits, which serves as a satellite office for the Center, can also assist your organization. Additionally, consulting with an independent attorney and accountant may provide additional insight into your organization’s vulnerabilities. 

Helen Ryan Savaiano, Esq., is Assistant Vice President at Monitor Liability Managers, specializing in the area of nonprofit liability. 

Special D&O rates available to MCN members

Under a new partnership with Monitor Liability Managers, MCN members are eligible for special premium pricing on their Directors and Officers (D&O) Liability Insurance. 

Monitor’s nonprofit D&O program is designed to provide organizations with three key features: asset protection, broad coverage, and litigation management. Another hallmark of this program is a simple one-page form that organizations can complete to request a same-day quote on their premiums.

MCN members are eligible for special pricing on D&O insurance offered by Monitor. Deductibles start at $500 and premiums start at $800. Premiums will vary depending upon size and type of organization.

The Morse Agency is the exclusive agent for this program. To receive a quote, download the one-page Request for Quote form from MCN’s web site or request a copy from The Morse Agency at 763-421-0550.

View Past Tips of the Month

May 2004 - One Million Minnesotans Can See Your Form 990
April 2004 - Avoid Unexpected Cost of Directors, Officers, and Organizational Liability
March 2004 - Strategies for Reducing Operating Costs
February 2004 - What Can Nonprofits Due During an Election Cycle
January 2004 - Celebrate Your Nonprofit
November 2003 -Get Your Board on Board
October 2003- Take a Walk-About for Safety
September 2003- Exit Interviews-Learn from those who Leave
August 2003 - Participant Waivers: The Good the Bad and the Ugly
July 2003 - Practical Tips for Reference Checking
June 2003 - Evaluating Your Insurance Professional 
May 2003 - Supervising Volunteers
April 2003 - Protect Your Assets with Sound Internal Controls
March 2003 - Teaching Computer Users to Surf Safely
February 2003 - Involve Clients in Protecting Their Own Safety
January 2003- Managing the Risk of Board Discontent

Learn how to manage your organization's risk.
More about the Nonprofit Risk Management Center
View the Top 10 Signs Your Nonprofit Needs to Start Doing Something about Risk Management