This year, we’re continuing our tradition of inviting a handful of our most trusted colleagues to share their ideas and expertise on topics of interest to our clients. For this blog, we’re happy to welcome back Randy Koeneke. Randy is Managing Partner at Sierra Republic Insurance Solutions, a specialty property & casualty commercial insurance agency with a focus on non-profit and social services risk. We’ve asked Randy to update us on additional risks we might face as volunteer leaders in light of the global pandemic.

 

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One of the more infamous impacts of the pandemic-related closures this past year has been an almost universal denial of coverage throughout the insurance industry against claims alleging damages caused by COVID-based issues.  Most noteworthy, for example, was the otherwise overlooked fact that virus-related damages are excluded by default from most liability- and property-policy contracts.

Such uncertainty of coverage has left many Board Members wondering to what extent they may be liable while volunteering on a non-profit Board of Directors.  Given that a Board Member’s legal obligation is to exercise sufficient Duty of Care in their oversight of the organization’s operations, are Board Members vulnerable to damages in situations where insurance does not accept coverage for a claim?

If this describes you, below are three key considerations to help bolster your protection and assure your peace-of-mind as you volunteer your time and service.

 

Director’s & Officers (D&O) Insurance In The Time of COVID

A non-profit’s comprehensive insurance portfolio will include multiple insurance policies—General and Professional Liability, Sexual-Misconduct Liability, Privacy Liability, Worker’s-Compensation, and other specialized policies—providing separately-defined coverage against liability exposures.  Each of these policies have unique positioning with respect to COVID-related coverage (read: lack thereof) and should be evaluated separately with your insurance broker.  Our conversation here applies to your Directors & Officers (D&O) policy, the insurance that responds to your individual exposure as a Board Member.

A key feature of D&O coverage is the broad nature of its coverage.  D&O insurance responds to allegations of financial damages resulting from the operations of the organization, including actions or in-actions of its Board of Directors.  That concept of “financial damages” is deliberately wide in definition and leaves open the possibility for coverage against a large spectrum of potential claims.

One outcome of such broad coverage language is that the D&O policy has potential to respond indirectly in situations where other insurance polices have denied coverage.  For example, Bodily-Injury damages may be excluded from a General-Liability policy but financial damages that arise from that Bodily Injury may in fact trigger protection through your D&O policy.  Such elasticity in coverage makes your D&O policy particularly valuable as COVID-related claims begin to manifest in the industry.

Here are three best-practices to help bolster your D&O protections:

 

THREE STEPS TO BETTER PROTECTION

1. Stress-Test Your D&O Policy. Have your insurance broker submit a report to the Board outlining strengths and weaknesses of your current D&O policy.  A good stress-test of your D&O policy will uncover areas where protection is soft, which in turn will help prioritize those areas where robust Risk-Management practices should be implemented.  The report can be addended to the Minutes of your next Board meeting helping to document that the Board has exercised sufficient Duty of Care.
2. Scrutinize Your Next D&O Policy Renewal. In anticipation of growing COVID-related litigation and claims, the insurance industry generally expects a “hard market” to develop for D&O insurance (i.e., increased cost and decreased capacity).  Be prepared for more underwriter scrutiny of the organization during your next D&O policy renewal.  Likewise, be prepared in turn to scrutinize the specific terms being offered at renewal, paying particular attention to any added restrictions, new exclusions, or changes in the definitions of the policy itself.  Your broker can outline this for you.
3. Pay Special Attention To Defense Costs. Your policy includes Defense Costs when a claim is triggered.  Those costs—attorney fees and related expenses associated with defending a claim—will come in one of two formats: Inside or Outside the Limits‘Inside the Limits’ means that all costs to defend your claim are applied towards your policy limit, thereby depleting available coverage.  Defense costs are paid first and only the remaining balance is then available to apply towards damages.‘Outside the Limits” means that any costs to defend a claim have no bearing on your policy limit and will not deteriorate coverage.  Your policy limit is reserved for paying damages: defense costs are accounted for outside of and apart from that limit.

 

Given the unknowns of upcoming COVID-related damages it is a very good year to consider upgrading your policy to the more robust Defense-Cost model, at least until predictability stabilizes D&O claims.

So by all means volunteer your times and service to a local non-profit:  they need the help today than ever.  With these D&O controls in-place, you can rest-assured that your good Samaritans will be well protected.

 

RANDY KOENEKE ARM, CRM, CWCA, MLIS, CPSI

Randy follows a defined liability-management process to help identify, prioritize, and mitigate the most pressing risks facing his clients’ organizations. He is accredited as an Associate of Risk Management (ARM) and is certified as both a Management-Liability Specialist (MLIS) and Cyber-Risk Manager (CRM).

SIERRA REPUBLIC INSURANCE SOLUTIONS
(310) 995-4471, rkoeneke@sierra-republic.com
5150 E. Pacific Coast Hwy., Suite 200, Long Beach, CA 90804