How Much? Costs to Manage Your Reputation

Several nonprofit organizations have had their reputations tarnished recently. The National Restaurant Association had its 15 minutes of fame via Herman Cain. Susan G. Komen for the Cure  is still reeling from its decision to defund Planned Parenthood. Penn State University (PSU) has been handling the repercussions of a grand jury report of child abuse allegations against former assistant football coach, Gerald (Jerry) A. Sandusky. Unfavorable media coverage is every organization’s worst nightmare.

Quantifying reputational risks is hard because the financial impact can take months to appear. The association may experience a decline in membership, advertising revenues, donations, or sponsorship that won’t be known for awhile. How do you know if you are still attracting or retaining members, students, talented employees, volunteers or board members? But there can be substantial upfront costs when your reputation is being attacked. Penn State has disclosed scandal offers insight into the initial costs of managing its reputation.

Penn State established a website, http://openness.psu.edu/, to demonstrate its commitment to openness and transparency. The site details the costs associated with the scandal.

Costs to Penn State

Protecting your reputation is not cheap. Penn State disclosed that as of January 31, 2012, it had paid $5,723,553 to respond to the Sandusky incident. (F.A.Q. 14. How much money is the University paying for legal fees, consultants and PR firms associated with the Sandusky matter?)

  •  Internal Investigations and Crisis Communications                 $3,936,137
  • University Legal Services/Defense                                                    $  813,427
  • Externally Initiated Investigation                                                     $     49,788
  • Officers Legal Defense                                                                              $  338,545
  • Other                                                                                                              $  558,656

The University states that it will not use donations or tuition fees to pay for the scandal. Some of the costs may be covered by insurance but much of it will be “out of pocket.”

Indemnification

The University’s bylaws [Article 5, Section 2 (a)] state that “except as prohibited by law, every trustee and officer of the University shall be entitled as a right to be indemnified by the University against expenses (including counsel fees) and any liability (including judgments, fines, penalties, excise taxes and amounts paid in settlement) paid or incurred by such person in connection with any actual or threatened claim, action, suit or proceeding, civil, criminal, administrative, investigative or other.”

Penn State promises to reimburse every trustee and officer for their expenses and any resulting liability from this scandal via its bylaws. The indemnification provision does not include employees so it is unclear what protection Penn State will provide to its non-officer employees.

General Liability Insurance

Penn State is relying on its general liability policy to cover many of the lawsuits and allegations arising from the Sandusky scandal. However, according to Business Insurance, the University’s general liability insurer, Pennsylvania Manufacturers’ Association Insurance Company (PMA), filed for declaratory judgment or basically denied any coverage for the lawsuit filed in November 2011 (alleging Penn State’s negligence related to Mr. Sandusky’s alleged sexual misconduct). PMA asserts that Penn State is not entitled to coverage and defense under certain policies issued by PMA mainly because of an abuse and molestation exclusion. Penn State has countersued PMA over its refusal to cover the lawsuit (Penn State sues insurer PMA in dispute over Sandusky case coverage).

So now Penn State is paying for its own defense against this lawsuit (probably only the first of many). Plus the University is funding its legal expenses to sue its own insurance company – never a cheap endeavor.

Directors & Officers Liability

On a brighter note, Penn State’s D&O policy may provide some coverage including defense costs. But coverage is dependent upon the terms and conditions of the policy such as how it defines “wrongful acts,” “claim,” and “insured.”

Some of the defense costs for both the entity and its directors and officers may be covered by the D&O policy. But a D&O policy usually excludes coverage for bodily injury claims so that policy won’t cover the specific negligence allegations.

Crisis Communications

Penn State has already spent almost $4 million in internal investigations and crisis communications which is probably not covered by insurance.

Lessons to be learned

Crisis Management Plan

If you haven’t already, develop and test your crisis management plan. The need for a crisis plan is reinforced every day with the power of social media (Trayvon Martin, Kony 2012, Arab Spring). Social media can both generate and respond to a crisis.

When you are prepared you can strive to keep the initial costs low since many of your actions may not be covered by insurance. Penn State probably had a crisis plan but doubtful it addressed the possibility for allegations of child abuse especially one involving its football program.

Indemnification

What does your bylaws or other corporate indemnification provision say about directors, officers, employees, volunteers, etc? The provision is probably rather broad and not all costs will be covered by insurance.

Review your insurance coverages

Meet with your insurance agent to review your coverages; use these current crises to analyze your coverages and limits. Remember several liability policies such as D&O, professional liability, media liability and others may include defense costs inside the policy limits. Penn State has already paid over $1.1 million in defense expenses; it’s not unusual for defense costs to exceed the settlement.

No one likes to think about bad things happening but they do and often occur to good people. It is only a matter of time before your association experiences unfavorable attention. Be prepared – it may save your association.

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