Risk management consultant working with associations and nonprofits to embrace and benefit from risk. Risk is crucial to an organization achieving its mission.
People frequently overlook one of the best values of a liability policy which is the insurance company pays to investigate and defend a claim. But the insurance company has to receive timely notification of a claim or incident to trigger or initiate these defense expenses. Too often the insured (you) contact your legal counsel and forget to call your insurance agent to report the claim.
An association received a letter from an attorney representing a terminated employee seeking restitution for alleged discrimination. The association sent the letter to its attorney who did a little research and wrote a letter to the employee’s attorney saying “go away.” Several months later the association received a letter announcing a court award of a judgment to the former employee. The organization did not respond to the complaint nor appear in court because it failed to notify its registered agent of its new address.
At this point the association finally contacted its insurance agent to file an Employment Practices Liability claim. The insurance agent presented the claim which the insurance company denied due to late reporting. The association was very lucky and had a good agent who after much pleading and negotiation the insurance company agreed to pay the defense costs from that point forward. The carrier was within its rights to deny the claim.
What went wrong?
The association did not call its insurance agent as soon as it received the original demand letter but rather had its legal counsel “handle it.” This common practice jeopardizes your insurance coverage. Frequently attorneys tell association executives to contact them as soon the person becomes aware of a claim or potential legal action. A few attorneys even tell clients they will advise the association if it should submit the claim to its insurance company.
WRONG! The insurance company is the only party that decides whether or not a claim is covered. So your first phone call must be to your insurance agent so he or she can guide you in filing a claim or notice with the appropriate insurance companies. Neither your attorney nor insurance agent should decide whether or not to report a claim.
Every insurance policy requires claims to be reported in a timely manner. The insurance company wants to investigate the claim immediately while memories are fresh, people are available and the evidence can be preserved. Many states have laws that stipulate late reporting can relieve an insurer of its responsibility to defend and pay a claim. A few states mandate that the reporting delay has to have a “material effect” on the company’s ability to defend the claim to negate coverage. Regardless of the applicable law, you are better served when the insurance company begins its investigation promptly.
Second, the insurance company’s responsibility to defend the insured is the most valuable coverage under a liability policy. Defense costs can exceed the actual claim payment. For example you may win in court or convince the claimant to go away but will still have defense costs.
Each policy’s defense provisions stipulate if the insurer has the right and duty to defend the insured. If the insurer does not have a duty to defend, there may be an option for the insured to tender its defense to the insurance company. However even if you do not tender the defense to the company the carrier still has to approve in advance any defense expenditures paid by you. Under most reimbursement provisions, the insurer will advance defense expenses (pay before the claim is settled).
It is important to know how defense costs are covered under each policy. In most general liability and auto policies defense costs are paid in addition to the policy liability limit(s). The full limit is available to pay any settlement or judgment. Most Directors & Officers and professional liability policies have defense expenses within the policy limit thereby reducing the amount of money available for claim payments. Some insurance companies offer an endorsement (for an additional charge) making defense expenses “outside” the policy limit. Check with your insurance agent to determine the defense provisions for your key liability policies.
You are probably paying a lot for your insurance policies and should receive its full benefits. Therefore all claim and incident notices should be filed promptly to the insurance company. Make sure every supervisor, manager, executive, general counsel and key volunteer (board and committee members) knows how to report any incident or event that could lead to an insurance claim to the proper person. Remind them often of the importance of timely notice and how to report an incident or claim.
The association’s first call or email should be to the insurance agent or broker who can guide them through the reporting process. The second call can be to General Counsel or your outside legal counsel but it is more important to notify the insurance company via your insurance agent. Don’t rely on your attorney to decide if you have insurance coverage; only the insurance company can make that determination.
Late claim reporting can cost you thousands (or more) of dollars in defense costs that the insurance company would have paid (within the terms of the policy) if you told them sooner.
My earlier post, What Does Your Exhibitor Contract Say? Protect Yourself, discussed how a hotel and convention center contract could hold an association responsible for anything that goes wrong, including the bad acts of exhibitors. Regardless of the terms of the facility contract, an exhibitor should have to protect the association from any harm caused by an exhibitor. The exhibitor contract should contain an indemnification and hold harmless agreement in favor of the association.
The protection provided by an indemnification provision is only as good as the offending party’s ability to pay for any harm they cause. If the exhibitor does not have the right insurance they won’t be able to meet their obligations nor protect the association. This is why having the right insurance is so important.
Very few contracts are written correctly from an insurance and risk management perspective. The hold harmless and indemnification provisions and insurance requirements are problematic. The contracts often contain incorrect insurance terms and do not require the exhibitor to submit proof of insurance.
If the contract has the exhibitor agreeing to indemnify and hold the association harmless, require the other party to have certain insurance coverages. You should also demand proof of insurance by requiring a Certificate of Insurance and/or Evidence of Property Insurance. Certificate handling is time and staff intensive especially for a large event. You have to train someone to receive, review and approve the certificates, follow-up if there is a problem, and file and retain the documents. This may seem like a lot of trouble but is invaluable if you avoid a large loss caused by an exhibitor.
The following is a general explanation of common insurance terms and coverages. Your policies may vary so do not rely upon this discussion. The terms and conditions of the actual policy determines coverage. Have your insurance agent or broker review all contracts before signing to make sure you have the required and appropriate coverages. Many contracts mandate terms contrary to insurance industry practices making compliance difficult or impossible. When drafting a contract or agreement have your insurance professional review it from an insurance and risk management perspective.
The most common errors arise from incorrect insurance terms. Almost universally contracts mandate “comprehensive general liability insurance” which no longer exists. Insurance companies stopped writing “comprehensive general liability insurance” in 1986 and some of the coverages under the comprehensive policy are no longer available. The correct term is “commercial general liability” although some use the terms of business or general liability. All insurance people understand the term “commercial general liability” and carriers’ policies are usually based on the Insurance Services Office’s Commercial General Liability policy.
Other terms not to use are:
- Personal Injury – Frequently, the exhibitor agrees to hold the association harmless for “personal injury” and damage to property. For attorneys, “personal injury” means or includes bodily injury. However in a commercial general liability policy, “personal injury” covers intentional torts such as libel, slander, defamation, false arrest, detention or imprisonment, malicious prosecution and wrongful eviction or entry into committed by or on behalf of the premises’ owner, landlord or lessor. Personal injury coverage excludes bodily injury, so the indemnification provision should use the term bodily injury. You can also require Personal and Advertising Injury which is Coverage B in the commercial general liability policy.
- Public liability – This was never an insurance coverage – no insurance person knows what it means.
- Broad form coverage – This was an endorsement added to a “comprehensive general liability” policy. The endorsement no longer exists and some of the coverages are no longer available.
- Blanket contractual liability – Another pre-1986 endorsement that is no longer available. Some insurance companies have a “blanket” endorsement for contractual liability but each form is different and may not give the intended coverage.
The contract may also require the exhibitors to include coverage for their independent contractors. No insurance company will provide coverage for the insured’s independent contractors – the exposure is too large and unknown. However you can require the exhibitor to pass your insurance requirements to their subcontractors.
The general liability policy grants contractual liability coverage as an exception to an exclusion. The insured has coverage for bodily injury or property damage liability assumed under a contract or agreement that is an “insured contract.” Not all contracts meet the policy’s definition of “insured contract.” The policy also has other restrictions on contractual liability coverage. Talk with your insurance professional to get a better understanding of this coverage.
The general liability policy is usually the only policy that provides some form of contractual liability coverage. Most other liability policies exclude liability assumed under a contract. Work with your insurance agent to decide which, if any, of your policies give this coverage when signing a contract requesting contractual liability
In most cases request the exhibitor to have the association added as an Additional Insured to its general liability policy. However there are many variations of the Additional Insured endorsement so specify the endorsement or wording you want. Request a copy of the additional insured endorsement to verify it is providing the right protection.
The exhibitor’s policy may have a “blanket” additional insured endorsement that adds any party requiring such status. However the blanket endorsement can have limitations or other problems so ask for a copy of the endorsement to verify coverage. Ask your insurance professional to check the form for compliance.
A contract may specify “all risk” or “fire and extended coverage” forms but these coverages no longer exist. Property coverage is now written on Cause of Loss – Basic, Broad or Special Form. The broadest coverage is the “Cause of Loss – Special Form” which usually does not include flood or earthquake.
Certificates of Insurance
A certificate of insurance documents the insurance policies in force as of the date of preparation; the coverage can change the next day. Regardless what the certificate displays, it does not amend the terms of any policy. The contract’s requirements such as adding the association as an additional insured may drive the need for an endorsement.
By requiring the exhibitors to have certain insurance coverages you are protecting your association from harm caused by others. Make sure your contracts are well-written and the exhibitors have to have the appropriate insurance policies.
Insurance is quite complex; so get help in drafting (and reviewing) your contracts and agreements. While attorneys address the legal aspects of a contract you also need the counsel of an insurance professional. Insurance with its own terminology and intricacies need the help of an insurance professional. Your survival may depend on it.
An association executive asked me about requiring certificates of insurance from conference exhibitors. My primal response was “Of course you require certificates of insurance from exhibitors that is Risk Management 101.” But then I decided to investigate the world of meeting and event planning to see what associations are doing. Thanks to ASAE’s Knowledge Center’s Models and Samples I reviewed seven (7) exhibitor contractors. The findings surprised me; from a risk management perspective the indemnification provisions were rather weak and the insurance requirements were problematic. Bottom line, only one association had a good indemnification provision and all had problems with their insurance requirements.
Why Do We Care?
Every hotel, convention center or facility contract has an expansive indemnification provision. In most cases, the association agrees to indemnify, hold harmless and defend the facility for anything that goes wrong. What do these terms mean?
Indemnification or to indemnify means the association assumes the financial responsibility for the liability of another party such as the hotel or convention center. A hold harmless agreement requires the association to respond to certain legal liabilities of the other party. Most event contracts have an “intermediate” hold harmless form where the association is responsible for its sole negligence and the negligence of both parties. However, the agreement can be “broad” where the association holds the other party harmless for suits against the other party based on the association’s sole negligence, joint negligence of both parties or the sole negligence of the other party. The facility can try to impose liability for its sole negligence but that portion is unenforceable in a number of states. (Definitions provided by International Risk Management Institute’s Insurance Glossary.)
Consequently, hotel and convention center contracts or license agreements impose substantial liabilities onto an association. Limited attention is often given to the indemnification provisions since the association is usually in a weak bargaining position. While the association may not be able to modify the terms it can work with an insurance professional to make sure it has the appropriate insurance coverages and limits. Just as importantly, the association can transfer contractually some of these exposures to the exhibitors and other service providers (exposition companies, caterers, AV, entertainment).
Most facility contracts also hold the association responsible (liable) for the acts of any persons admitted to the facility by the association. One agreement states “For the purposes of this Agreement, the act of any person admitted to the Center by Customer shall be the act of Customer.” Therefore, the association is financially responsible to the facility for any legal liabilities caused by its employees and volunteers as well as the attendees, exhibitors, speakers, contractors, subcontractors and anyone else invited to the event. For example, if an exhibitor’s “swag” hurts a person or they serve food that causes food poisoning, the association is liable to the facility if the facility is involved in the loss or claim. A knowledgeable claimant or plaintiff will name every party even remotely related to the incident including the facility. For your protection, transfer this financial responsibility to the exhibitors and other service providers through your contracts.
Indemnification and Hold Harmless Problems
Several of the exhibitor contracts focused on limiting the association’s liability from the exhibitor filing a claim against the association for damage to the exhibitor’s property or people. The contract should address this issue but it is more important to have a good indemnification and hold harmless provision especially if the facility contract has an “intermediate” or “broad” hold harmless provision.
The indemnification provision should protect the association to the fullest extent possible. Review the facility contract to determine your obligations and transfer the same responsibilities to the exhibitors.
Below are solutions to some common errors in indemnification provisions.
- Clearly identify the provision with a heading such as Indemnification, Liability or Waiver
- State that the exhibitor has to defend the association in addition to indemnify and hold it (and any other parties) harmless. Most insurance policies will not pay defense costs unless the contract specifically requires the insured (exhibitor) to defend the other party (you).
- State what liabilities and exposures the exhibitor is assuming.
- List all parties that the exhibitor has to indemnify. This should include the parties the association has to indemnify under its event contracts.
NOTE: Since this is a part of a contract or agreement, have your attorney review and approve the document before you use it.
Co-ordination with Lease
The Produce Marketing Association (PMA) has a great provision in its PMA Official Exposition Rules and Regulations that makes the exhibitors liable to the same extent that PMA is obligated to indemnify the owner of the building. Here’s the wording:
Exhibitor hereby agrees to indemnify, defend and hold harmless Exposition Management to the same extent that Exposition Management may be obliged to indemnify the owner of the building and other related entities as lessee or licensee of the exhibit hall or space. If there are any inconsistencies between Exposition Management’s lease or license for the exhibit hall or space and this agreement, the terms of the lease or license shall govern. If there are additional rules, regulations or terms or conditions that Exposition Management must comply with under its lease or license, to the extent they may be applicable to the Exhibitor’s booth, those additional rules, etc. are hereby incorporated herein by reference and the Exhibitor agrees to comply with them.
If you include a similar provision you should inform the exhibitors of the extent of your liability to the building owner so they can review their insurance program for the appropriate coverages.
Insurance is the best way to fund an indemnification agreement. However the Insurance section is either overlooked or done poorly. Another blog post will more fully explain Insurance requirements.
First, make sure the indemnification provision is written to trigger insurance coverage. Second, describe the required insurance coverages properly. Your insurance agent or broker can help you develop the correct wording. Finally require the exhibitor to provide your association with a Certificate of Insurance and Evidence of Property Insurance prior to the event. Review the certificates to verify the exhibitor has the right insurance coverages.
You have too much at risk to have a weak indemnification provision in your exhibitor contract. The larger exhibiting companies will have no trouble meeting tougher indemnification and insurance provisions – they expect it. Some smaller companies may not have the required insurance but you can help them. Short-term special event general liability policies are available if an exhibitor needs help to meet the contract’s requirements. Your insurance agent can help identify or supply these markets if the exhibitor needs help. You can provide a valuable service to the exhibitor while protecting your association.
What to Do
So what does your exhibitor contract say about indemnification and insurance? Review your contract with your insurance agent and attorney. They can draft a stronger contract to protect your association from harm caused by others. Get to it!
My friend, an insurance broker, was lamenting the disconnection between her association and nonprofit clients and the insurance industry. Her clients expect their property and casualty insurance premiums to decrease while insurance companies are seeking increases. This disparity forces insurance brokers to market their accounts in search of reduced pricing. The marketing efforts can produce lower costs but usually because the incumbent carriers cut their prices to keep the account.
The insurance industry has programmed insureds to expect premium decreases. The insurance marketplace is cyclical and it has been in a “soft” market since 2005 with declining rates. However according to MarketScout’s research, the market started to turn last fall when rates stayed flat and then slight increases. Since November 2011, average premiums have increased with April recording a 3% increase compared to last year. Conning Research’s Property-Casualty Forecast & Analysis predicts net premium growth of 4% in 2012, +5% in 2013 and +5.5 in 2014. Premium increases will be higher in catastrophe-exposed regions especially for property coverages.
What does this mean? Associations and nonprofits should expect their annual premiums to increase for the next few years. But nonprofit organizations are still recovering from the Great Recession and money is tight. Many have already reduced their insurance costs by lowering policy limits, increasing deductibles, and/or eliminating coverages. How much lower can they go?
Although you may still need to cut costs, reducing your insurance coverages can be a false savings. Having adequate insurance is important to your financial well-being but what is “adequate” for you? How did you decide where to cut your insurance costs?
Risk Financing Strategy
In a perfect world every nonprofit has a risk management policy but few have one. It is valuable to discuss how to manage your risks and then adopt a formal policy. A plan for financing your risks – how you will pay for losses – is a part of your risk management program. A risk financing strategy helps you make these difficult risk financing decisions. Most associations have policies or strategies for their investments and reserves but not for financing its risks.
Risk Financing Techniques
There are two ways to finance risk; retention or financial transfer. An organization retains a risk when it pays for all or part of a loss. A deductible is one form of retention; not purchasing insurance for an exposure is another. Hopefully your types and amounts of retention are conscious decisions but you can passively retain a risk when unaware of its existence and have no plans for paying for a loss. A good risk identification process may prevent an unexpected risk retention.
With financial transfer another party is financially responsible for a loss but you need to make sure they have the financial resources to meet their obligations. Purchase of insurance is a financial transfer. Indemnification or hold harmless provisions in contracts are another transfer technique since another party has to pay for certain types of losses. For all financial transfers make sure the other party can meet their financial obligations.
Insurance is the primary risk financing technique for nonprofit organizations. Every nonprofit has an informal risk financing strategy based on the scope of its insurance program but it would be better to formalize your strategy.
Insurance purchasing guidelines, a part of a risk financing strategy, are similar all organizations. An organization should:
- 1. Assume risks whenever the amount of the potential loss would not significantly affect the organization’s financial position; and
- 2. Insure risks whenever the amount of potential loss is significant or insurance is required by law or contractual agreement.
The first step is to decide what is a “significant loss.” Often a “significant loss” is one that threatens the organization’s survival. You may have established your loss threshold when setting your reserves level.
Another consideration is your association’s risk appetite – how much risk the association is willing to accept in pursuit of its strategic objectives. In some pursuits you are willing to accept more risk than others. These factors affect your insurance purchasing decisions.
Your association may be subject to certain laws or regulations requiring specific insurance coverages and limits. For example most states mandate Workers Compensation insurance and the Employee Retirement Income Security Act (ERISA) requires Employee Dishonesty insurance for your fiduciaries.
Contracts are often an overlooked exposure due to an indemnification or hold harmless agreement as well as specific insurance requirements. The person responsible for the insurance program isn’t always informed of the contractual requirements so the insurance program is non-compliant. You could inadvertently breach a contract or have an uninsured exposure.
Before you make cuts in your insurance program adopt a risk financing strategy. Decide what you want to do via retention and financial transfer. Make retention a conscious decision matching your risk appetite. Insurance is another option but don’t forget you can transfer a risk or operation to another party (outsourcing). Just make sure the other party has the right types and amount of insurance to protect both you and them. When necessary buy insurance but base your decisions on your risk financing strategy and organizational goals. You’re less likely to be surprised.
I love all of this talk about innovation because it always leads to discussing risk. I just watched Rita Gunter McGrath a professor at Columbia Business School talk about strategy and innovation in highly uncertain environments at DigitalNow: Association Leadership in a Digital Age. DigitalNow offered a free live stream option for its general sessions.
Dr. McGrath summarizes her view of complexity in her DigitalNow bio:
Complex organizations are far more difficult to manage than merely complicated ones. It’s harder to predict what will happen, because complex systems interact in unexpected ways. It’s harder to make sense of things, because the degree of complexity may lie beyond our cognitive limits.
My ears perked up when she talked about managing risk (or trying to manage uncertainty). She challenged our use of prediction when the world is unpredictable. Every decision has unintended consequences that may lead to failure or unexpected outcomes. But McGrath encourages us to from these “intelligent failures” to improve our decisions.
My favorite subject was Dr. McGrath discussion of resource trade-offs suggesting that redundancy and stockpiled resources are our friend. As the business continuity professionals and Dr. McGrath says: “Time is your friend before a disaster and your enemy afterward.” She followed with “we also over-invest in prevention and under-invest in resilience.” From a risk management perspective I couldn’t agree more. So many associations only focus on preventing a loss from occurring but don’t consider how to respond to the actual event. For example, most associations lack risk management plans for succession, business continuity/disaster recovery, and crisis management and communication. This DigitalNow tweet sums it up (Follow the discussion on Twitter #diginow12)
We all agree that innovation is risky but we don’t do much to manage the risks other than trying to avoid it. If we do nothing we can avoid the risks of innovation. But social media shows us that the greater risk is to do nothing. If associations continue to maintain things as they are we lose our relevance and meaning to the point where we may ultimately die.
The appropriate use of various risk management techniques increases our chances for success. As we evaluate our options we both control or reduce the risks and maximize the opportunities. Our decision may be wrong but with proper planning and analysis we experience an “intelligent failure” instead of a catastrophe.
Risk control techniques let us avoid, prevent or reduce the loss. Building redundancy into our systems and processes (especially information technology) reduces the size of the loss. Back-up of electronic data and software provide redundancy while the use of hosted sites and the cloud segregate your loss exposures (a loss at your office doesn’t affect the hosted sites) and enable a rapid recovery.
So I’ll continue to beat the drum for associations to incorporate risk management into its daily operations and innovative efforts. The identification, analysis and mitigation of risks are crucial to your success and growth as an organization. Risk management is not a separate activity done by a committee but integral to all of your operations, strategic and tactical. Risk management has evolved into an enterprise-wide activity. As Dr. McGrath said associations are complex organizations requiring new management systems and methods. Incorporating enterprise risk management (ERM) in your association helps you with this new complexity.
We all write policies, lots of them. It’s one of the services I provide to my clients. But what purpose do policies serve? Should they serve? Do your current policies meet these purposes?
My hypothesis is we have too many documents called “policies” that are really procedures, rules and guidelines, not policies. For example, personnel manuals contain “employee policies” but most are rules (with a few guidelines) such as office hours, leave/time off, electronic communications, workplace environment, and benefits. Even your social media policy isn’t a policy but guidelines on how employees should behave while online.
Many “policies” are written as a knee-jerk reaction to an incident such as a dress code because someone wore inappropriate attire to work. An employee spends too much time on personal phone calls so we write a “policy” to restrict personal use of office equipment. As many associations still struggle with social media, under the guise of a policy, they implement rules to restrict access to social sites during office hours and limit employees’ participation during non-work time.
So what is a policy? A policy documents an association’s guiding principle(s) on a specific subject or issue. A well-written policy is aspirational and supports our various strategies (see discussion below). Policies are the “what” we plan to do to meet our vision, mission and corporate culture. Through policies we clarify who and what we want to be as an organization.
Essentially, policies are the guidelines, intentions and plans for WHAT an organization proposes to do while procedures are an outline for HOW these wishes and intentions are to be carried out. (p. 9)
Policies help people make better decisions; offer guidance on how the organization wants us to behave. Well-written, strategic policies enable the decision to be intuitive to the employee, member or volunteer as a reflection of the association’s mission and reason for being.
One challenge in drafting policies is that the document needs to be flexible but written clearly enough to be applied to unanticipated circumstances. No policy can take into account or address all of the possible situations the decision maker might encounter but offers insight into how to solve the problem.
Rules and Procedures
Most, if not all, policies need to be supported by rules, procedures and guidelines which document how we will carry out the “wishes and intentions” of the policy. For example, a personnel policy may say that all employees are valued human beings, to be treated with respect. From this premise of respect an association then develops its personnel rules, procedures, guidelines and benefits. Any tasks related to a policy should be standardized, such as finance and accounting procedures. There are also regulations and compliance requirements that have to be addressed via procedures, rules and guidelines.
We can’t discuss policies without considering their strategic role. Strategy comes from the Greek word “strategia” meaning “office of general, command, generalship” reflecting its military roots. The business world adopted this military concept using it as a plan of action designed to achieve a vision. Through strategies associations determine where it wants to go and what it wants to accomplish as an organization. Association strategies include marketing, social media, membership, finance, fundraising, human resources, advocacy and so on. Policies develop and evolve from these strategies.
In game theory, strategy refers to one of the options that a player can choose. That is, every player in a non-cooperative game (chess) has a set of possible strategies, and must choose one of the choices. Therefore strategy setting involves evaluating numerous options and choosing one that best meets your vision and mission.
Think Before You Write
The association industry continues to discuss the future of associations. Some believe the social revolution has made associations unneeded, superfluous. Others think that association must undergo a massive shift with a new business model. And some believe associations are just as vital today as years ago. The best aspect of this discussion is that associations are questioning their existence and purpose.
I believe that most associations (and businesses including mine) are fuzzy on what they want to be, why they exist and how they make the world a better place. This lack of focus lets us try a little bit of everything – try to be all things to all people.
Policy writing when done strategically helps an association clarify who and what it is (or wants to be) for its members and other stakeholders. We often establish rules and procedures often under the guise of being a policy without asking why. What do we want to do to be a better association? How will this strategy and subsequent policies make us better? When you answer these questions you can write a strategic policy that will serve you well.