Archive for category Decisions
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.
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.
After the recent Virginia earthquake, many people asked about the need for earthquake insurance. Let’s do a risk assessment.
Earthquake is not the risk but rather the peril or cause of loss for damage to property. A building can sustain structural damage, walls crumble and ornate facades, pinnacles and spires fall off. Heating, ventilation and air conditioning equipment if not secured properly will shift and be damaged. Broken gas pipes and electrical wiring create other dangers. The shaking can make interior walls collapse, file cabinets, large furniture and other objects tip over, and pictures fall off walls.
If the quake caused any significant direct property damage your business operations will be interrupted. During the interruption your association may lose income (rental fees, dues, sales, conference registrations) or incur added expenses to keep up operations including setting up a temporary office.
During the analysis phase we consider the frequency (how often) and severity (dollar loss) potentials of earthquakes. The U. S. Geological Survey (USGS) is a tremendous resource all things earthquake.
USGS suggests you find your proximity to active earthquake faults, the seismic history of the region (frequency), and how long since the last earthquake. On the East Coast earthquakes are relatively low in both frequency and intensity. However the New Madrid Fault in southeastern Missouri and western Tennessee has a higher probability of a significant earthquake. The West Coast including Utah and Nevada has a higher incidence of earthquakes. USGS’s 2009 Earthquake Probability Mapping site enables you to check the probability by zip code.
As we say in the insurance world “frequency breeds severity,” so the more earthquakes in a region the greater the chance for a significant event. Alaska is the most earthquake prone state but California has had the most substantial earthquakes.
When assessing severity consider both the potential intensity of an earthquake and your building’s and office’s susceptibility to damage. Brick buildings don’t do well in earthquakes while frame construction fares better due to its “flexibility.” Other construction types depend upon its level of “earthquake resistance.” Buildings in California are more earthquake resistant than in other parts of the country. You also need to consider the soil composition, slope of the land and annual rainfall to assess severity.
You can purchase earthquake insurance as an additional peril under your property insurance policy (personal and commercial). The premium depends upon your location (proximity to faults) and building construction. Earthquake insurance is much cheaper on the East Coast than the West Coast. You can buy coverage for the full value of your property or as a sublimit.
Another factor is the size of the deductible. On the East Coast your deductible may be as low as 2% of the property values while in California your deductible would be 10 – 15% of the property values.
While assessing the need for earthquake insurance, determine the property values subject to loss by an earthquake. If the property values are low and you have a high deductible, the claim may be under the deductible. If you own an older building with ornate features you may sustain more damage than a newer building. The East Coast quake caused damage mainly to churches and older brick buildings where it might be appropriate for earthquake insurance.
If you are still undecided, ask your insurance agent to get a quotation for earthquake insurance. Knowing the cost and deductible can help you decide if you need earthquake insurance.
The Virginia earthquake awakened people to this exposure. We learned that few of us know what to do and unintentionally endangered themselves and others. Even if you don’t purchase insurance learn what you should do before, during and after an earthquake to protect people and property. After writing your new procedures don’t forget to train your staff. Be safe.
By Leslie White on August 2, 2011
During the CommPartners’ Learning Socially: Associations at the Crossroads Seminar, Susan Robertson, CAE executive vice president of ASAE and president of ASAE Foundation, mentioned a speech by Barry C. Melancon, CPA, chief executive officer, American Institutes of CPAs about risk. Association TRENDS selected Mr. Melancon, as its 2011 Association Executive of the Year. According to Association TRENDS Melancon said that “association executives ‘have an obligation to drive our individual associations forward,’ noting that this cannot happen without taking risks, finding an appropriate balance, and communicating effectively.” You can view his speech here (risk discussion begins around 16:00).
My heart warms when an association executive talks about risk especially one that practices good risk management. Melancon shared his view that an association’s board and key volunteers need to be willing to take risks. The association leaders have to recognize that not every effort will be successful or get the results expected. When an association tries something new and gets unexpected results it is not “failure” but rather an opportunity to learn and move forward.
Innovation and Risk
I’ve written about Innovation and Risk before that an association has to take risks to be creative but be smart about the risks it takes. Risk involves uncertainty; we don’t know the outcomes of our efforts. A lot of us are uncomfortable with uncertainty we still hold the illusion of control. We don’t know if that new service, program, membership model will have the results we want (or expect)? As Jamie Notter tweeted during the seminar
Jamie was talking about social media but the statement holds true for other activities. Some associations are still offering the same arguments against social media – what if someone says something bad about? An employee or member misbehaves? In my first guest post for SocialFish, The Hidden Risks of Social Media: It’s Not What You Think, I declared the greatest social media risk is not being an active participant. If you use social media you are aware negative comments and can respond accordingly. Therefore,
The greatest threat to an association’s survival is to not take any risks; not trying something new or moving forward.
Or another way to say it is failure to take risks leads to failure. Albert Einstein defined insanity as doing the same thing over and over again expecting different results. If you don’t change what you are doing the results won’t change either. The downward spiral will continue until your association becomes completely obsolete and out of business.
Risk Management as Change Agent
So how do we get out of this insanity loop? How do we start taking some risks? A risk averse association isn’t going to change simply by a board or CEO edict; this requires a cultural change. Change doesn’t come quickly to many people or associations but the practice of risk management provides techniques to facilitate change and address people’s fears.
Risk management is about learning to deal with uncertainty; not knowing how people will receive a new initiative or when something bad may happen such as an auto accident, office fire, employee injury, or anything else that goes wrong. You first need to know how your management team and board feel about risk – their appetite for risk, tolerance for uncertainty. If risk averse, you have a bigger challenge to get them comfortable with risk and uncertainty.
Another way risk management is a change agent is by putting risks into perspective. Our first reaction to an idea is its too risky but after evaluating the potential outcomes we realize it is not so bad. The risk may be acceptable or can be mitigated effectively. A part of implementation is to set up the metrics to measure the impact of the change. Through the metrics you find if the results are what you expected or if you need to change some aspect of the project.
Remember everything has its risks but each decision also has the possibility of reward. The new membership model, chapter re-organization, or volunteer management tools may be successful, even exceed expectations. But you won’t know until you do something. Push through the fear and inertia by managing risks. You’ll be amazed at the results.