Archive for category liability
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!
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.”
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.
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.
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.
Many consider risk management the language of “NO.” “No we cannot do X because it is too dangerous or risky.” But this decision is usually made too early in the risk management process before the organization has analyzed its risks to decide if they truly threaten your association. To be effective in managing risks you have to follow all the steps in the risk management process starting with (1) risk identification and (2) risk analysis and prioritization.
Identifying risks seems pretty easy where you just sit around and brainstorm everything that can go wrong with an idea. However the brainstorming approach is limiting and less effective. People’s personal knowledge and worldviews restrict their ability to discern when a good idea is stopped or a more dangerous project goes forward.
Instead of just brainstorming possible negative outcomes you should be identifying all potential events (positive or negative) that affect the organization. To increase your chance for success use a more systematic identification method. The process starts with identifying the values exposed to loss (people, property, income, business operations). Then look at the possible events that can cause a loss. The cause or peril can be natural, human or economic coming from an internal or external source. There are risk checklists and other means of identifying risk available based upon your association’s needs and operations.
The second step of the risk management cycle is to analyze and prioritize the identified risks. Many overlook this step and make decisions based solely on their personal perception of the risk. Without analysis, risk becomes an emotional issue; we are considering the loss of something of value. Each person perceives risk differently (Read Risk and Fear: How Do You Perceive Risk?) and reacts based upon their beliefs. Human beings are not rational; we don’t always act in our own best “rational” interest but our emotions. Many exposures especially liability generate fear that equates to risk for many folks. Fear affects your decisions that may or may not be in the best interests of your organization.
Risk analysis offers a practical and rational approach to counter the emotional responses to risk. In this phase we decide how likely and often an identified event will occur, its potential “frequency.” If you live on the Atlantic or Gulf Coasts there is a higher probability of a hurricane than in the Midwest.
After assigning the level of frequency of an event, you have to rank the potential severity when it happens. Severity is usually evaluated in financial terms – how much it will cost – but can also consider non-financial factors such as reputational damage.
The process of assigning frequency and severity rankings helps people to recognize their fears and perceptions of risk. For example you may be a risk-taker in a group of risk-averse people so you need to acknowledge and address their concerns.
After analyzing the risks we can set our priorities for managing these risks. Not all risks are equal some are more important than others. Through frequency and severity analysis you decide which risks need to be addressed first. Generally any risk with a high severity ranking has to be managed or avoided. An exposure with both high frequency and high severity should be first on your priority list. A low-frequency – low severity risk can perhaps be ignored. By setting priorities attention is focused on managing the most important risks improving your chances for success.
Don’t just identify your risks. Without analysis and setting priorities you can’t be confident you will manage the right exposures and make the best decisions. Analysis enables a full understanding of the risk and selecting the most proper management techniques. Anything less leads to bad decisions and possible harm to your association.
As a risk management consultant, I should be happy everyone thinks they are a risk manager. But often the person’s sense of risk and liability is more of a weapon than a tool. She convinces others that a course of action is too risky due to liability. The activity may be risky but that shouldn’t be the only reason not to pursue the idea. Liability is just one exposure to consider when assessing risk.
While it is true in the United States anyone can sue anybody for any reason whether or not the case has merit but you should not fear every liability exposure. Filing a claim or lawsuit is not the same as winning although insurance companies spend a lot of money defending you for such claims which is why you buy insurance. But having insurance does not negate your need to assess and manage your risks.
Understanding liability and negligence will help with your risk assessment efforts. I am not an attorney so I view liability from an insurance and risk management perspective. Consult with your legal counsel on the law but remember an attorney’s opinion is just one factor to consider in your analysis. You can manage most liability risks if you’re willing to expend the time and resources to do so.
Society considers a person or organization liable when an individual is legally responsible for damages (financial consequences) due to negligence. Not all types of liability (such as criminal, statutory or strict) require the presence of negligence but that is what worries association executives the most.
You are deemed negligent when you fail to perform the standard of care that society expects of a reasonable person under similar circumstances. “Negligence is an unintentional of a legal duty causing damage reasonably foreseeable without which breach the damage would not have occurred” (van der Smissen, Betty, Legal Liability and Risk Management for Public and Private Entities, (Anderson Publishing Company, Cincinnati, 1990, p. 65).
Standard of Care
Negligence is tricky because your actions are judged by the “standard of care” a reasonable person would exercise. There is no Standard of Care Manual detailing society’s expectations for your behavior a judge or jury decides if you are negligent by what they think you should have done. Many attorneys argue against associations setting standards or best practices since the association is possibly creating the standard of care required of your industry or profession.
The “reasonable person” is another ambiguous term defined by the judge or jury. The standard is based upon what someone with the same level of training and experience would do under similar circumstances. Your actions are judged by what another person with similar training and experience would have done in that situation. A doctor is held to a higher standard than someone with basic first aid training.
Elements of Negligence
A negligent act has to meet four elements for the claimant to be successful. If any one of these elements is missing you aren’t negligent.
- Existence of a duty – You must have a duty of care to the person injured. If you have no duty, you can’t be negligent. Entire books have been written and endless court cases cited to define the legal tenets of duty of care. In most cases an association will have some type of duty to its employees and members.
- Breach of duty – You have to breach or violate your duty of care to another person. You can do something wrong, do nothing, or you do the right thing incorrectly. Negligence involves sins of both of omission and commission.
- Actual harm or damage – The other person has to suffer some type of injury or harm. As the saying goes “No harm, no foul.”
- Reasonably close relationship between the breach and harm – The breach of duty has to be the proximate cause of the harm. There needs to be a direct causal relationship between the breach and harm. Your failure to check the driving record of someone driving on your behalf may be the proximate cause of an auto accident when the driver has an unsatisfactory driving record.
Your defense attorney will contend the claimant has not met these four elements of negligence while the plaintiff attorney will dispute those arguments.
Now you have a rudimentary knowledge of negligence to use when assessing risks. Before you dismiss or go blindly into a new idea, program, and product or service consider the nature and potential consequences of the exposure. Liability is a major concern for associations. The key is to decide the desired level of risk and whether you can mitigate the risk, modify the activity, to make it acceptable in an effective and cost-effective way. Too many good ideas can be lost because no one took the time to evaluate and manage the risks.