D&O claims keep climbing: and costing more to settle. (Special Report).

Director and officers (D&O) insurance claims have doubled during the past five years at Nonprofits' Insurance Alliance of California (NIAC), a liability insurance pool for nonprofits based in Santa Cruz, Calif.

Ninety-eight percent of all NIAC's D&O claims are employee related and 80 percent of those claims are wrongful termination, according to NIAC statistics.

Increases in employee-related claims are a trend across the nonprofit sector for D&O insurance, and those claims pack the highest exposure risk for nonprofits, several insurance representatives said.

Employment liability comprises at least 85 percent of the D&O claims at Philadelphia Insurance Companies, based in Bala Cynwyd near Philadelphia, said Brad Lacey, product manager.

"That's really the biggest exposure that we've found," Lacey said. "It's really employment practices liability."

Chubb D&O insurance claims and employee-related claims "substantially increased" in the past five years, but Chubb officials declined to release specific numbers. Employee practice liability insurance claims range from the upper 60 percent to mid-70 percent of all D&O claims at Chubb Specialty Insurance, company officials said.

Practices of employers, especially at nonprofits that have employees, "has been a driving force of claims just like you're seeing in the outside arena in terms of the large employers," said Jane Hodgson, non-public group manager at Chubb Specialty Insurance in Simsbury, Conn.

Anti-trust issues, misallocation of funds, volunteer, membership and other issues form the remaining percentages of Chubb Specialty Insurance D&O claims, an official said.

D&O liability insurance indemnifies directors and officers for losses or damages resulting from claims. Wrongful termination, sexual harassment and discrimination are examples of employment practices liability. Other claims such as mismanaging money or using contributions or donations inappropriately can also trigger D&O insurance.

D&O policies vary by insurance provider. Traditionally they cover only claims against directors and officers, but many policies include employees, volunteers and the organization, according to a Nonprofit Risk Management Center publication, Insurance Basics for Community-Serving Programs authored by Charles Tremper and Pamela Rypkema.

Nonprofit officials, participating in a recent D&O liability survey, said employee-related issues accounted for 89 percent of claims. Nonprofits and governmental agencies comprised 17 percent of more than 2,000 self-selected participants in the survey, 2001 Directors and Officers Liability Survey conducted by Tillinghast - Towers Perrin, a risk management and actuarial consulting firm headquartered in New York City.

The Equal Employment Opportunity Commission (EEOC), headquartered in Washington, D.C., is another place to identify trends. The EEOC enforces federal statutes related to employment discrimination issues and, in some cases, files lawsuits that address discrimination issues on behalf of workers across professional fields.

EEOC received 80,840 charges of discrimination during 2001, the highest since 1997. Numbers include for-profit and nonprofit sectors.

"We know that in the early 1990s claims at the EEOC, which are not lawsuits they're just administrative claims, were going up and up and up," said Melanie Herman, executive director of the Nonprofit Risk Management Center (NRMC) in Washington, D.C. "Then, all of a sudden, we got to the end of the '90s and claims started to go down. So we had a downward trend in the last couple of years of the 1990s."

Now charges filed with EEOC are climbing again. Herman attributed it to a slow economy that, for example, results in more unemployed people suing former employees for wrongful termination.

Andre Juneau, senior vice president of Nieman Hanks Puryear, a division of Frost Insurance Agency in Austin, Texas, said claim frequency at his company is increasing, but not noticeably.

Philadelphia Insurance Companies has seen an increase in employment practices claims, but overall D&O claim numbers have remained constant and loss experience on D&O has been very good, officials said.

Defense costs are bounding upward. Average defense costs for all closed claims reported by Tillinghast survey participants were $544,000, an increase from the approximately $490,000 average the previous year. Those figures aren't trended or adjusted to current economic conditions.

Average defense costs for closed employee claims over a 10-year period for all participants in the survey were $105,000, said Mark Larsen, who authored the study.

Tracking nonprofit-specific lawsuits is difficult, but claim pay-outs appear to be increasing.

Most insurance companies didn't release specific numbers, but one insurance group's average claim pay-out has jumped from about $22,000 in 1996 to approximately $42,000 on claims closed between 1996 and 2001.

"I think there's no question over time the outcomes are becoming more expensive," Herman said. "Verdicts in all forms of litigation go up over time."

The EEOC settled 354 cases in 2001 and obtained $50.6 million for victims of discrimination, or. about $142,900 per settled case. By comparison it settled 626 cases in 1992 for about $71.1 million, or about $113,600 per case. Other annual settlement figures for certain years in that time span were higher than 2001 EEOC settlement figures.

Lacey, of Philadelphia Insurance Companies, attributed average payout increases to litigation costs and inflation, but added nonprofits don't see the same payouts as for-profits.

"It's a constant increase, but it's not a large jump," Lacey said. 'For instance, if you were to talk about for-profit D&O again in the public arena it is astronomical right now. I mean, think about things with Enron -- what that's doing to that arena. There is no exposure to that nature, to that extent with a nonprofit D&O policy. I would say it's a constant increase, but it's a small percentage increase."

Regardless if an organization is public, private or a charity," every single director is potentially in the crosshairs of a lawsuit today," said Robert Hartwig, senior vice president and chief economist at the Insurance Information Institute in New York City. The institute analyzes insurance issues and provides information to the public.

Yet, despite possible risks and an increase in claims, insurance company representatives and a nonprofit official who track risk management said D&O cases are rare. "Most nonprofits will never be sued in their institutional lifetimes," said Herman, who asks at the start of workshops how many organizations have been sued. Responses are generally limited to a few. "For the most part it's still a rare occurrence when a nonprofit gets sued. There are 1.5 million nonprofits. Most of them will never be sued in their institutional lifetime."

Juneau, of Nieman Hanks Puryear, believes a majority of lawsuits against nonprofits result from "apathy on the part of nonprofit directors?"

He believes nonprofit directors need to "step up, be more astute," and scrutinize an organization's representations to outside parties, especially funding sources.

Juneau offers nonprofit boards these tips to limit risk exposure.

* Board members should periodically review and agree about procedural issues of board meetings such as frequency, scheduling, and timing of content and notices.

* Board members need to attend meetings and keep informed. For example, receive presentation materials ahead of time. Also, board members should document and review outgoing representations.

* Board members should be concerned about delegating responsibility. A good idea is to create committee reports," so an informed few can focus on issues being presented."

* Boards should use outside legal advice, especially when making employment decisions.

* Board members should avoid conflicts of interest.

Nonprofits must be aware of possible risks, moreso than in the past warned Hartwig, of the Insurance Information Institute.

Said Hartwig, "The difference between now and maybe 10 years ago is that, I think juries are more willing to perceive some charities as deep-pocketed, the same way they would view a corporation that is deep-pocketed, and punish it."