Dodging the liability bullet: preventing tort claims resulting from association policies and programs.

IMAGINE THAT YOU ARE the education director of a professional society for health care practitioners. You are responsible for the largest portion of your society's budget, almost half of which comes from associate members--that is, medical products companies that pay dues, attend meetings, purchase advertising in your publications, rent booths at your exposition, and sponsor educational sessions. One such company pays your society a large sum to be the exclusive sponsor of the society's symposium on new developments in an area in which the sponsoring company has the market leading products. You and your staff book the site, arrange for the speakers, market the symposium, handle all on-site administration, and ultimately reap for the society a significant net return on the event.

Quite unexpectedly, you find your society named as a defendant in mass tort litigation--class action lawsuits against that same associate member medical products company. The central allegation against the society is that it facilitated the marketing of medical products that caused injury to each of the plaintiff class members. The complaint alleges that you assisted the co-defendant company by adding the prestige and reputation of your society to its products (implicitly endorsing them), that you allowed the company to help plan and administer the symposium at which practitioners were encouraged to use the products, and that you failed to disclose that some of the products described and discussed at your symposium were not yet approved by the government as safe and effective.

This scenario is based on an actual lawsuit. While the association eventually prevailed, the example demonstrates a legal risk to nonprofit membership organizations that is slowly and quietly becoming a major area of concern. The risk is from tort claims--that is, claims alleging that association policies or programs helped cause property damage or personal injury to the claimants.

A higher-profile case centered on the National Spa and Pool Institute, Alexandria, Virginia. Last year the Washington Post published articles on the difficult plight of NSPI, reporting that NSPI had filed for bankruptcy due to an adverse tort ruling in the state of Washington in which the organization had been found responsible for the injuries of the quadriplegic plaintiff, Sean Meneely. Meneely had dove into a swimming pool from a diving board; the courts in Washington considered the accident and resulting injuries to be connected to NSPI actions or inactions. Most commentators regarded the outcome of the lawsuit as an aberration, an example of a sympathetic local jury and courts favoring a seriously injured claimant against what they saw as a large national association. Perhaps most chilling of all from an association perspective was the Post's revelation that a number of other such suits had been brought against NSPI. Apparently one unfortunate result spawned other claimants. By fall 2002, the organization was facing lawsuits that, according to the organization, totaled more than $50 million.

Forms of risk

Tort claims can also arise from several other kinds of nonprofit organization policies or programs including advice, endorsements, and regulation. Understanding the risks inherent in each of these association activities can help you avoid litigation and potentially costly claims.

Trade associations, professional societies, and other nonprofit membership organizations typically have numerous publications and sponsor many educational programs in which statements might be made that could be considered advice regarding the safety, efficacy, propriety, or other aspects of products, services, individuals, or entities. Usually the statements are attributed to authors, speakers, or others who are independent of the association. In those cases readers or listeners understand clearly that the statements are not those of the association. When a statement would probably not be understood as carrying the official approval of the association for a product, service, individual, or entity, likewise little chance exists that the association could be successfully accused of responsibility for damages or injuries that result from reliance upon the statement.

However, an increasing phenomenon is that of claims against associations for personal injuries or property damage allegedly resulting from reliance upon associations' advice, endorsements, or regulatory efforts. So far, unlike in the NSPI case, the majority of these claims have ultimately failed. The few that have succeeded, however, merit close attention, for certainly associations face some legal risk in this area. Consequently, such claims and the circumstances that brought them about should be understood clearly and their related issues managed carefully.

Advice. When associations give some form of advice, the risk could be termed "derivative malpractice" or "derivative product liability." The typical allegation involves an association that has issued some guidelines, standards, or directions with the expectation that the association's constituency will adjust behavior accordingly. The plaintiff argues that the association's pronouncements proved to be not only inaccurate but also harmful. According to the complaint, reliance on what the association did or said has resulted in injury or damage. This kind of a claim might be made by a member of the association or by a customer, patient, or client of a member.

In a case some years ago, a health professionals association was accused of responsibility for injuries allegedly caused by members misdiagnosing an illness. The association had sponsored a national advertising campaign promoting its members' capabilities. The association ultimately won because the claimant could not show that he had read the association's ads before seeking treatment.

Endorsements. Endorsement liability is an obvious risk when associations become involved in the marketing programs of commercial vendors. The argument would be that by "standing behind" or allowing its name and reputation to be used in connection with the promotion of a product, service, individual, or entity, an association effectively guaranteed that it would assume financial responsibility if the product, service, or entity proved to be harmful or ineffective. Note that this potential liability for nonprofit organizations concerns endorsements that are favorable but are claimed to be inaccurate and damaging. This is effectively the opposite situation from defamation, in which the potential liability arises from communication that is allegedly unfavorable, inaccurate, and damaging. A successful case against a magazine that gave its seal of approval to a product that later failed illustrates this form of liability. The favorable ruling for the claimant was based on the fact that the claimant was able to show that the magazine had never actually tested the product.

Regulatory activities. A third platform for tort claims is that of association regulatory efforts, whether they he "self" regulation" of the association's constituency through association policies and programs or, alternatively, the association's advocacy for more lenient government regulation.

1. Self-regulation. Many associations develop standards, codes, specifications, or other prescriptive criteria that are available for voluntary adoption. Other associations go a further step by testing and certifying products or services, certifying professional practitioners, or accrediting institutions or other entities. Although nonprofit programs are inevitably voluntary, they can be referenced by governments and thus made mandatory; further, sometimes they achieve such a level of acceptance that they are effectively necessary to be followed. When the products or services that are subject to these self-regulation programs are seen as having failed, thereby causing injury or damage, the associations that operate the programs might become defendants in tort suits. For example, suits have been brought against associations of blood banks after members allegedly distributed contaminated blood in spite of the associations' enforcing strict rules in this area.

2. Government regulation. A corollary to tort suits based upon association self-regulation is the risk of suits based on associations' advocacy in government regulation. Claimants have accused associations--so far apparently without success--of bearing responsibility for their injuries or damages because the associations sought and obtained government regulation less restrictive than might have been necessary to prevent the damages or injuries. In one case, the plaintiffs alleged that a trade association of manufacturers of pre-finished plywood paneling was the cause of a fire that destroyed their home, arguing that the pre-finished plywood paneling in one room caught fire, burned rapidly, and ultimately consumed the whole house. Years earlier the association had worked hard to convince a federal agency to adopt the manufacturers' version of a federal flammability standard for plywood paneling. Over the opposition of consumer groups, the agency ultimately published a standard that requires the paneling to be fire retardant but not inflammable. The plaintiffs argue that "but for" the association's regulatory lobbying, a tougher federal standard would have prevented the loss of their house.

Elements that leave you Vulnerable

What elements must exist before advice, endorsements, or regulatory policies and programs of associations become the bases for successful tort claims? There are by now dozens of cases in this area, but relatively few consistent themes have arisen in the cases; many, like the NSPI case, seem to turn as much on the inclinations of the jury and court as on solid legal precedent. To the extent that consistent conclusions can be drawn from cases such as those previously mentioned, the conclusions seem to be these.

Existence of a duty. Faced with a claim that someone was personally injured or had property damaged because of advice offered by an association or because of dealing with a product, service, individual, or entity endorsed by an association or affected by the association's regulatory activity, a court is likely to consider first whether the association owed a duty to the claimant. Resolution of that question will often depend on the extent to which the association officially participated in, or approved, the guidelines, standards, or directions--that is, the "advice"--at issue. For claims related to endorsements, such as the case involving the magazine's seal of approval, the central issue would be whether the association had any control over quality of the product, service, individual, or entity that it "stood behind." For claims related to regulatory activity, such as in the cases involving blood banks, the issue of whether or not the association assumed a duty might hinge upon whether the association engaged in the activity with the announced purpose of protecting consumers, patients, clients, and so forth. Even when it does not seem that the association intended to be responsible for the products or services of others, the association could be found to have assumed that responsibility for instance, through helping to determine what advice would be given, testing the products or services endorsed, or bragging about the association's pro-consumer stances in self-regulation or government advocacy.

Reliance upon the association. An equally critical consideration in a tort claim against an association based on its policies or programs is whether the claimant actually relied on the association. It is ordinarily not sufficient, in attempting to bind the association to liability, for the claimant merely to show that the association adopted a particular policy or undertook a certain program and that injury or damage later occurred. It is crucial that the claimant be able to show that it was because of the association's involvement that its advice was followed, or an endorsed product or service was used, or some product or service was inadequately regulated. For example, a claimant is unlikely to succeed if the association merely published someone's paper that had information allegedly causing injury. Only if the association itself developed and promulgated the information is it likely to be at risk.

Negligence and causation. Even in cases in which the court can find that the association owed a duty to the claimant and the claimant relied on the association, ordinarily the court will require something more before holding the association responsible for the injury or damage alleged. In most cases of this type so far, courts have felt the need to find that the association was negligent and that its negligence caused the injury or damage. Thus, no "strict liability" theory has been imposed upon association policies and programs. In short, the association must do something wrong--such as give advice without adequate basis, endorse services without checking references, or promulgate certification standards that are invalid--and the claimant's injury must actually result from the association's wrongdoing.

Tort liability's threat

A couple of hypothetical cases one involving association guidelines and the other involving endorsements, might best illustrate these principles in the growing threat of tort liability exposure for associations.

Guidelines. An association of scientific researchers in human pathology determines that it will issue criteria to assist members in assessing the suitability of candidates to serve as human subjects in an area of the members' research. The candidate criteria are derived from several papers presented on the matter at association meetings or published in association journals, all by well-respected researchers and all following peer review. Later, a subject in a research study claims to have suffered personal injury as a result of participation in the study. The subject sues the researcher who conducted the study as well as tire institution at which it was conducted. Those defendants in turn sue the association on the basis of the research that identified them as suitable candidates. One candidate criterion in particular, as promulgated by the association, is missing an important qualification that had appeared in the original paper from which the association derived the criteria; this qualification would have excluded the subject from the research. The association apparently had inadvertently left out the qualification when it adopted and published the criteria.

The association loses the suit. The court finds that the association clearly had a duty to the researchers for whom it promulgated the candidate selection criteria. It concludes that the member researcher relied upon tire association's criteria, and it finds that the association was negligent in omitting an important qualification from one criterion that resulted directly in the inappropriate selection of the candidate. The association is ordered to reimburse the member researcher and the institution for their damages, as well as for their legal responses and court costs.

Endorsements. A trade association supporting firms in the securities industry is frequently asked by members to provide information about consultants who assist these kinds of businesses in data processing management. The association decides to conduct surveys and other research to identify and categorize data processing management consultants according to established standards (regional or national avail ability, minimum experience in the field, client satisfaction determined in objective sampling, and so forth). The association publishes a list of all identified consultants, with special recognition given to those who achieved the highest level of ratings in the association's study.

One data processing management consulting firm, Ajax, has achieved the association's highest rating and secures several engagements among members of the association, in part by referencing the association's high rating. Ajax specializes in accounts receivable and consumer credit; it offers software and procedures for "dunning" overdue consumer accounts.

After a period of time, the principal in Ajax dies, causing the firm to dissolve; meanwhile, the Ajax software program is found to be seriously deficient in not respecting the requirements of the law. As a result, all of the firm's clients are investigated by the federal government and threatened with legal suit for having violated federal regulations on collection of consumer accounts. The clients ultimately settle with the government, usually for substantial penalties. Then, to recover its costs, together they sue the association based upon the high rating that it had and seek substantial damages.

In the end, after legal proceedings that last three years, the association is exonerated. The court finds that the organization's surveying and researching of consulting firms were objective and appropriate. Although the association did have a duty to its members, and the members relied upon the association's rating of the consultants, the association was not negligent ill giving Ajax its highest rating. No damages are awarded against the association, but each side is required to pay its own legal expenses, which in the association's case are substantial.

Keys to minimizing tort risk

Clearly, associations are encountering a growing risk from potential tort claims. Associations need to be careful to recognize instances in which they can be perceived as providing advice or endorsements--especially as to the safety, efficacy, propriety, or other aspects of products, services, individuals, or entities. To that end, all guidelines, standards, and credentialing criteria, directions, endorsements, or approvals should always be carefully researched for substantive accuracy and reviewed for legal appropriateness before they are promulgated.

Associations generally should be very cautious and exercise due diligence in endorsing vendor products offered to its members. Organizations also should refrain as much as is feasible from involvement in, or control of, endorsed products or services of outside vendors. Further, when communicating to members, associations generally should be careful to avoid giving the impression that they are guaranteeing the products or services.

Finally, disclaimers may be useful in limiting associations' liability arising from both advice and endorsements. Practices such as these can help associations minimize the risk of litigation.

Insurance Protection Against Tort Claims

One lurking problem for associations in attempting to manage their risk from tort claims is that of insurance. Many associations carry two kinds of insurance policies.

Comprehensive general liability policy. Sometimes called an "office" policy, this form of coverage primarily protects the association from "slip and fall" claims at the association's offices or meetings; the policy often has additional coverages such as for association-owned automobiles.

Association or nonprofit organization liability insurance policy. Also called an association professional liability policy, this coverage protects not only the association but also its officers, directors, staff, and certain other individuals from antitrust, employment, defamation, and other such claims. But almost universally this kind of policy does not respond to claims for "bodily injury or property damage" against the association or its volunteers and staff.

Tort claim coverage, if it exists at all, can likely be found only in the comprehensive general liability insurance policy. Associations should determine whether that coverage exists in their policies, as well as whether the policies include any conditions and qualifications, by inquiring of their insurance or legal consultants.

Jerald A. Jacobs, a 2002 American Bar Association Outstanding Nonprofit Attorney award recipient, is general counsel to ASAE and a partner in the law firm of Shaw Pittman, Washington, D.C. He is the author of Association Law (2002, ASAE), a compilation of legal columns in ASSOCIATION MANAGEMENT. Both books are available from ASAE. E-mail: [e-mail].