Managing legal risks: an overview of association liability issues and key insurance areas for associations.

The legal environment for associations and their volunteers continues to grow more difficult and complex. Issues requiring legal guidance continue to increase as do the number of associations that turn to association lawyers for assistance. Even with this increased focus on legal prevention, however, associations are forced to spend more each year to defend themselves and their volunteers against claims.

The recent enactment by Congress of the Volunteer Protection Act of 1997 provides fairly broad protection for volunteers. However, it affords no protection whatsoever to associations themselves or their employees (see coverage of the act in "Issues Update"). Furthermore, the very applicability of the Volunteer Protection Act to volunteers of Section 501(c)(6) trade associations may be open to legal challenge because the statutory language does not reflect the intent of Congress to cover trade associations - an intent that was more clearly stated in the act's legislative history. Although some state laws provide limited protection for volunteers, employees, and associations, many of these states require associations to carry insurance to qualify for this protection.

All of this suggests the critical importance for associations to identify and manage their legal risks as well as to ensure they have adequate insurance to cover all of their activities. Only in this manner can associations protect their volunteer leadership and preserve their assets.

Avoiding legal problems

The ultimate goal is to avoid claims ever being made. Obviously, the biggest price to pay is defense costs and possible adverse judgments. Even if insurance covers these costs, however, claims drain staff time and resources. Claims also focus the attention of leadership on the problems of the past instead of the critical programs of the future. Finally, negative publicity surrounding claims has an inevitable adverse impact on fund-raising and an association's ability to attract and retain members and volunteers.

The first line of defense is to have a professional and well-trained staff and volunteer leadership that understands association legal issues and is always on the lookout for potential legal traps. In addition, an association needs policies and procedures to provide guidance in key areas, and to ensure that it can distance itself from anyone or any situation that may violate them. Here is an overview of some of the key legal areas an association needs to address.

Antitrust. Associations of business competitors that have market power need a written antitrust policy that is enforced at all association events.

Employee policies. Employment disputes - including hiring, promotion, firing, discrimination, and sexual harassment - is perhaps the fastest growing area of legal liability. The employee policy handbook must be updated frequently to reflect changes in employment laws and must be followed carefully in all personnel actions.

Conflicts of interest and ethics. A policy concerning conflicts of interest and ethics becomes important if the need arises to defend against charges of self-dealing or claims by competitors that an association has unfairly criticized them or promoted competitors that had some business ties to senior staff or the volunteer leadership.

Standard agreements. It is a good practice to build certain key protections into each agreement with an outside consultant or vendor (such as the requirement that an affinity vendor indemnify and hold harmless the association from all third-party claims).

Accreditation and certification. Increasing claims by individuals or companies denied accreditation or certification or by those who face revocation of such status suggest the need for detailed requirements that include waivers and releases as well as conflicts avoidance and due process procedures to minimize liability.

Accounting and cash management. Policies in this area are needed to ensure that the association's assets will not be squandered or pirated away.

Board oversight. To avoid a debacle like the multimillion-dollar lawsuit over the cancellation of the Sunbeam endorsement contract by the AMA, an association's volunteer leadership must actively oversee all new outside programs and activities, and sometimes it may be necessary to even involve the membership.

An association may also wish to consider establishing a separate corporate entity to conduct programs or activities that involve considerable risk. Another option is to restructure or even eliminate marginal programs that simply are not worth the risk.

Ensuring adequate insurance protection

As noted earlier, federal and state volunteer protection is incomplete and generally does not cover the association itself or its employees. In many cases, such protection also depends upon the association carrying an insurance policy to ensure that adequate financial protection exists for claimants in the event the association is at fault and liable for damages.

For these reasons, board members and other volunteers increasingly want the association to carry insurance to protect them from possible claims. Although a commitment to indemnify volunteers under the bylaws is also important, there is no assurance that the association will have sufficient financial resources to back this form of contractual obligation when the time comes, so most volunteers rightly insist that the association also provide insurance protection.

From the perspective of the volunteer leadership, the most critical types of insurance are directors and officers, association professional liability, comprehensive general liability, and umbrella/excess policies.

Although they used to be divided into two separate policies, directors and officers (D&O) insurance and association professional liability (APL) insurance are now generally combined into a single policy form that provides broad coverage for a wide variety of economic claims (in contrast to bodily injury or property damage claims, as discussed later). Make sure the policy includes in its definition of an "insured" the association as well as its employees and volunteers.

It is also critical to confirm that coverage is provided in the following areas to the extent applicable: antitrust; standard setting-certification-accreditation; employment practices and ERISA; suits by one insured against another; libel-slander defamation; and publisher's liability. Some carriers may provide these coverages, or at least provide sublimits, for an additional premium, but only if you ask for them. They are easily obtained, however, under specially designed policies like the programs sponsored by the American Society of Association Executives.

It is also important to consider a number of additional provisions when selecting a D&O/APL policy. These include

* making sure there is "prior acts" or "tail coverage" when changing from one carrier to another to avoid timing and coverage gaps;

* deciding on appropriate limits and deductibles;

* seeing whether the association will have the right to help select defense counsel and whether legal expenses will reduce the limits; and

* determining whether the policy requires the carrier to pay defense costs directly as the litigation progresses or only to reimburse the association after the litigation is over.

The other major type of insurance policy that is important is commercial general liability (CGL) insurance, which primarily covers bodily injury and property damage claims. This type of coverage primarily provides protection from claims by individuals who are injured on the association's premises or at association-sponsored events. The CGL policy may also provide personal injury and advertising injury coverage that supplements the D&O/CGL policy in certain areas, although this coverage is often excluded.

The association must also ensure that product liability and other special coverages are not excluded. Finally, as in the case of D&O/APL insurance, it is important to ensure that the CGL policy covers the employees and volunteers as well as the association itself.

Associations that can afford it may also consider umbrella or excess insurance to raise the limits and obtain certain coverages that are not provided under the D&O/APL or CGL policies. Of course, none of these policies cover breach of contract or other business-related litigation. Good management practice is the only way to avoid such claims.

In today's highly litigious environment, it is critical for associations to manage their legal risks and to obtain adequate insurance to protect their volunteers and assets. Your legal counsel and insurance broker can help you minimize the risks of your association's activities and help you ensure that you have the right kind of insurance in the event of a claim.

Jeffrey P. Altman is a partner with McKenna & Cuneo, LLP, where he chairs the firm's general business department and heads the trade association practice group. In addition, he is the 1997- 1998 chair of the American Society of Association Executives Legal Section. His e-mail address is [e-mail].