Your Involvement in D&O Insurance.

Understanding the risky business of directors and officers liability insurance.

What role should you as a volunteer leader play in evaluating your association's insurance coverage?

You and your fellow board members should not get overwhelmed by the actual purchase of directors and officers liability insurance (D&O). That means you can forget about how much the insurance costs, whether the staff got competitive bids, and whether the association could save money by raising the deductible. Most association executives already recognize such negotiating necessities, so leave the nuts-and-bolts negotiation of coverage to them.

Instead, concentrate on the broader issues of coverage adequacy. Your board is responsible for making certain that insurance protects your organization from losses that, based on the nature and scale of association operations, are reasonably foreseeable.

For example, if your association is involved in activities that may lead to antitrust claims, does the policy provide antitrust coverage, and is it adequate? If your association is involved in peer review, certification, standard setting, or significant publishing, is the D&O policy properly responsive to these areas? If your association has a significant overseas presence, does your policy respond to claims brought outside the United States?

An association's liability insurance portfolio is a mosaic in which the D&O portion represents only one piece. Look to your association staff, with the help of the broker and perhaps counsel, for a broad overview of available insurance safeguards throughout the portfolio. You and your fellow board members may observe a coverage deficiency that the staff has overlooked or misunderstood, or you may elect to self-insure certain exposures where the cost of buying insurance is perceived by your board to exceed benefits.

A broad-brush approach will allow your board to become familiar with the larger risk-management issues that are the proper focus of your time and attention.

WHO AND WHAT D&O COVERS

A quick review of D&O insurance misconceptions, terminology, and limitations will be helpful at this point.

First, you may ask, does the Volunteer Protection Act of 1997 eliminate the need for D&O liability insurance? No. Second, are you covered under your homeowner's policy? No.

Moving on, D&O is often referred to as association professional liability (APL). But D&O is the more appropriate name to use because many associations carry a separate professional liability insurance policy in addition to D&O.

As far as "who is an insured" in nonprofit D&O policies, generally speaking the answer is directors, officers, committee members, employees, volunteers, and the association itself. When insured individuals committed the act that led to a claim, the presumptive requirement for coverage is that the insured individuals were acting in a covered capacity (that is, in some approved service to the association).

Claims involving bodily injury and property damage are not covered under the D&O policy; they are covered elsewhere in the association's liability portfolio. But other claims involving money damages are covered. The perils that most often lead to claims under a D&O policy include:

* personal injury (that is, libel, slander, invasion of privacy, etc.);

* publisher's liability (plagiarism, copyright infringement, etc.); and, No. 1 and still rising,

* employment practice (wrongful termination, failure to promote, etc.).

Other events often associated with D&O claims include violations of antitrust statutes and state and federal civil rights.

CLAIMS AND RELATED GROUPS

Two other areas of D&O coverage are especially important for the board to understand.

Claims. Depending upon circumstances it may not be necessary for you and the board to focus claim by claim on your association's loss experience. However, you do have cause for concern if you detect a pattern of similar claims, regardless of severity, because it may indicate an area of particular vulnerability that needs to be addressed.

You would also be overlooking an important responsibility if you didn't consider the potential impact of catastrophic claims, even if the expected frequency of these claims is low. There is ample precedent for extraordinary loss from claims involving certification, standard setting, publishing, and antitrust.

Chapters and subsidiaries. There are several questions you need to ask concerning coverage of your related organizations. For example:

* Are all of your association's subsidiary operations and chapters included as named insureds on your association insurance policies? If not, what coverage protects these entities?

* Does a loss involving a chapter or subsidiary necessarily involve the association? Even if the association bears no direct responsibility to insure these entities, is it in the association's interests to do so?

* If they are covered under association policies, what are the consequences of sharing coverage?

Your association must make decisions about these and other policy issues at the board and committee level. Clearly, there is no single right answer to these questions. Even so, it's important to consider the alternatives carefully and choose the one that protects your association best.

Louis B. Novick is president of the Novick Group, Rockville, Maryland.