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Staff coverage under D & O.

Are staff members covered under your association's directors and officers insurance policy? Most association executives think their insurance coverage protects the acts of the executive committee, board of directors, executive director, volunteers, and the legal entity itself. With any good D & 0 policy, that should include acts by staff workers. All employees--whether salaried or not--are insureds, since certain claims made against nonprofit insurance policies are for acts caused or at least participated in by employees.

For example, suppose an employee is responsible for mismanagement of association funds or wrongfully discharges another employee. These activities should be covered. As stated below, there are certain exclusions in all insurance policies, whether the wrongful act is committed by officer, director, or staff person.

The typical liability insurance policy issued to a nonprofit to cover its officers, directors, staff, and the corporate entity usually defines insured as "any individual who was, now is, or shall be a director, officer, trustee, employee (whether salaried or not), volunteer, or member of any duly constituted committee of the entity."

A separate section of the policy usually defines entity with the understanding that the entity itself is also insured for the acts committed by the people who run the association.

A wrongful act under the typical policy means "any actual or alleged error, misstatement, or misleading statement, or act or omission, or neglect, or breach of duty by the entity or any insured in the discharge of his or her duties solely in his or her capacity with the entity, individually or collectively, or any matter claimed against the insureds by reason of their being directors, officers, employees, volunteers, or members of any duly constituted committee of the entity."

Typical exclusions. With these definitions, the typical nonprofit insurance policy is meant to cover any loss in respect of wrongful acts committed when the policy is in effect. But the exclusions of a typical policy are many.

All insurance policies have exclusions--acts for which the policy will not provide coverage. The typical exclusion in an association's liability policy is worded so that coverage will not exist for such things as discharge of toxic chemicals, bodily injury, sickness, mental anguish, disease or death of any person, or damage to or destruction of any tangible property. Also, many policies today do not insure for wrongful acts of individuals (including staff people) who serve as fiduciaries under ERISA--that is, who are trustees of a pension plan.

Insured versus insured. Most D & O insurance policies also contain a number of endorsements not specifically contained in the standard exclusion language. These endorsements are to exclude coverage for such things as nuclear energy liability, prior and pending litigation, and what has become a particularly odious clause to many associations, the insured versus insured claim.

This last endorsement states that the insurer will not cover any claim made in a suit brought by another insured person--that is, if a member, employee, officer, or director sues the association, its board, executive committee, individual board member, volunteer, or staff person. One insured suing another insured is not the type of risk companies that sell policies to associations wish to provide.

The insured versus insured exclusion is usually worded so that it does not disallow coverage for an employee suing the association for wrongful termination or failure to promote or advance the employee.

An important exclusion in most policies concerns dishonest, fraudulent, malicious, or criminal acts committed by an insured, including an employee. Examples include a director of the association intentionally embezzling money from a trade show company with which the association does business; certain cases of libel and slander considered intentional; and collusion by the board or executive committee to fix prices or illegally divide markets.

In fact, some association executives wonder after reading a policy just what is covered. Often, not much. Some association boards have found more comfort in the relevant state incorporation statute than in their nonprofit liability policies. Modern nonprofit incorporation statutes provide a shield for litigation against officers and directors. Do these statutes include association staff in their coverage? No. One state law providing broad coverage to officers and directors of nonprofit organizations is Virginia Statute #13.1-870, but it does not apply to association staff. Don't rely solely on state laws that limit officer and director liability when staff liability coverage is an important issue.

George D. Webster is general counsel to ASAE and a partner in Webster, Chamberlain and Bean, a Washington, D.C., law firm.
COPYRIGHT 1992 American Society of Association Executives
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Copyright 1992, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:Legal; directors and officers
Author:Webster, George
Publication:Association Management
Date:Sep 1, 1992
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