Brother, Could You Spare Some Coverage’ Some Nonprofits Face Shrinking D&O, EPL Capacity

Since the book-cooking scandals that undid Enron, Worldcom and other concerns surfaced in recent months, insurers have ratcheted up their already growing scrutiny of corporate clients, resulting in higher premiums and lower limits for directors and officers (D&O) and professional liability coverages. Carriers’ more stringent underwriting criteria in these areas are also being applied to not-for-profit clients, despite the considerable differences between these organizations and their commercial brethren.

To be sure, hard markets have been affecting capacity for nonprofits well before the recent corporate scandals broke. Risks unique to their operations continue to drive up rates, especially for employment practices liability insurance (EPLI), which covers various forms of employee discrimination, sexual harassment and wrongful termination lawsuits. Now that D&O coverage has also become harder to obtain, more and more nonprofit organizations’ activities face the same scrutiny as those of corporations.

Playing with the big boys
One major reason some nonprofits find themselves in the same boat as corporate insurance clients when it comes to D&O is their increasing engagement in activities traditionally associated with for-profit concerns in order to raise funds. Their missions and organizational structures haven’t necessarily changed, but the tactics some of them employ sometimes bear remarkable similarities to those of corporations, thus exposing them to some of the same risks.

Jacqueline LaRock, vice president and not-for-profit underwriting manager at Chubb Specialty Insurance, explained how nonprofits’ unconventional activities have created greater D&O exposures. “For years not-for-profit in the insurance world meant very low premiums and very low deductibles—very often, zero deductibles,” she said. “And an increased frequency of claims, particularly in employment practices, over the last five to ten years has really caught up with insurers such that the market very much needed to harden.”

LaRock mentioned that recent accounting scandals, coupled with a growing incidence of lawsuits, caused Chubb to utilize more cautious underwriting standards for both for-profit and not-for-profit clients engaged in corporate-like fundraising tactics: “While Enron and Worldcom certainly made everyone more aware of management issues, etc., I think it probably had the overall effect of causing people to more actively manage limits. I know at Chubb across all lines we are very carefully assessing our limits and determining where we need to have some adjustments, whether it be on the for-profit public side, the private commercial, or the nonprofit side.

“In terms of the effects of recent events, I’d say that nonprofits are probably more than ever targeted by plaintiffs’ attorneys,” LaRock continued. “We’ve seen an increase in class actions. It’s not uncommon to have a handful of similarly situated insurers be named in a suit by one claimant. One of the other primary factors that I see on an increasingly frequent basis is not-for-profits are becoming more entrepreneurial in their activities—they’re becoming much more engaged in activities that you and I would customarily view as for-profit. In the past, not-for-profits were thought of as organizations that asked for donations. Now they come up with some very interesting ways to generate revenues. So they increase the complexity of their operation; because some of those operations are in the for-profit realm, there’s greater exposure and liability. They’re playing with the big boys. They’re playing with people out to make a dollar for their shareholders, and it results in greater liability.”

LaRock said she’s noticed that, increasingly, not-for-profits are more actively involved in tax-exempt bonds and interesting finance arrangements. “No one really expects a not-for-profit to be issuing bonds, but many of them do. So that creates exposure to suits from bondholders, and that is expensive exposure—to have a suit brought by a bondholder, it’s in essence securities litigation, and limits go very quickly with that type of exposure.”

Capacity can depend on size, type
Nonprofits not as heavily engaged in the type of activities mentioned by LaRock, however, may not have as difficult a time finding D&O coverage. Damian Testa, president of Kaye Group Inc., a New York-based unit of Hub International, noted that the type of service a nonprofit provides can also affect its ability to find reasonable coverage: “(Nonprofits) have a tendency to be into a little bit more difficult territory in that they may be dealing with homeless people, adoption agencies, counseling for children. If you’re doing the insurance writing taking up third party liability for sexual harassment or discrimination, the issue becomes a little bit more interesting.

“They’re definitely not having an easier time than anyone else, which actually runs counter to what I thought, because they’re privately held,” Testa continued. “You don’t have shareholders, there’s a little bit less of the drive to inflate your quarterly statements; and also because you’re not publicly held, you have a lot smaller universe of people who have a financial interest in you.”

Getting what you pay for
Testa explained further, “It was definitely the whole Enron thing—the whole financial product is now looked at very carefully by carriers. But on a nonprofit, you still have niche players … Chubb is looking for certain nonprofits—hospitals and nursing homes, which are larger. You have Philadelphia Insurance Companies, which is still aggressively going after it … Then you have some inferior products out there that look good because they’re cheap—but you’ve got to be careful on that stuff, because D&O and EPL are not legislated or watched over by (state) insurance departments. Every carrier’s form is different. Depending on what you’re looking at, cheaper is not always better, more so than for a lot of other insurance products. An automobile policy is an automobile policy—not a huge difference between one and the other. A D&O policy differs within the same carrier—three different underwriters may be putting out three different coverage forms.

“Nursing homes are very difficult, hospitals are difficult, and day care centers are difficult (to cover). Soup kitchens, things like that, are okay—they’re not too difficult. Also, some nonprofits are strictly there for raising funds, and so they’re driven more by fiduciary liability, a different product. They may not have the number of employees for EPL, so that’s not a problem. The D&O is not a problem if their financials are strong. If you’ve got a big endowment going, believe it or not, they’re not as difficult (to cover) as somebody who’s running a string of homeless shelters.”

Reinsurance a factor
Whether or not a reinsurer distinguishes between a D&O policy written for a for-profit and one for a nonprofit can also affect capacity for such coverage—especially for larger nonprofits. Robert O’Leary, senior vice president at the Philadelphia Insurance Companies, explained that larger clients, which usually require higher policy limits, could have a harder time finding coverage.

“I think what’s happened is that some companies—not all—had reinsurance treaties that lumped all D&O together, regardless of whether it was for profit or nonprofit, or private companies or public companies,” he said. “When they got whacked with these public D&O losses, the reinsurers ran for the hills, and some of them may not have been well educated enough to understand the difference in exposure between nonprofits and for-profits. It left some carriers with reduced capacity because they were unable to provide insurance—some were writing $20 million policies.

“When you’re writing nonprofit D&O, you really don’t want to write $20 million policies too often because you’re not getting a lot of premium for it,” O’Leary continued. “So, I think that’s caused somewhat of a void on a select few customers—you may take a company like the American Red Cross or the Boy Scouts of America—some huge national organization that may buy very high limits of liability as opposed to the local chamber of commerce in town that probably buys $1 million.”

As O’Leary sees it, however, smaller nonprofits aren’t experiencing as many difficulties obtaining D&O coverage: “The lion’s share of nonprofits are not experiencing capacity problems because they don’t buy the limits that would result in problems.”

EPLI: a perennial cost driver
Although recent events are affecting the pricing and availability of D&O insurance, a traditionally more troublesome coverage for nonprofits is EPLI.

LaRock explained, “Over the last several years employment practice liability was hands down the cause, in terms of frequency, of the not-for-profit loss ratio. More recently, we have been seeing some more severe D&O claims. Again, it in large part results from the fact that, as I mentioned, not-for-profits are becoming more engaged in different types of activities.”

Testa noted that, the current state of the D&O market notwithstanding, EPLI consistently generates the most claims of any nonprofit line of insurance: “(Employment practice liability) is driving nonprofits’ prices terribly. It’s the fastest area of litigation in the country. Million-dollar verdicts are just going up, to start with … The median EPL claim was going for probably $93,000 eight years ago. It’s going for about $250,000 now.”

Testa continued, “If you go by sex discrimination—you’d think that would be the big one—they’re going for about $100,000 per award. But age discrimination is going for $270,000 per award. What’s affecting that is, you’ve got new laws—the laws are a little bit confusing and ambiguous in their language, which works for the plaintiffs. The courts have been broadening their decisions—this is all typical of what happens in cases where lawyers have a tendency to favor the little guy.

“By the way, I said age discrimination was number one at $270,000,” he said. “Number two is disability discrimination. Disability and age are above the national average, sex and race (discrimination) are below the overall average. The Americans with Disabilities Act that passed 12 years ago really incentivized a lot of this.”

According to Testa, the litigious atmosphere surrounding EPLI shows no sign of abating: “Generally, the median compensatory award for discrimination cases went up from $85,000 to $222,000. The success ratio—the plaintiff recovery rates—have been growing a little bit more all the time.”

Arthur Seifert, president and CEO of Lighthouse Underwriters LLC, echoed Testa’s assessment of EPLI as a major cost driver: “We write (coverage) for 450 nonprofits,” he explained. “There’s been some uptake in the pricing—some nonprofits that provide higher risk services are getting more scrutiny.” Seifert noted that between 85 and 90 percent of Lighthouse Underwriters’ claims are for EPLI.

Larger nonprofits with more employees often prove more likely to file EPLI claims than smaller organizations. O’Leary explained that while larger nonprofits must pay higher retentions for Philadelphia’s EPLI coverage, those retentions help stabilize prices.

“We took the position a couple of years ago that we increased our retentions on our nonprofits that had significant employee counts to try to cushion us against the EPLI losses that have happened,” he said. “They’ve just been inevitable. So that’s caused our pricing to be a lot more stable than some of the other markets.”

What agents can do
Insurance agents trying to obtain coverage for nonprofit clients in the current market have several issues to consider, including the organization’s size, nature of operations, and number of employees or volunteers. Nonetheless, there are a few guideposts applicable for any nonprofit.

LaRock emphasized the need for agents to fully understand their nonprofit clients’ operations and activities: “It’s important that (agents) have as much information as possible about the insured’s activities. I spoke on a panel a couple of weeks ago to agents and brokers, and they expressed the difficulty they had in obtaining information about activities of their nonprofit insureds. It is important for them to obtain as much information as possible so that there aren’t surprises down the road.”

O’Leary pointed out that agents would fare much better obtaining coverage for their clients from carriers specializing in covering nonprofits. “Focus on the people that have been in the marketplace for a long time, because the chances are the people that have been in for a long time are going to stay in,” he advised. “The people that have been in for a year—many of them may not have any staying power.”

To comment on this story, e-mail seisenhart@insurancejournal.com.

Topics Lawsuits Carriers Profit Loss Agencies Underwriting Reinsurance Chubb