Quiz: How Well Do You Know Your Insurance Coverage?
By: Lou Novick
You know your association has an insurance policy, but how well do you know what's in it? Take this quiz to identify some common errors and misconceptions.
1. Most claims under a nonprofit directors and officers liability policy arise from:
- Breach of the fiduciary duty of loyalty
- Breach of implied contract
- Negligent rendering of professional services
- Wrongful termination
- Copyright and trademark violation
2. True or false: Event-cancellation insurance is a form of property coverage.
3. According to the Employee Retirement Income Security Act (ERISA), sponsors of qualified benefit and welfare plans are required to maintain the lesser of 10 percent of plan assets or $500,000 under which policy or policies?
- Employee benefit liability
- "Property of others" section of the commercial property policy
- Bond/ fidelity/employee dishonesty
- Fiduciary liability
- Both A and C
4. The residence state of an employee working from a home office does not need to be included under a workers' compensation policy if:
- The employee's pay represents less than 5 percent of total payroll
- The employee is an officer as defined in the bylaws
- The employee is required to be in the office not less than 10 days per quarter
- No single correct answer; underwriting requirements vary by state
- None of the above
5. The most reliable metrics for associations to use when estimating liability insurance requirements take into account:
- Board size and gross revenue
- Board size and reserve balance
- Gross revenue and reserve balance
- All of the above
- None of the above
6. True or false: Obligations under a lease or license for space are insured if the general liability policy includes contractual liability coverage.
Lou Novick is president of the Novick Group, Inc., an association insurance agency in Rockville, Maryland. Email: firstname.lastname@example.org
1. D. The most frequent source of claims under nonprofit D&O insurance policies involves adverse employment actions, including wrongful termination. These account for as much as 90 percent of claims in some years.
2. True. In terms of risk management, a meeting that generates revenue is an item of property. If an association's event is cancelled or curtailed, the "property" is impaired, resulting in a loss of revenue and possibly extra expenses. Event-cancellation insurance is similar to the "business income and extra expense" coverage that is a part of the property section of the association's package policy. The big differences are the insured causes of loss and the coverage location limitations.
3. C. If you answered "fiduciary liability," you're forgiven: Many people, even some in the insurance industry, confuse fiduciary liability and fidelity. Associations can easily and inexpensively comply with the ERISA requirement without obtaining a separate ERISA bond. Many employee dishonesty policies extend coverage to include ERISA requirements. If not, an ERISA endorsement may be added to the association's fidelity policy at little cost.
4. E. While answer D is true, it is not correct. Underwriting rules in every state and territory call for the worksite location to be included with the appropriate amount of payroll allocated to it.
5. E. There is no known metric or algorithm that can be relied upon to estimate liability limits. The nature, scale, and scope of association operations are more relevant factors, but even knowledge of these important issues is generally not enough to project future claim activity. The most useful measure is the historical loss experience of peer group organizations.
6. Absolutely, positively false. Just because an insured association has agreed to assume the risk of loss of a third party under a contract does not mean that obligation may be transferred to its insurance carrier. Defense costs may in some cases be covered, but performance under an insurance contract is never insured. Also, in nearly every circumstance, it must be clear that the association's insurance covers loss arising from its operations only.