ASSOCIATIONS NOW, May 2008 , Feature
|Summary: Directors and officers insurance can save your skin—but when you look at the language in your policy, do you really know what you’re looking at? A group of experts—insurance executives, attorneys, and an association executive—take a passage from a D&O policy and dissect it. What it really says might surprise you.|
There’s no question that liability exists whenever a nonprofit acts. And one good lawsuit over a seemingly innocuous decision could bring down the whole organization. That’s why so many associations invest in directors and officers (D&O) insurance policies, which are designed to cover them in the event of legal action.
But insurance officers, attorneys, and association executives readily admit that the policies can be confusing, and that signing them without carefully reading and understanding all of the provisions can lead to expensive and frustrating problems later.
One of the most misunderstood or overlooked sections of a D&O policy is the settlement provision, which outlines how the insurance company will defend the association in a lawsuit—it details how the defense attorney will be chosen and the company’s “duty to defend,” or its obligation to see a suit through or settle out of court.
Associations Now asked experts in insurance, law, and association management to comment on a sample settlement provision of a generic D&O policy (see box below for language) as it applies to a nonprofit trade association. While all said the selected section of the policy would be acceptable, they each had a different perspective on its provisions.
The Insurance Perspective
Lou Novick, president of The Novick Group, says that the specific language in these paragraphs is relatively unique in D&O insurance—and to the association’s advantage.
“What’s so good about this is that it’s very instructive to the association,” he says. “It’s such an important provision, and this addresses not just key issues but core issues.” Many policies, he says, are much more convoluted than this and don’t spell things out so clearly.
At its core, this provision outlines who chooses the attorney in a civil action (the insurance company, with some input from the association), and the right of the insurance company to settle claims out of court. That last bit, says Novick, is often surprising to association executives who might not have understood their policies when they signed on.
“The insurance company says, ‘I’m not here to fight the principle. I’m here to settle this as economically as I can. If I can make this go away for $50,000, I’d rather do that than spend half a million dollars defending you against this argument.’” In other words, the insurance company has the right to either settle out of court, or to pay the association the money it would have spent to do so, and let the association battle out the court fight on its own dime.
Additionally, Novick says, the language in the first few lines is clear and to the point: Any court action will come about with an attorney of the insurance company’s choosing. Such a provision is common, he says, but not always so forthright.
“It’s clear here that the carrier, not the insured association, has the final authority to select defense counsel,” he says. “That’s a big hurdle. Associations tend to think they’re going to use whomever their outside counsel is in a suit, but they probably aren’t.”
Eric Johnson, assistant vice president of Aon Association Services, agrees, adding that this policy allows for some input by the association when selecting defense counsel. “Some carriers allow some input from the insured, but it’s rare,” he says. That makes this particular provision a strong one for the association, which might appreciate input on counsel for a number of reasons.
The Legal Perspective
Attorneys agree that this provision’s clarity and flexibility make it a good one for nonprofits. “The language in this provision is better than most I’ve seen,” says Jeff Glassie, partner at Pillsbury Winthrop Shaw Pittman, LLP. “Many of them give the insured no right to have any input.”
“Most policies don’t have the language that’s here in section D-1,” he continues. “If the company just gets to select an attorney, that’s not always good. The other way to look at it is that this doesn’t just say that this is a duty-to-defend policy and that they’ll provide counsel, period, with no input or consent. This is actually very good language for a duty-to-defend policy.”
Glassie says it’s not unusual to have an association begin work on a suit with their own lawyers before talking to the insurance company, only to find out weeks and thousands of dollars later that the insurance carrier won’t cover those costs, and that they need to start all over with the defense.
Jeff Altman, partner at McKenna Long & Aldridge, LLP, says he also likes the language in D-1. “This is more generous than most policies,” he says. “There are three general provisions we see: The insurance company picks counsel; the insurance company picks but the association has to agree to it, which is what this policy says; or the association itself gets to pick the lawyer. You very rarely see that, but you also very rarely see this language.”
He says it’s vital for association executives to read and understand both the attorney-choice provision and the duty-to-defend provision before signing any policy, as those two sections will determine exactly how a court action is handled.
“Most of what you’re buying is the defense,” he says. “There are pros and cons to using panel counsel [lawyers contracted by associations for defense claims]. This seems to be a reasonable compromise.”
The Association Perspective
Chris Busky, chief operating officer of the Heart Rhythm Society, says that he clearly understood the sample language but that he’s also been through several court actions that required him to put his D&O policy into action. That background, he says, helps him know what to look for when considering a new policy.
“We attempted to have our own attorney represent us,” he says of the first time he needed defense. “That was denied. But the caliber of counsel that was assigned to us from the insurance company was outstanding.”
He says the sample language seemed relatively standard to him and that nothing jumped out as being unusual or a potential problem for an association. That said, he says the association’s choice of insurance carrier can make all the difference in the world, even if everyone understands the policy itself.
“It all comes down to your relationship with your insurance broker,” he says. “We had a very close relationship with our carrier and we were able to talk about both the nuts and bolts of the policy, but we had a much broader perspective of their understanding of the industry we represent and the risk perspective of the organization.”
He says one question to ask is whether defense attorney fees are included in the policy’s financial limit.
“You could use up your entire limit in attorney’s fees and never have anything to pay up or settle with,” he says. “That’s key. You need to feel comfortable with the level of the deductible—how much risk you need to absorb as an organization—and balance that with the cost of the policy.”
Insurance and legal experts say that it’s important to fully understand any policy and that associations should ask for clear explanations of the exact language they’re going to agree to before they sign anything.
“It’s appropriate for the association executive to say to their broker, ‘Help me understand what I need to know as I go forward during the course of litigation,’” says Novick, adding that even seemingly tiny issues can become huge if the association steps out of the bounds of its policy.
“The insurance company says they’re going to appoint panel counsel. And then the association says they’ve already spent $10,000 with their attorney,” he says. “The carrier then says they’re sorry, but they didn’t authorize that expenditure, and they’re not going to cover it. That’s a very big issue.”
Glassie agrees, adding that associations should absolutely ask their brokers or carriers to show them the exact policy language and explain it before they sign, even if they think they know what it says.
“Insurance companies would rather not pay claims,” he says. “They’ll gladly take your premium money, but like with health insurance or anything else, they’d rather not pay you any money. These policies can be written in a format that, if you don’t quite understand the format, you can’t make heads or tails of it. And it’s not a matter of being stupid or smart. It’s a matter of understanding how the policies work.”
Kim Fernandez is a contributing editor to Associations Now. Email:email@example.com
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