Does Your Association Have the Right Insurance Coverage?

By: Jacqui Cook

Natural disasters and bad weather can disrupt the largest revenue generators an association has, and board mismanagement can lead to a lawsuit. Learn what insurance coverage will give your organization the most protection. (Titled "Are You Covered?" in the print edition.)

As the Gaylord Opryland Resort filled with the swollen waters of the Cumberland River in May 2010, the Healthcare Financial Management Association (HFMA) was close to watching its Annual National Institute (ANI) revenues wash away in the flood. The meeting at the historic Nashville hotel was only five weeks away, and it quickly became clear that the event would not be possible after more than 13 inches of rain fell in two days and left damage that would take months to repair.

Fortunately, HFMA had a backup plan—and a backup to the backup plan.

The organization scrambled to relocate the meeting, which meant finding space for 2,300 healthcare finance executives from across the country and more than 70 education sessions. If that didn't work, and chances were high that it wouldn't with such short notice, HFMA had one more fall-back plan to protect its bottom line: event-cancellation insurance. This coverage would protect the organization in the event its major revenue-generating event could not go forward.

"We didn't have event-cancellation insurance when I got here, but we added it soon after," says Edwin P. Czopek, FHFMA, CPA, senior vice president of HFMA. "While we have not had to use it, we've come very close."

For ANI 2010, HFMA ended up finding space at the Sands Expo Center and Venetian/Palazzo Resort in Las Vegas, and the meeting was held there. But until that arrangement was secure, Czopek says, it was a relief to know that even if the meeting had to be canceled, HFMA would be protected from the huge financial impact. In addition, event-cancellation insurance can cover an organization for lost profits if the meeting has to be held in another location. "This provision gave us the ability to hold the meeting and focus on the needs of our members with the assurance that we would not suffer adverse financial performance," he says.

You never want to be in the middle of a disaster when you discover what coverage your association has, or worse, is missing. Instead, be proactive and ensure that you have the right broker and coverage for your organization.

Begin With the Broker

Making insurance decisions can be overwhelming for an association executive. What do you need? What don't you need? What if this happens? What if that happens? Is it worth the money?

The key to answering these questions is finding a good insurance broker. The right broker will talk extensively with senior managers, review the organization's activities and programming, and look at what impact certain scenarios would have on the association's ability to continue operating. Once that discovery process is completed, the broker should present a package of coverage tailored specifically to that association and then commit to reviewing it once a year.

"If you get insurance wrong, there can be disastrous consequences," says Lou Novick, president of Novick Group, Inc., which specializes in nonprofit and association insurance. "Far and away, most organizations don't have someone in house to do risk management, so you have to rely on an agent or broker to serve in that role."

Novick says that this doesn't mean the association executive has no role in establishing proper insurance coverage. "My feeling is that few association executives need to be responsible for really understanding insurance and risk management in any depth," he says. "But what they need to be good at is being able to communicate in a clear and concise way to the agent or broker, ‘This is who we are, this is what we do, here is where our money comes from, who we do business with, where we go to do business, and these are the loss scenarios that come to mind.'"

And while every organization is looking for ways to cut costs, be wary of brokers who put your insurance needs out to several companies for bids, then come back with one that is clearly below market price, says Joe Dietrich, FACHE, CPA, CAE, of the American College of Healthcare Executives.

"If I say I need this product, and they say we have bids of $9,000, $9,000 and $2,000, I'd be really leery of that $2,000 premium," says Dietrich, who is vice president, finance and administration, and CFO for ACHE. "I'd think there was something wrong with it. If you define your profession and your coverage needs correctly and the broker deals with reputable carriers, there's not a wide range of premium cost."

What You Must Have

Once a broker is chosen, it's time to think about specific types of coverage. With all the risk scenarios, which products must your association have to mitigate potential losses? All organizations are required by law to have workers' compensation insurance (assuming you have employees), car insurance for any vehicles titled in the association's name, and a bond to cover a qualified benefits or welfare plan.

In addition to the three required insurance elements, there are others that most experienced brokers would consider essential.

Directors and officers (D & O) liability. This insurance covers an association's management, including board members, for damages or defense costs arising from allegations of mismanagement while acting in their official capacity. This is not the same as general liability, which would cover a person falling in your office, for example.

Eric Johnson, assistant vice president for Aon Association Services, says while this coverage isn't mandatory under law, associations should consider it that important. "There are some individuals we work with who refuse to serve on a board unless that organization has D & O," he says. "From the standpoint of value, I'm not sure there is an insurance product that offers more protection for an association. A key component is protection of the personal assets of board members acting on behalf of the association."

Hired and nonowned auto liability. This refers to protection against liability involving operation of a vehicle not owned by the association but used on its behalf. Novick offers the example of an employee getting into an accident while using his car to pick up the association board president at the airport. In this case, both the individual driver and the association could be named as defendants in any legal action.

"It's my view that the single-biggest expense most associations will face in terms of severity is auto liability," Novick says. He points out that associations typically do not manufacture products or perform services that would leave them vulnerable to a major liability claim. "From an administrative point of view, liability assumed by the association under contract (e.g., use and occupancy of the premises such as an office, convention center, hotel, and so forth) is a recurring and significant source of risk for most associations, but automobile operations remains the most likely, albeit infrequent, source of severe liability loss," he says.

Event-cancellation insurance. This insurance is especially important for organizations that derive a significant portion of their budget from an annual gathering. It provides coverage for the loss of revenue or expenses incurred due to the cancellation, curtailment, or rescheduling of an event. When Dietrich assumed his current role at ACHE, he was surprised to learn how much of the organization's budget comes from its annual Congress on Healthcare Leadership and immediately ensured that ACHE carried event-cancellation insurance.

"It covers many aspects of event cancellation, including, for example, a public healthcare disaster or even terrorist activity, anything where for some reason folks who had planned to attend couldn't," he says. "Other possibilities include speaker cancellations, hotel double bookings, and attrition penalty charges. All those possibilities are what we get event-cancellation insurance for."

Umbrella liability. This policy increases an association's liability limits without having to increase each individual policy. "An umbrella policy sits atop the underlying limits of coverage, typically general liability, auto liability, and employer's liability," Novick says. "The umbrella drops down to provide excess coverage in the event a claim exceeds the limit of coverage in place for those underlying limits." For example, if your association has $1 million in auto liability coverage, and the judgment against you is $1.5 million, the umbrella would pay the remaining $500,000.

What You May Not Need

Obviously it's worse to have too little insurance than too much, but some products may not be worth the cost. At the very least, they merit extra investigation before you decide to add them to your coverage.

"It's pretty easy to identify what an organization has to have, but you hear about some of these boutique products that insurance companies want to sell, and you have to ask about the usefulness of that product," says Tony Benedetto, executive vice president of NASW Assurance Services, Inc., the wholly owned subsidiary of the National Association of Social Workers. "I would look to the broker and say, 'For every 100 policies like this you sell, how often does a claim happen?' In tough times, be very curious about what you are buying."

One example is "cyberinsurance," a relatively new product that covers associations for losses stemming from unauthorized website access, online libel, data-privacy issues, and repairs to company databases after system failures. Johnson says that while he can see why associations would want protection for their online assets, it's important that associations assess their true cyberexposure relative to what the coverage offers.

"Absent a coverage extension for security-breach notification, cyberliability insurance may simply duplicate coverage offered by other insurance policies," he says, adding that security-breach-notification laws require organizations to notify affected individuals when the security of their personal data has been compromised.

"Liability insurance is typically defined by the courts, and cyberinsurance is one that, although it's a hot topic, it's still being defined in the court system," Johnson says. "Although some aspects have been addressed by legislation, other aspects have not. It's going to be interesting in the next couple years to see what develops."

The same holds true for terrorism insurance, which provides protection for losses and liability incurred because of a terrorist attack. When purchasing this type of coverage, the association should thoroughly examine the coverage it already has, such as general property and liability coverage, to see how it would cover damages resulting from an attack, Benedetto says.

The other consideration, he says, is whether your organization really needs coverage that promises to reimburse for interruption of income as a result of an attack or disaster. "Having coverage for business interruption may be necessary for some, but I'm not so sure if most associations need it," Benedetto says. "Since it covers for lost income, some expenses, and relocation, the association needs to ask what would be interrupted in a major event that shuts down their operations. Government affairs, advocacy, and collecting dues come to mind."

There's Always Some Risk

If you asked association insurance brokers the number-one question they get from clients, chances are it would be some variation of "Is our coverage enough?" And no matter how experienced the brokers are, the answer from all would probably be "I don't know." That's because there is no way to plan for every possible bad thing that could happen to an association.

The best answer a broker can give to that question is to tell the association what can be expected to happen based on the experience of other organizations, Novick says. In addition, he says, associations must realize they assume some risk simply by doing business.

"Most associations think their insurance makes them bulletproof. It doesn't," Novick says. "It can't cover you for everything. The risk associated with some operations is not transferable to an insurance company. In those situations, it's an unknown business risk, and the association retains that risk themselves."

Jacqui Cook is a freelance writer in suburban Chicago. Email: [email protected]