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High Net Worth

Nonprofit Boards Pose Personal Risk

High net worth board members are ready targets for lawsuits.
By: | September 14, 2016 • 5 min read

Successful people who serve their communities with their knowledge and executive experience are worthy of praise. But  while serving on the board of a nonprofit can be a great way to give back, it can also open the door to lawsuits and personal liability risks, especially for high net worth individuals.

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Insurance and risk experts say that while many organizations have commercial and directors and officers policies, board members may not be fully covered for a myriad of personal liability risks.

They recommend those interested in serving on boards be cognizant of the risks, perform due diligence when evaluating an opportunity, and ensure they have sufficient insurance coverage.

Big Exposure for High Net Worth Board Members

When most high net worth individuals take on duties as board members, it’s usually out of passion, not to make a profit. Parker Beauchamp, CEO of INGUARD, an insurance and risk management firm in Wabash, Ind., said most individuals are “trying to do good,” but they can open themselves up to significant personal risks when serving on boards.

Parker Beauchamp, CEO, INGUARD

Parker Beauchamp, CEO, INGUARD

In many cases, these individuals jump into fields they don’t fully understand. While an oil company executive might have a high level of experience in petrochemical engineering and market economics, he or she might know little about the liability risks related to directing a children’s cancer foundation.

“Suddenly they’re dealing with an entirely new venture that they know little about. When you combine the profile and the wealth, and something negative happens, they’re a big target,” said Beauchamp.

Jim Fiske, senior vice president of marketing at Chubb Personal Risk Services in Whitehouse Station, N.J., said some of the biggest risks come from employment practices and liabilities related to operation of the organization. Fiske said anything from wrongful termination and accusations of harassment to fiduciary exposure liabilities and misallocated funds could personally come back to a board member.

A white paper by Gulfshore Insurance in Naples, Fla., said that directors of nonprofits can be held liable for invasion of privacy, discrimination, bankruptcies, and misuse of financing claims made by the IRS. Fiske said while personal injuries, property damage, and general liability are typically covered, “it can get ambiguous quickly if there are allegations against the board.”

Although all states perform the indemnification of directors to an extent, those laws do not always absolutely eliminate the risk of personal liability, said Donna Ferrara, senior vice president and managing director at Arthur J. Gallagher & Co. in Itasca, Ill. No matter how broad the indemnification agreement may be, there are limits, she said.

“Insurance can reduce the risk, but it’s not a cure-all. There are always going to be some limitations on how protected a director can be,” said Ferrara.

Insufficient Liability Coverage

A survey by ACE Private Risk Services, a global carrier that caters to affluent customers with at least $5 million in investable assets, found that 44 percent of those serving on boards did not have adequate personal liability coverage in place.

Donna Ferrara, senior vice president and managing director, Arthur J. Gallagher & Co.

Donna Ferrara, senior vice president and managing director, Arthur J. Gallagher & Co.

Ferrara said most assume they’re covered by their personal umbrella policies, but these policies typically won’t respond to business liabilities. Commercial umbrella policies may cover liabilities if there’s an underlying D&O policy and the umbrella is specifically “excess” of the D&O, but that’s not always the case.

“D&O insurance is not uniform. Policies can be negotiated, tailoring coverage to meet the needs and finances of the insured. Their terms and conditions differ widely,” said Ferrara.

Paul King, SVP, national MPS director and cyber practice leader at USI Insurance Services in Valhalla, N.Y., said many small nonprofits “aren’t very sophisticated” when it comes to compliance and having the right coverage.

He said these organizations can often run into rules and regulation issues that lead to D&O claims. And while these policies should often be at the forefront of board discussions, King said they are “often shoved to the back of the line.”

Fiske said another problem is that D&O policies typically don’t cover defense costs for the individual. So even if there is a claim, the board member may still have to cover his or her legal fees related to defending themselves.

Beauchamp said while these personal liabilities aren’t always tremendous, they are a “real risk.” In one example, he said, a small nonprofit forgot to pay its payroll taxes and sparked a federal claim against the organization. The individual director of the organization was deemed personally liable to reimburse the U.S. government.

Beauchamp said it was a relatively small amount but a clear example of claims that can come back on board members.

King said claims related to cyber attacks and data breaches are another growing liability risk for directors.

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Because many organizations don’t have large IT departments and usually use third-party companies, organizations need to do due diligence with their contractors, he said.

Many policies don’t cover such exposures and may require that the organization have a separate cyber liability insurance policy.

“They might feel emotionally attached to the group and they’re not thinking about things like malware attacks and the IT infrastructure,” said King.

Due Diligence Required

Lisa Lindsay, executive director of the Private Risk Management Association, said individuals need to work with their attorneys and brokers to ensure the organization has the level of sophistication required to cover their bases and reduce risk. Individuals should drill down with a full examination of the processes and procedures of the organization to ensure compliance with rules and regulations.

Lisa Lindsay, executive director, Private Risk Management Association

Lisa Lindsay, executive director, Private Risk Management Association

Lindsay recommended that high net worth individuals not sit on boards if there isn’t sufficient coverage in place. She also said many are often misled into believing that their personal umbrella policy offers coverage if they sit on a board in a non-leadership position. High net worth individuals need to be “very persistent” in asking questions, she said.

“We really want to see the individual do an awful lot of due diligence around understanding the organization, how the board operates, because even while [policies] are available, high net worth individuals still have significant risk exposure,” said Lindsay.

The Gulfshore Insurance white paper said that individuals should first engage in best practices to avoid future claims. This includes ensuring the organization has an adequate conflict of interest policy as well as policies that ensure restricted funds are used and invested as required by law.  &

Craig Guillot is a writer and photographer, based in New Orleans. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

The Profession

Curt Gross

This director of risk management sees cyber, IP and reputation risks as evolving threats, but more formal education may make emerging risk professionals better prepared.
By: | June 1, 2018 • 4 min read

R&I: What was your first job?

My first non-professional job was working at Burger King in high school. I learned some valuable life lessons there.

R&I: How did you come to work in risk management?

After taking some accounting classes in high school, I originally thought I wanted to be an accountant. After working on a few Widgets Inc. projects in college, I figured out that wasn’t what I really wanted to do. Risk management found me. The rest is history. Looking back, I am pleased with how things worked out.

R&I: What is the risk management community doing right?

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I think we do a nice job on post graduate education. I think the ARM and CPCU designations give credibility to the profession. Plus, formal college risk management degrees are becoming more popular these days. I know The University of Akron just launched a new risk management bachelor’s program in the fall of 2017 within the business school.

R&I: What could the risk management community be doing a better job of?

I think we could do a better job with streamlining certificates of insurance or, better yet, evaluating if they are even necessary. It just seems to me that there is a significant amount of time and expense around generating certificates. There has to be a more efficient way.

R&I: What was the best location and year for the RIMS conference and why?

Selfishly, I prefer a destination with a direct flight when possible. RIMS does a nice job of selecting various locations throughout the country. It is a big job to successfully pull off a conference of that size.

Curt Gross, Director of Risk Management, Parker Hannifin Corp.

R&I: What’s been the biggest change in the risk management and insurance industry since you’ve been in it?

Definitely the change in nontraditional property & casualty exposures such as intellectual property and reputational risk. Those exposures existed way back when but in different ways. As computer networks become more and more connected and news travels at a more rapid pace, it just amplifies these types of exposures. Sometimes we have to think like the perpetrator, which can be difficult to do.

R&I: What emerging commercial risk most concerns you?

I hate to sound cliché — it’s quite the buzz these days — but I would have to say cyber. It’s such a complex risk involving nontraditional players and motives. Definitely a challenging exposure to get your arms around. Unfortunately, I don’t think we’ll really know the true exposure until there is more claim development.

R&I: What insurance carrier do you have the highest opinion of?

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Our captive insurance company. I’ve been fortunate to work for several companies with a captive, each one with a different operating objective. I view a captive as an essential tool for a successful risk management program.

R&I: Who is your mentor and why?

I can’t point to just one. I have and continue to be lucky to work for really good managers throughout my career. Each one has taken the time and interest to develop me as a professional. I certainly haven’t arrived yet and welcome feedback to continue to try to be the best I can be every day.

R&I: What have you accomplished that you are proudest of?

I would like to think I have and continue to bring meaningful value to my company. However, I would have to say my family is my proudest accomplishment.

R&I: What is your favorite book or movie?

Favorite movie is definitely “Good Will Hunting.”

R&I: What’s the best restaurant you’ve ever eaten at?

Tough question to narrow down. If my wife ran a restaurant, it would be hers. We try to have dinner as a family as much as possible. If I had to pick one restaurant though, I would say Fire Food & Drink in Cleveland, Ohio. Chef Katz is a culinary genius.

R&I: What is the most unusual/interesting place you have ever visited?

The Grand Canyon. It is just so vast. A close second is Stonehenge.

R&I: What is the riskiest activity you ever engaged in?

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A few, actually. Up until a few years ago, I owned a sport bike (motorcycle). Of course, I wore the proper gear, took a safety course and read a motorcycle safety book. Also, I have taken a few laps in a NASCAR [race car] around Daytona International Speedway at 180 mph. Most recently, trying to ride my daughter’s skateboard.

R&I: If the world has a modern hero, who is it and why?

The Dalai Lama. A world full of compassion, tolerance and patience and free of discrimination, racism and violence, while perhaps idealistic, sounds like a wonderful place to me.

R&I: What about this work do you find the most fulfilling or rewarding?

I really enjoy the company I work for and my role, because I get the opportunity to work with various functions. For example, while mostly finance, I get to interact with legal, human resources, employee health and safety, to name a few.

R&I: What do your friends and family think you do?

I asked my son. He said, “Risk management and insurance.” (He’s had the benefit of bring-your-kid-to-work day.)

Katie Dwyer is an associate editor at Risk & Insurance®. She can be reached at [email protected]