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

High Net Worth

High Net Worth Clients Live in CAT Zones. Here’s What Their Resiliency Plan Should Include

Having a resiliency plan and practicing it can make all the difference in a disaster.
By: | September 14, 2018 • 7 min read

Packed with state-of-the-art electronics, priceless collections and high-end furnishings, and situated in scenic, often remote locations, the dwellings of high net worth individuals and families pose particular challenges when it comes to disaster resiliency. But help is on the way.

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Armed with loss data, innovative new programs, technological advances, and a growing army of niche service-providers aimed at addressing an astonishingly diverse set of risks, insurers are increasingly determined to not just insure against their high net worth clients’ losses, but to prevent them.

Insurers have long been proactive in risk mitigation, but increasingly, after the recent surge in wildfire and storm losses, insureds are now, too.

“Before, insurance was considered the only step in risk management. Now, our client families realize it is one of the many imperative steps in an effective risk management strategy,” said Laura Sherman, founding partner at Baldwin Krystyn Sherman Partners.

And especially in the high net worth space, preventing that loss is vastly preferable to a payout, for insurers and insureds alike.

“If insurers can preserve even one house that’s 10 or 20 or 40 million dollars … whatever they have spent in a year is money well spent. Plus they’ve saved this important asset for the client,” said Bruce Gendelman, chairman and founder Bruce Gendelman Insurance Services.

High Net Worth Vulnerabilities

Laura Sherman, founding partner, Baldwin Krystyn Sherman Partners

As the number and size of luxury homes built in vulnerable areas has increased, so has the frequency and magnitude of extreme weather events, including hurricanes, harsh cold and winter storms, and wildfires.

“There is a growing desire to inhabit this riskier terrain,” said Jason Metzger, SVP Risk Management, PURE group of insurance companies. “In the western states alone, a little over a million homes are highly vulnerable to wildfires because of their proximity to forests that are fuller of fuel than they have been in years past.”

Such homes are often filled with expensive artwork and collections, from fine wine to rare books to couture to automobiles, each presenting unique challenges. The homes themselves present other vulnerabilities.

“Larger, more sophisticated homes are bristling with more technology than ever,” said Stephen Poux, SVP and head of Risk Management Services and Loss Prevention for AIG’s Private Client Group.

“A lightning strike can trash every electronic in the home.”

Niche Service Providers

A variety of niche service providers are stepping forward to help.

Secure facilities provide hurricane-proof, wildfire-proof off-site storage for artwork, antiques, and all manner of collectibles for seasonal or rotating storage, as well as ahead of impending disasters.

Other companies help manage such collections — a substantial challenge anytime, but especially during a crisis.

“Knowing where it is, is a huge part of mitigating the risk,” said Eric Kahan, founder of Collector Systems, a cloud-based collection management company that allows collectors to monitor their collections during loans to museums, transit between homes, or evacuation to secure storage.

“Before, insurance was considered the only step in risk management. Now, our client families realize it is one of the many imperative steps in an effective risk management strategy.” — Laura Sherman, founding partner, Baldwin Krystyn Sherman Partners

Insurers also employ specialists in-house. AIG employs four art curators who advise clients on how to protect and preserve their art collections.

Perhaps the best known and most striking example of this kind of direct insurer involvement are the fire teams insurers retain or employ to monitor fires and even spray retardant or water on threatened properties.

High-Level Service for High Net Worth

All high net worth carriers have programs that leverage expertise, loss data, and relationships with vendors to help clients avoid and recover from losses, employing the highest levels of customer service to accomplish this as unobtrusively as possible.

“What allows you to do your job best is when you develop that relationship with a client, where it’s the same people that are interacting with them on every front for their risk management,” said Steve Bitterman, chief risk services officer for Vault Insurance.

Site visits are an essential first step, allowing insurers to assess risks, make recommendations to reduce them, and establish plans in the event of a disaster.

“When you’re in a catastrophic situation, it’s high stress, time is of the essence, and people forget things,” said Sherman. “Having a written plan in place is paramount to success.”

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Another important component is knowing who will execute that plan in homes that are often unoccupied.

Domestic staff may lack the knowledge or authority to protect the homeowner’s assets, and during a disaster may be distracted dealing with threats to their own homes and families. Adequate planning includes ensuring that whoever is responsible has the training and authority to execute the plan.

Evaluating New Technology

Insurers use technologies like GPS and satellite imagery to determine which homes are directly threatened by storms or wildfires. They also assess and vet technologies that can be implemented by homeowners, from impact glass to alarm and monitoring systems, to more obscure but potentially more important options.

AIG’s Poux recommends two types of vents that mitigate important, and unexpected risks.

“There’s a fantastic technology called Smart Vent, which allows water to flow in and out of the foundation,” Poux said. “… The weight of water outside a foundation can push a foundation wall in. If you equalize that water inside and out at the same level, you negate that.”

Another wildfire risk — embers getting sucked into the attic — is, according to Poux, “typically the greatest cause of the destruction of homes.” But, he said, “Special ember-resisting venting, like Brandguard Vents, can remove that exposure altogether.”

Building Smart

Many disaster resiliency technologies can be applied at any time, but often the cost is fractional if implemented during initial construction. AIG’s Smart Build is a free program for new or remodeled homes that evolved out of AIG’s construction insurance programs.

Previously available only to homes valued at $5 million and up, Smart Build recently expanded to include homes of $1 million and up. Roughly 100 homes are enrolled, with an average value of $13 million.

“In the high net worth space, sometimes it takes longer potentially to recover, simply because there are limited contractors available to do specialty work.” — Curt Goetsch, head of underwriting, Private Client Group, Ironshore

“We know what goes wrong in high net worth homes,” said Poux, citing AIG’s decades of loss data.

“We’re incenting our client and by proxy their builder, their architects and their broker, to give us a seat at the design table. … That enables us to help tweak the architectural plans in ways that are very easy to do with a pencil, as opposed to after a home is built.”

Poux cites a remote ranch property in Texas.

Curt Goetsch, head of underwriting, Private Client Group, Ironshore

“The client was rebuilding a home but also installing new roads and grading and driveways. … The property was very far from the fire department and there wasn’t any available water on the property.”

Poux’s team was able to recommend underground water storage tanks, something that would have been prohibitively expensive after construction.

“But if the ground is open and you’ve got heavy equipment, it’s a relatively minor additional expense.”

Homes that graduate from the Smart Build program may be eligible for preferred pricing due to their added resilience, Poux said.

Recovery from Loss

A major component of disaster resiliency is still recovery from loss, and preparation is key to the prompt service expected by homeowners paying six- or seven-figure premiums.

Before Irma, PURE sent contact information for pre-assigned claim adjusters to insureds in the storm’s direct path.

“In the high net worth space, sometimes it takes longer potentially to recover, simply because there are limited contractors available to do specialty work,” said Curt Goetsch, head of underwriting for Ironshore’s Private Client Group.

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“If you’ve got custom construction or imported materials in your house, you’re not going to go down the street and just find somebody that can do that kind of work, or has those materials in stock.”

In the wake of disaster, even basic services can be scarce.

“Our claims and risk management departments have to work together in advance of the storm,” said Bitterman, “to have contractors and restoration companies and tarp and board services that are going to respond to our company’s clients, that will commit resources to us.”

And while local agents’ connections can be invaluable, Goetsch sees insurers taking more of that responsibility from the agent, to at least get the claim started.

“When there is a disaster, the agency’s staff may have to deal with personal losses,” Goetsch said. &

Jon McGoran is a novelist and magazine editor based outside of Philadelphia. He can be reached at [email protected]