Abuse Coverage Isn't as Elusive as a
Needle in a Haystack, but It Will Cost You
By Melanie L.
Herman
Current hard market
conditions are causing thousands of nonprofit managers to lose sleep and
patience after receiving “nonrenewal” letters, notice of changes in the terms
and conditions of coverage, and notification from weary brokers and agents
explaining that the same or less coverage purchased in the past will now cost 10
percent, 30 percent or even 100 percent or more than last year. Is there a
bright spot? For those who see the glass as half-full, it’s arguable that it’s
perhaps a good thing that nonprofits haven’t been singled out. And based on our
conversations with colleagues in the industry, the increases nonprofits are
facing remain less than the average change in coverage and pricing imposed on
corporate consumers. But as every nonprofit CEO well knows, the margin in a
nonprofit is often slim. There’s little room for an unexpected increase in
pricing for any good or service. Coupled with declining donations and quickly
vanishing state and local grant dollars, nonprofits are being pinched, and hard.
One of the coverage areas that seems to
causing the most distress is liability coverage for allegations of sexual abuse
and molestation committed by a paid or volunteer staff member or a client. This
coverage is sometimes labeled “improper conduct” or “improper sexual conduct,”
or even “explicit sexual abuse/molestation.” In recent weeks the Center has
received a flood of calls from nonprofits:
- facing nonrenewal of sexual abuse coverage and dim prospects for
obtaining the coverage elsewhere;
- receiving notice of drastic reductions in limits of liability, such
as limits of $1 million per occurrence/$3 million in the aggregate reduced to
$100,000/$300,000;
- scurrying to respond to demands from underwriters that the nonprofit
implement costly and time-consuming risk management measures before a quote
will be released; or
- facing new policy exclusions that eliminate coverage altogether for
sexual abuse on other liability policies.
What’s Behind the Reality?
The reasons for these developments are
multi-fold. Some experts, such as former Risk Manager for the United States
Olympic Committee David Mair, argue that these changes in underwriting are due
in part to the practice of “underwriting by anecdote.” According to Mair, with
respect to sexual abuse coverage “headlines, far more than reality, may provide
the basis for underwriting decisions in the near term.” He adds, however, that
nonprofits need to recognize that the price many were paying for insurance
during the very soft market of the past decade was, in many instances, simply
too low. While advantageous while it lasted, the market created a false
expectation with regard to a nonprofit’s real cost of risk, according to Mair.
This sentiment has been echoed in numerous articles and presentations addressed
to insurance buyers, but the message is a difficult one to hear.
Other experts have a different perspective. A
representative of a major specialty insurer and long-time writer of abuse
coverage says that although most abuse claims are settled out of court or are
unfounded, the expenses related to the investigation and defense of abuse claims
are partly responsible for the decision by many insurers to offer lower limits
of liability for the coverage than in the past. The company made expense and/or
indemnity payments on 200 abuse claims over an eight-year period. Average
indemnity payments were $95,000. Several claims were total limits losses—where
the entire limit of liability was exhausted for defense and indemnity—and one
claim penetrated the umbrella coverage.
Pamela Davis, president and CEO of the
Nonprofits’ Insurance Alliance of California and Alliance of Nonprofits for
Insurance, Risk Retention Group— two organizations that only ensure nonprofits
and are themselves nonprofits—offers the following insight about abuse claims:
"While claims for sexual abuse in the nonprofit sector are not frequent, when
they occur, they typically result in relatively large settlements. Even
defending one of these cases when the allegations are baseless can be extremely
expensive. And because of the emotional nature of these cases, plaintiffs’
attorneys will attempt to garner large settlements, because they know that
juries have a tendency to identify with the plaintiff, whether or not the
nonprofit could have done anything at all to prevent the abuse."
Echoing the anecdotal information collected
by the Nonprofit Risk Management Center during the past decade, Davis reports
that “virtually none of the abusers have prior records.” Davis argues strongly
against the practice of nonprofits to seek and insurers to offer large limits of
liability for sexual abuse coverage. “There is little that money can do other
than provide counseling for victims of abuse. Although we offer $1 million
limits in some cases, we believe that lower limits, such as $250,000 and
$500,000, actually make more sense. These limits are more than adequate to
establish structured settlements to provide for lifetime counseling and care for
victims of abuse. Higher limits simply make the potential settlement richer and
encourage plaintiff attorneys to prolong the claim process with little regard to
the well-being of the person who was abused.”
How Is Coverage Sold?
Coverage to protect a nonprofit against
claims alleging sexual abuse is available in many forms.
- Provider types: it’s possible to purchase coverage from a domestic,
admitted carrier; from an excess and surplus lines carrier; or from a risk
retention group or other alternative market insurance provider.
- Policy types: sexual abuse coverage is sometimes sold as a separate
policy, while in other cases it’s covered under the Commercial General
Liability or Professional Liability policy. In one unusual case the Center
found coverage provided under an Employment Practices Liability policy (in this
example the policy responded to claims by participants, clients and third
parties alleging abuse by paid and volunteer staff, as well as clients).
- Defense costs: some policies pay defense costs above and beyond the
limit of liability that’s available for judgments and settlements. Other
providers offer coverage with defense costs included in the limit of liability.
Some providers offer both options.
- Coverage type: coverage is usually provided on a claims-made basis,
but is sometimes available on an event-trigger or occurrence basis.
|
How to Cope With Challenging Market
Conditions
In the section that follows, we offer
several tips for coping with the difficult task of obtaining adequate sexual
abuse coverage for your nonprofit. This advice assumes that you have already
decided your nonprofit requires this coverage, or you need the coverage to
comply with the terms of a grant or contract. All of the suggestions will not
be meaningful for every reader. We invite you to review this list and identify
the steps that could help you address the challenges your nonprofit faces with
respect to this line of coverage.
· Consider whether you’re working with an insurance
advisor (broker or agent) who has a large book of business with a carrier that
writes sexual abuse coverage. In some cases, such as when your broker is
approaching a company that specializes in nonprofits and writes sexual abuse
coverage regularly, the market clout of your broker may be a lesser issue. But
in other instances, the broker’s influence with the carrier will play an
important role in the decision to offer your nonprofit the coverage you want
at the limits you’re seeking.
· If you’re unable to obtain the limits of liability
required under a private or government grant or contract, immediately contact
the appropriate administrative official at the funder to discuss the challenge
you have encountered and how you can reach a mutually-agreeable resolution.
Don’t simply run the risk the funder won’t find out you have failed to comply
with this grant or contractual requirement.
|
|
- Discuss with your broker the possibility of
detaching abuse coverage from your other liability coverages (e.g., CGL and
professional liability) and seeking separate coverage from an excess and
surplus lines carrier. Some social service providers seeking relatively high
limits for abuse have decided to obtain separate policies in the alternative
market, in an effort to minimize the effect this coverage has on the pricing
and terms of other liability policies.
- Make certain that if your nonprofit has an
abuse exposure, you have a written, up-to-date policy in place concerning the
organization’s response to allegations of abuse. The policy should extend
beyond meeting the minimal requirements imposed on “mandatory reporters” of
abuse under state law, and include how you will handle inquiries, staffing
issues, and the media.
- Consider higher retentions for your sexual
abuse coverage than you might otherwise prefer, in order to demonstrate your
willingness to bear some of the financial risk of claims to the underwriter.
But don’t accept a retention that is unrealistic for your nonprofit and would
impose a serious hardship or put critical operations at risk in the event of
a claim.
- Demonstrate with detailed information in your
renewal application that you are complying with the carrier’s requirements.
Don’t assume that the carrier will know that you’re meeting specific risk
management requirements it has imposed on insureds with sexual abuse
coverage.
- Check your state’s law that requires insurers
to give commercial policyholders advance notice of nonrenewal or a change in
coverage terms. Companies may also issue what is called an “alternative
notice,” which indicates the company’s intent to either nonrenew or renew the
coverage conditioned on a change in terms, conditions or rates. A second
notice must be sent indicating the company’s final decision. The notice
period varies based on state law and may differ based on policy type. For
example, New York policyholders are entitled to 60 days’ notice, while in New
Jersey 30 days’ notice of nonrenewal or change in contract terms is required.
In Connecticut, 60 days’ notice is required for nonrenewal of most commercial
coverages, although 90 days’ notice is required for professional liability
policies. This is an important place to know your rights under these laws,
and your broker should be in a position to assist. If you receive untimely
notice of nonrenewal, work with your agent or broker to vigorously dispute
the insurer’s proposed action. Many of these laws provide for an automatic
renewal or extension of coverage if the notice requirements are not met.
- Evaluate whether your current broker is
communicating insurance-related "bad news" to your nonprofit in time to
collaborate with you in addressing the challenge. If you’re working with a
broker that has a large book of business with the company insuring your
nonprofit, the broker should be able to stay abreast of changes in the
company’s underwriting policies and practice. If your broker shies away from
delivering bad news until it’s nearly too late to do anything about it, you
may need to add "finding a new broker" to your "things to do list" for the
coming year. While it’s human nature to loathe conveying bad news to a
customer, the mission and health of your nonprofit require that your
insurance provider do so from time to time.
- Plan to begin working on your insurance program
renewal at least 90-120 days in advance of the renewal date, and develop a
realistic timetable for completing required applications, compiling
information, and responding to underwriters’ questions about your operations.
- Make certain that the information presented in
your renewal or new coverage applications is clear, complete and likely to be
understood by someone who knows little or nothing about your nonprofit or
your corner of the nonprofit sector (e.g., social services, literacy, outdoor
recreation). There is no guarantee that the same underwriter who reviewed
your application will be involved on your account this year. Don’t use jargon
or acronyms on your insurance applications, particularly when describing the
operations (and exposures) of your nonprofit and the risk management measures
you have in place to minimize the likelihood of claims arising.
- Keep in mind that when you’re applying for
coverage, you’re selling your “insurability” to a provider who is going to
risk a large sum of capital in exchange for a relatively small annual
premium. More than a clean claims record is required to convince an
underwriter that your nonprofit should be offered sexual abuse coverage
limits in the first place, or the high limits you might be seeking. A
funder’s requirement that your nonprofit purchase coverage at a certain limit
of liability is of little consequence to the carrier.
- Ask your broker whether he or she prepares a
thoughtful cover letter for your application that encapsulates the risk and
highlights the risk management measures in place. Most brokers will have
already spoken with an underwriter about your account before they submit an
application, but a carefully crafted cover letter may be helpful in putting
your nonprofit’s best foot forward.
- Consider obtaining a quote for “claims-made”
coverage for sexual abuse, instead of the preferred occurrence-based
coverage. Although most insureds and insurance advisors would argue that
insuring this risk on an occurrence form is desirable, keep in mind the
possibility of forfeiting the preferred form in exchange for the desired
coverage.
- While considering the resources and
circumstances facing your nonprofit, strive to have the most appropriate
procedures in place and in use specifically to prevent abuse or unfounded
allegations. More than just having such procedures in place however, be
prepared to put them into effect. A carrier will respond more favorably to a
process which is shown to work than one which exists on paper.
The author is grateful to the persons
quoted in this article, as well as Peter Andrew of Council Services Plus;
David Szerlip of David Szerlip & Associates; Debbie Markel of Markel Insurance
Company; Andy Musilli of Andrew Musilli Insurance Agency; and John Kelly of
Munich-American RiskPartners for their thoughtful suggestions with respect to
the strategies listed above.
Melanie Herman is executive director of the
Nonprofit Risk Management Center. To contact Melanie about any of the topics
covered in this article, send an e-mail message to Melanie@nonprofitrisk.org. To
speak with a staff member about risk management activities to manage the risk
of abuse in your nonprofit, contact John Patterson: John@nonprofitrisk.org. To
request permission to reprint or adapt this article, contact Barbara B.
Oliver, director of communications,
Barbara@nonprofitrisk.org. All staff can be reached by telephone at (202)
785-3891.
|