March 16, 2011
Credit Union Management magazine’s Web-only “Insurance Matters” column runs the third Wednesday of each month.
Your board members probably know they can be held personally liable for their actions as board members. It’s in all the “Credit Union Board Member 101” booklets and handbooks.
Your credit union undoubtedly buys directors’ and officers’ insurance to cover your board members. There’s a fly in the ointment though. What you have may not be enough. If it is enough, it may not be the right kind. If it is the right kind, it might get all used up.
First, we have to talk about indemnification, the act or process of securing against loss. The idea that D&O protects directors and officers is actually a bit off. Your credit union bylaws state that if a director is sued, the credit union will indemnify the board member. Your directors’ and officers’ insurance reimburses the credit union for that indemnification.
In most cases, it is really the assets of the credit union that protect a board member. The D&O policy (up to the limit of coverage) keeps the credit union from being out the cost of the lawsuit. In most cases, the D&O policy really protects the credit union.
Except when it doesn’t.
There are times when the indemnification is not allowed.
If the credit union is out of assets, there can be no indemnification. Some state laws prevent indemnification for certain allegations against directors. In addition, National Credit Union Administration rule §701.33 prohibits federal credit unions from indemnifying officials or employees for liability associated with misconduct that is grossly negligent, reckless, or willful in connection with a decision that adversely affects the fundamental rights of members.
And there is always the possibility of a “derivative” lawsuit where it’s the credit union that is suing the director. That’s when the second part of most D&O policies kicks in.
Often called “Side A” coverage, the second section of directors’ and officers’ insurance policies pays those claims against directors that are not, or cannot be, indemnified.
That’s great. When one part of the policy doesn’t work, the other side steps in.
Except when it’s used up.
Some policies have a limit of insurance that gets used up as claims are paid. Claims for indemnified expenses use up the coverage available for non-indemnifiable expenses. Directors can be left out of coverage.
Not good, right? Especially if you’re a director and your spouse/partner/significant-other likes his/her current housing arrangement and retirement savings accounts. (Remember the “personal liability” thing in Credit Union Board Member 101? That was talking about your house and bank accounts.)
The solution is a dedicated section of the D&O policy held in reserve just for directors when all else fails. Think of it as the panic-room of insurance coverage. Most insurers offer this coverage. You probably have to ask for it. It’s called “Excess Side A” or “Dedicated Side A” coverage.
Another possible solution is to buy lots of D&O coverage for your credit union. That makes it more difficult to run out of insurance. But it’s hard to know how much is enough. Is $5 million of directors’ and officers’ insurance a lot? Sure. But $15 million is better. Is it enough, though?
The third line of defense (or are we at the fifth line here?) is an independent director's liability insurance policy. Several insurance companies are now selling coverage directly to independent board members to provide coverage when the corporate D&O doesn't respond due to government intervention, bankruptcy or insolvency. Talk to your insurance advisor.
Here are the questions to ask about the issues presented here:
-What are the D&O policy limits?
-Do indemnified claims reduce coverage for non-indemnified claims?
-Is there any coverage reserved just for the directors if all the other coverage is used up?
I’ve prepared a free white paper written to explain D&O insurance to credit union board members. Send an e-mail to Scott@ScottSimmonds.com for a no obligation copy.
Scott Simmonds is the unbiased insurance guy, consulting on, but never selling, insurance, www.CUinsuranceConsultant.com. He welcomes questions from readers, and will attempt to answer as many as possible in future columns.
| Reader Question: Q - We sponsor several youth sports teams in the community. Are we covered if someone gets hurt? A - Let's consider the possibilities. A player is injured. A spectator is injured. A child is molested. A car full of kids is in an accident on the way to a game. An employee who is serving as the coach is injured. Four insurance policies come into the above examples. Look to the general liability policy when there is bodily injury and property damage. If an injured player or spectator sues the credit union, the CU’s general liability insurance will, in most cases, respond. Liability from an auto accident should be covered by the CU’s auto insurance. An employee should not look to the CU’s insurance to pay for damage to her car while transporting kids to a baseball game; that's the employee's personal insurance. In some states an employee who is coaching a sponsored team has been found to be covered by workers’ compensation. That is not the usual case though. Coaching is usually considered a leisure activity. You should be aware that some insurers will exclude sponsorship or participation in athletic activities from general liability insurance. Review your policy. I have left the least pleasant scenario for last: sexual abuse. We are talking about an illegal and intentional act by the perpetrator. No liability insurance policy will cover the person who commits such a foul act. There may be defense cost coverage for civil suits in some instances. A suit brought against the credit union by the parents of an injured child is a possible concern. Sexual abuse is not excluded by most general liability policies. So, if a coach molests a child and the parents bring suit against the coach and the CU (as sponsor of the team), the coach would not have coverage (intentional act) but the bank would. Again, make sure your general liability insurance does not have a specific exclusion for such events. I would suggest that any organization sponsoring a youth activity take care to review the screening procedures for the adults who work with the kids - sports, scouting, after school programs, student exchange, and the like. There should be criminal background checks and reference checks. Not only will you be protecting the children involved, you will also be protecting your credit union and its reputation. The public relations issues that come from any connection to an abused child are huge. You owe it to yourself and to your community to be sure that the kids are safe. |
