Legal Brief

The Council on Foundations endorses a directors' and officers' liability insurance policy administered by Aon/Huntington Block and carried by The Hartford. The Council and Aon/Huntington Block have worked together for more than 10 years and have consistently sought to make strong D&O coverage available at competitive rates. In establishing and coordinating the program, we've learned about how these policies work.

Directors' and officers' liability insurance helps protect the assets of foundation managers and the organization itself if individuals or government regulators make claims against the foundation.

For example, if a former employee sues the foundation and claims that his or her dismissal was motivated by racial discrimination, D&O coverage will generally cover the legal defense costs of the foundation-even if the suit is groundless. In certain circumstances, D&O insurance will cover a judgment against the foundation. While D&O policies may not reimburse foundations for fines and penalties paid to the IRS for violations of the tax code's private foundation rules (the bar on self-dealing, etc.), strong policies will generally cover expenses incurred in defending the foundation.

The Council on Foundations does not necessarily recommend that all foundations obtain D&O coverage. Each foundation should make the decision whether or not to obtain coverage after consulting with its legal and other advisors. Factors to be weighed include the asset size of the foundation and the composition of those assets. Since most D&O claims arise from employment issues, the number of foundation employees should also be considered. The risk tolerance of board members will also be an important issue—some individuals will not join a board unless there is D&O insurance in place.

For those foundations that do opt for such a policy, the following might help.

When a foundation applies for D&O coverage—or any insurance coverage—it is crucial to disclose any unusual activities or arrangements.

Does the foundation operate a soup kitchen or an art gallery? Are all of the foundation's assets invested in one company? These are perfectly legal situations, but an insurance broker may want to suggest particular supplementary coverages (sometimes called "endorsements") to fully protect the foundation from any special risks it faces.

Another benefit of full disclosure: If the foundation suffers a loss in connection with one of these unusual arrangements, the insurance carrier should not be able to avoid coverage by arguing that it was outside the scope of the policy.

In addition, a foundation should also disclose in its application the existence of any situations that might possibly lead to a lawsuit or other claim. Has a group of employees just sent the board a letter threatening to sue over promotion practices? It is unlikely that disclosing the existence of an open matter will lead to denial of coverage or even a higher premium. The new policy generally will not cover expenses resulting from a claim that the foundation discloses.

It also generally will not cover expenses relating to a claim that the foundation should have disclosed, so there is no benefit in concealing a claim of which the foundation was aware. Be assured that if litigation ensues, the insurance company will discover that the foundation knew of the claim when it applied for the policy and will try to deny coverage! If the foundation is switching from one insurance carrier to another and discloses an existing claim, the new carrier may refer the matter to the old carrier for disposition.

Ideally, a foundation will communicate with its insurance agent—for D&O coverage or any other sort of coverage—whenever it contemplates an action that may increase its liability exposure.

Is the foundation hiring its first employees? Is it expanding its board to include non-family members? Is it opening an office in a foreign country? All of these are perfectly legal undertakings that the foundation's insurance agents will want to hear about before they are undertaken. Insurance agents should be a good source of information on how the foundation can arrange its affairs to minimize the risk of claims.

When a claim situation does arise, it is important to communicate quickly with the agent. Like many insurance policies, the D&O policy endorsed by the Council on Foundations requires insured parties to report claims "as soon as practicable." That's a fairly subjective standard, but it certainly means that a foundation should inform the agent when a lawsuit or other complaint has been filed against the foundation and should let the agent know about letters that threaten lawsuits.

Reporting claims early serves the interests of the foundation. It allows the insurance company to step in and provide advice on resolving the situation before it goes to court. If court cannot be avoided, an early contact with the agent allows the insurance company to provide legal defense for the foundation at the insurance company's expense. If a foundation does not inform the agent, goes forward with its own legal defense, and then seeks reimbursement, the insurance company may question or deny the expenses.

To put D&O insurance in perspective, here are year 2000 figures from the Council's forthcoming Foundation Management Series, 10th Edition, Volume II, Governing Boards.

The percentage of foundations that provide D&O coverage varies with asset size.
Assets of $250 million or more: 88.2%
Assets of $25 to $49.9 million: 70.1%
Assets of less than $5 million: 57.0%

Three-fifths (58.0%) of policies (among community, family, independent and public foundations, aggregated) have deductibles. Deductibles vary among foundations with different asset sizes.
Assets of $250 million or more: average deductible, $44,321; median, $10,000
Assets of $25 to $49.9 million: average deductible, $8,633; median, $2,500
Assets of less than $5 million: average deductible, $982; median, $500 

Liability limits are more evenly distributed according to asset size than deductibles.
Assets of $250 million or more: average liability limit, $7,092,105; median, $5,000,000
Assets of $25 to $49.9 million: average liability limit, $2,924,528; median, $2,000,000
Assets of less than $5 million: average liability limit, $1,292,308; median, $1,000,000

Finally, here's an idea of what foundations pay in premiums:
Assets of $250 million or more: average premium, $19,218; median, $13,000
Assets of $25 to $49.9 million: average premium, $4,453; median, $2,641
Assets of less than $5 million: average premium, $1,091; median, $950

—Will Schroeder

Directors and Officers Liability Insurance and Indemnification, by John Edie (Council on Foundations, 1993, 38 pages). Call 888/239-5221 or visit www.cof.org/applications/publications/index.cfm to order. Members $15.00, nonmembers $25.00.

Foundation Management Series, 10th Edition, Volume II, Governing Boards (Council on Foundations, forthcoming 2002). Check the Council's Web site, www.cof.org, for announcement of availability.

For more information on the Council-endorsed D&O program, visit www.cof.org/government/Legal-Service/index.htm.

Local insurance agents can access the Council on Foundations' D&O program by contacting Aon/Huntington Block at 800/432-7465. This policy is offered on an exclusive basis, and local brokers must work with Aon/Huntington Block to secure coverage.