Abuse Coverage Isn't as Elusive as a Needle in a Haystack, but It Will Cost You
By Melanie Lockwood Herman
Author's Note: Although this article was originally published during the recent hard market, many nonprofits continue to struggle to locate affordable abuse coverage, despite current soft market conditions. While the overall insurance market has improved with regard to availability and pricing, abuse coverage continues to present challenges and the advice offered in this article is still appropriate.
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 or to request permission to reprint or adapt this article, send an e-mail to Melanie Herman. To speak with a staff member about risk management activities to manage the risk of abuse in your nonprofit, contact the Center at (703) 777-3504.