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Not-for-profit doesn't mean not-to-be-sued.
More lawsuits are being filed against directors and officers of U.S. non-profit organizations, a recent survey indicates.
Thirty-six percent of non-profits surveyed reported a D&O claim during the period 1987 through 1996, according to Watson Wyatt Worldwide. That is more than double the 17% that had faced a claim in the 10-year period prior to the 1993 Watson Wyatt survey.
Among the non-profits that responded to the survey, the average was 1.78 D&O claims per organization, the survey showed.
The Bethesda, Md.-based consulting firm surveyed 726 U.S. non-profit organizations, 119 of which have assets exceeding $1 billion. These organizations include health care companies, public and private colleges and universities, foundations, museums and social welfare organizations. Fifty-seven percent of those surveyed are privately run.
While non-profits of all sizes experienced an increase in claims filed against them, organizations with total assets of less than $30 million saw the most dramatic increase. Twenty-one percent of such organizations reported D&O claims in the new survey, compared with 6% in 1993.
For organizations with assets between $30 million and $100 million, those reporting claims rose to 26% last year from 11% in 1993. For those with $100 million to $400 million in assets, the figures rose to 44% from 25% in the same period, while those with assets of more than $400 million to $1 billion rose to 48% from 35%. The largest organizations-with assets of more than $1 billion-saw claims climb to 54% from 40%.
By type of non-profit, health care organizations saw the greatest increase in claims since 1993. Forty-five percent of the health care non-profits surveyed reported claims last year, compared with 11% in 1993.
Private schools saw an increase in claims from 27% to 38%, claims against public schools rose to 36% from 20%, and for all other types of non-profit organizations, the claims increased to 22% from 14%, the survey reported.
The most frequent claims involve employment practices. They are in two categories: claims concerning wrongful termination, which account for 25% of all claims filed against non-profits; and claims alleging discrimination against current, past or prospective employees, totaling 23%.
"The employment practices liability exposure continues to be the driving force behind the dramatic increase in D&O claims made against health care organizations, educational institutions and other non-profits," the survey report states.
Claim payments overall averaged $376,178, a decrease from the $457,000 respondents reported in 1993. However, for the largest block of claims, employment liability, the cost of an average payment more than doubled, to $275,000 last year from $107,500 reported in 1993.
The employment practices figures are "a very good representation of where the trend of costs actually lie," said Mark Larsen, a Watson Wyatt consultant in Chicago and the survey author.
The dramatic increase in average employment liability payments reflects changes in federal law also affecting for-profit companies, Mr. Larsen said. The most significant change is the passage of the Civil Rights Act of 1991, which permits plaintiffs to request punitive damages and seek a jury trial for discrimination suits in federal court.
Another reason for the uptick in claims is that more organizations have insurance policies that cover not only the directors and officers but the entity as well. That leads to more claims being covered by D&O insurance and the surveyed organizations reporting more D&O claims.
"When coverage is broader, we find out about more claims," he said.
Despite the increase in claims, "pricing has remained stable or even been reduced in many cases," the study states.
The recent study shows that 81% of surveyed organizations had purchased D&O insurance in 1996, compared with 80% of the respondents to the 1993 survey. These policies covered 65% of the 1,290 claims reported by respondents in the new survey between 1987 and 1996. Another 16% of the claims fell within deductibles. Only 2% of claims reported were found to be uninsurable under the terms of the policy.
Public schools were the least-covered entity, with only 60% of those surveyed saying they had D&O coverage. Mr. Larsen found that figure disturbing. He noted that 55% of the public schools that did not purchase D&O coverage said they thought state sovereign immunity laws would protect them. But because the majority of D&O claims are employment suits under federal law, he said, sovereign immunity will not protect these schools.
"It is simple enough to establish that discrimination, harassment and even many termination claims are federal claims, and thus state laws providing indemnification would be inapplicable," the study states.
"It's possibly a position that institutions ought to rethink, given the rise of employment-related claims and the statutes being cited with those claims, namely federal statutes," Mr. Larsen said.
Copies of the survey, "1996 Watson Wyatt's Non-Profit Organization Directors and Officers Liability Survey," are available for $300 each from Mark Larsen, 312-704-2500; e-mail: email@example.com.