Often known as the ‘third sector’, not-for-profit organisations are a significant part of the Australian economy, contributing $75 billion and employing about 8% of the workforce.
In recent years, the risks they face have increased significantly, through both increased government regulation and through greater public awareness of legal rights, driven in part by the global financial crisis.
The insurance industry has largely kept pace with the changes and is now increasingly tailoring bespoke packages to community groups and trying to bridge the coverage gap with what the commercial sector enjoys, while finding innovative ways to adapt to the community sector’s innate differences.
Internal and external risks
“A key risk difference with the not-for-profit sector is that associations have a business more around stakeholder management than making money,” says Jeremy Scott-Mackenzie, Australasia Commercial Institutions Manager for AIG, who deals with management liability for this sector.
“Brokers need to understand the association’s objectives and that its directors, governors or committees will not be after financial outcomes but sometimes a more nebulous, harder-to-quantify contribution to members or the communal good.”
Lucinda Conlon, Regional Forefront and Not-For-Profit Product Manager at Chubb Specialty Insurance, adds that executives of associations face legal risks as managers, employers and representatives entering into contracts, but may also face exposures arising from the provision of professional services.
These include misleading statements, defamation, breach of relevant laws and acts, bodily injury and property damage to name a few, says Natasha Burr, Senior Account Manager from Parmia Insurance.
“The exposures can greatly vary between organisations, so a risk analysis by an insurance expert should be undertaken, ensuring all liabilities are taken into account,” Burr says.
“For example, training may fall outside of the cover of many policies, so the association may be legally liable but not insured if bodily injury and property damage occurs.”
lament that crime is a regrettably large exposure in an area predicated on advocacy and charity, so theft of assets, fraud and other such losses to associations also need to be insured.
For this reason, crime cover including investigation costs is often added but Scott-MacKenzie adds that the industry is continuing to innovate for emerging risks, such as cyber liability.
Products plugging the gaps
The fundamental insurance products for an association to consider are association and/or management/directors and officers (D&O) liability, professional indemnity (PI), management liability, public and products liability, workers compensation, volunteers’ personal accident and property insurances.
How these products are combined depends on the association’s goals and activities.
Risk management and business operations can run a poor second and brokers may need to know how to handle strong personalities.
Burr says that in some cases, a policy combining D&O liability and incidental PI in conjunction with a public and products liability insurance may suffice.
However, AIG’s Jeremy Scott-MacKenzie says volunteer cover is often required, as directors are usually voluntary and the workforce frequently reliant on them.
He says historically there was a need for individual policies but now they are purchased as a package, which has significant benefits.
“Wording is consistent and definitions are linked across policies so there are less gaps in cover, and it is easier to purchase and renew as one premium.”
However, too many combined covers can exceed the aggregate policy limit, warns Sarogini Millott, Underwriter with Community Underwriting.
“If an action against the entity exceeds this limit, there may be no cover left to fund the personal liability components for the management.
“Signing agreements that contain blanket indemnities can be unrealistically broad for event or hiring or lease agreements, professional services, etc,” Millott says.
She adds that management liability policies should include key extensions including advance defence costs (where the insurer commits to provide reasonable legal defence costs upfront); automatic reinstatement of policy limits; retirement cover; libel and slander/defamation; and crisis management expenses.
The largely pro-bono aspect of charities and limited resources of associations mean that financial and operating constraints come with the territory.
Often the organisations are created by passionate and active people wanting to pursue a cause or make a positive difference, so risk management and business operations can run a poor second and brokers may need to know how to handle strong personalities which can clash.
“The voluntary nature of the sector throws up many challenges, particularly around employment-related claims such as harassment, discrimination and the ‘cash’ nature of donations and the long- term undetected theft by staff,” Chubb’s Lucinda Conlon says.
Employment practices indemnity cover that covers volunteersis often prudent.
“Staff being primarily volunteers makes it more difficult for background checks to be performed.
“The financial constraints can deny organisations expertise in management or, say, an audit, so they don’t always know about fraud occurring.”
Community Underwriting’s Sarogini Millott says that many of these challenges can be overcome with a knowledgeable and experienced broker, although the funding and resource uncertainty that may arise out of the NDIS scheme is an emerging problem.
“How the organisation is funded and interacts with its client, how services are delivered and changes in insurance arrangements are many of the unknowns,” she says.
1. Collapse create new product
The Victorian Division of the National Safety Council collapsed in 1990 with debts of $255 million, and each of its voluntary board directors were sued by the Commonwealth Bank.
The collapse was largely attributable to the fraud of Managing Director John Friedrich and it was arguable the directors were not to blame. All board members settled with CBA out of court except the chairman. He opted to defend the action brought by the CBA, lost and had a $97 million judgement made against him. The council did not have D&O cover in place and the chairman, whose primary asset was his home, lost everything.
This landmark case led to the establishment of association liability, as it is now known in Australia. — CPR Insurance Services
2. Student teaches lesson on fraud
While an office holder in three student organisations with the Australian National University’s Student Association (ANUSA) between February 2010 and May 2012, an undergraduate was suspected of siphoning up to $60,000 of members’ money. Australian Capital Territory Policing investigated the alleged fraud over several months and a forensic audit revealed more than $125,000 had been embezzled.
In the wake of the revelations, ANUSA agreed to several changes to the accountability regime around student funds, including anti-fraud and conflict-of- interest training for all its office holders.
The student being investigated about the alleged theft reportedly used direct bank transfers, credit cards, and direct deposits to businesses to misappropriate the funds.
Fortunately, the ANUSA was insured – crime insurance protects against financial loss whether the attack has come from inside the organisation or has been committed by a third party such as a burglar or computer hacker; while fidelity insurance protects against financial loss as a result of an employee or office holder’s dishonesty.
3. Head over heels
Michelle Maitland, 19, was practising at her regular recreational gymnastics class with Townsville Gymnastics in June 2009. While attempting an advanced manoeuvre, Maitland over-rotated her somersault from a metre-high tumbling ramp and fell headfirst onto a bare concrete floor that should have been covered by a safety mat.
She was rushed to hospital but died the following day.
Townsville Gymnastics was charged by Townsville Industrial Magistrates Court in 2010 with breaching the Workplace Health and Safety Act and fined $70,000 plus an additional $7175 in costs.
A Workplace Health and Safety Queensland (WH&S) safety review of about a quarter of Queensland’s gymnastics clubs made nine recommendations to boost risk management and ensure trainers are properly qualified, which a coronial inquest last year recommended Gymnastics Australia implement.
An association liability insurance policy would have been able to assist in covering defence costs.
Fines and penalties resulting from breaches of the WH&S Act can also be covered, should the policy contain such provisions and/or endorsements and the particulars of the matter meet with the conditions of the policy.