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D&O Coverage for Private Clubs: Protection during Uncertain Times

The challenges that the private club industry is facing now, and into the foreseeable future, continue to escalate. The decisions that have to be made by club management and boards of directors are not as simple as they used to be in the “good old days,” when the economy was bustling and membership numbers were on the rise. As we begin 2011, we can expect to see this continue, and while this should not portend complete doom and gloom for the industry, the reality is a cold one and those making the tough decisions are feeling the heat. Since combat pay for board members is not an option, rolling up the sleeves and growing thick skin has become more the norm.  

Most private clubs are fortunate to enlist directors with a variety of business backgrounds and professional expertise. This has clear advantages, assuming they don’t throw out their business approach to decision making when they join the board of a club. The duty of care that board members owe to the organization’s members and other constituencies continues to broaden, especially during an economic downturn, which sees increased lawsuits and rising business bankruptcies and lay-offs. Within a society that is litigious, the mere statistics indicate, that while not as certain as death and taxes, a club being sued at one point in time or another is highly probable. That being said, the need to have a broad based directors and officers (D&O) insurance contract in place is of the utmost importance.

Insulating Your Club against Liability

The club’s directors and officers can be, and are, held personally liable for their actions as well as their lack of action, in managing the overall organization. Directors and officers generally must act with the care that a reasonably prudent person in a similar position would use under similar circumstances. This includes being subject to three basic duties in performing their responsibilities, including the duty of diligence or care, duty of loyalty and duty of obedience.

The duty of diligence would include educating themselves with all of the pertinent information available on a specific subject matter prior to making a business decision. This includes reviewing, implementing and adhering to the club’s governance guidelines, bylaws, policies, financial documents and operating procedures, as well as regularly attending board and committee meetings.

The duty of loyalty would include such actions as refraining from activities which would injure or take advantage of the club. In addition, this duty requires that they refrain from using their position of trust and confidence to further their private business or family interests, including avoiding even the appearance of a conflict of interest.

The duty of obedience would include the requirement of directors and officers to perform their duties in accordance with the bylaws of the organization and all other federal and state rules that may apply. The bottom line is that each director must act in good faith and in the best interest of the club. While following these principles is the implied responsibility of the board members, it certainly does not preclude litigation which is where the D&O insurance coverage steps in.

Understanding Your D&O Coverage 

Who is covered?

A D&O policy covers the organization as an entity, the organization’s obligation to indemnify individual insureds and any owned subsidiaries (this would typically include the club as the named insured and perhaps a separate entity such as a foundation that the club has set up for the purposes of raising capital, or an entity that holds ownership of land or buildings for the clubs use). It also covers individual insureds such as past, present or future elected or appointed directors, officers, trustees, executive directors, department heads, committee members, employees or volunteers acting on behalf of the organization.

What is covered? 

The policy provides coverage for any actual or alleged wrongful acts of the organization or individual insured. The definition of wrongful acts typically includes any breach of duty, neglect, error, misstatement, misleading statement, omission, libel, slander, defamation or publication or utterance in violation of an individual’s right of privacy, wrongful entry or eviction or other invasion of the right of occupancy, false arrest or wrongful detention, infringement of copyright or trademark or unauthorized use of title. Most importantly, wrongful acts also include claims regarding employment practices violations, actual or alleged, including the following:

  • Wrongful dismissal, discharge or termination of employment, including breach of an implied contract. 
  • Harassment (including sexual harassment whether “quid pro quo,” hostile work environment or otherwise).
  • Discrimination, (including but not limited to discrimination based upon age, gender, race, color, national origin, religion, sexual orientation or preference, pregnancy, or disability).
  • Retaliation, (including lockouts).

This could include the insured’s response, or alleged response to any of the following activities: a) the disclosure or threat of disclosure by an employee to a superior or to any governmental agency of any act by an insured which is alleged to be in violation of any federal, state, local or foreign law; b) the actual or attempted exercise by an employee of any right that such employee has under law, including rights under worker’s compensation laws, the Family and Medical Leave Act, the Americans with Disabilities Act or any other law relating to employee rights; c) the filing of any claim under the Federal False Claims Act or any other federal state, local or foreign “whistle-blower” law; or d) employee strikes.

  • Employment-related misrepresentation(s) to an employee or applicant for employment with the organization.
  • Employment-related libel, slander, humiliation, defamation or invasion of privacy.
  • Wrongful failure to employ or promote.
  • Wrongful deprivation of career opportunity, wrongful demotion or negligent employee evaluation, including the giving of negative or defamatory statements in connection with an employee reference.
  • Wrongful discipline.
  • Failure to provide or enforce adequate or consistent organization policies or procedures relating to any other employment practices violation.
  • Wrongful acts also include claims from non-employment discrimination. This would include any actual or alleged sexual harassment or unlawful discrimination, when such acts are alleged to be committed against anyone other than an individual insured, or applicant for employment with the organization. These non-employee third party claimants could include members, vendors or suppliers.

Common Exclusions

While exclusions will vary between different insurance carriers, the standard policy exclusions generally include the following:

  • Claims arising out of, based upon, or attributable to the gaining of any profit to which the insured was not legally entitled.
  • Claims arising out of, based upon, or attributable to the committing in fact of any criminal or deliberate fraudulent act.
  • Claims that have been reported, or in any circumstances in which notice has been given, under any prior policy.
  • Claims for bodily injury, sickness, disease, death of any person, or damage to or destruction of any tangible property, including loss of use thereof.
  • Violations of any of the responsibilities, obligations or duties imposed by ERISA.
  • Claims alleging, arising out of, based upon, or attributable to the actual, alleged or threatened discharge, dispersal, release or escape of pollutants.

What is considered a Claim?

It is essential for clubs to work with their own counsel when an incident arises, which may eventually lead to a claim as defined by the policy terms. The most common definition contained in the policy would read as follows:

  1. A written demand for monetary relief; or
  2. A civil, criminal, regulatory or administrative proceeding for monetary or non-monetary relief that is commenced by:
  • service of a complaint or similar proceeding; or
  • return of an indictment (in the case of a criminal proceeding); or
  • receipt or filing of a notice of charges.

While there is some subjectivity in what clubs may consider to be an incident worthy of reporting to their insurance carrier and/or agent, the common theme of erring on the safe side versus being sorry at a later point is generally the appropriate route. However, any formal claim against the club that would fall within the policy definition must be reported to the carrier as soon as practicable after the club becomes aware of the claim. This is a standard condition of any D&O policy, which, if not followed, could result in the voiding of coverage by the carrier. In addition, it is a condition of the policy that the insured not admit or assume any liability, enter into any settlement agreement, or incur any defense costs without the prior written consent of the carrier.

With an insurance marketplace that is constantly evolving based upon legal trends, the proper evaluation of policy coverage terms, conditions and exclusions is a must.  Dedicate the necessary time and effort into making sure D&O coverage is an important part of your overall insurance program.

Thomas D. Walker is senior vice president of Bollinger Insurance. He can be reached at 800-446-5311, ext. 8098 or via e-mail at [email protected].

Frequent D&O Claims   

The most prevalent types of D&O claims at private clubs are related to employment practices, especially:

  • Wrongful termination based upon age and gender discrimination
  • Sexual harassment and hostile work environment
  • Retaliation
  • Defamation of character
  • Breach of employment contract
  • Racial discrimination

For more information, visit [email protected] or have your insurance broker call Tom Walker, SVP Marketing/Sales for Bollinger, at 800-446-5311, ext. 8098 or via e-mail at [email protected].

Claims Scenarios

While the preponderance of claims in the club industry involve employee-related legal actions such as wrongful termination, discrimination, sexual harassment, negligent supervision, hostile work environment and the like, there is no doubt that policy coverage terms and conditions will continue to be tested in all areas in the future. Here are some claims scenarios that are real life, albeit anonymous. Is your club covered for these types of situations?

Prospective New Member … is in the door, then out? 

A new prospective member at a private club passes through with the membership committee review and is given a verbal acknowledgement from a committee member that he is a “shoe-in” for membership following the next board meeting. In his excitement, he tells his family and business associates that they will be joining him on the first tee in the near future. Afterwards, the board turns down the candidate and confirms in writing that his membership has not been approved, which sets off an immediate volley of legal actions against the committee and board claiming various forms of discrimination along with humiliation and defamation of character, etc. Defense costs are in excess of $100,000. Since this was a third party, would your club’s coverage respond?

Economic Times force employee headcount down by one … that’s OK, right?

A long-time employee of the club, who was in a management position, was let go on short notice as their position was being “eliminated.” Shortly thereafter, the club hired an individual who was essentially performing the same duties as the employee that was let go. The new employee happened to be of a different gender and was much younger. Needless to say, the former employee was not amenable to the severance offer by the club and furthermore, refused to sign a release of any future claims against the club. Before the new employee had time to review their new employment manual, the former employee and their counsel inked a legal action against the club, the general manager, and an individual board member, claiming among other things, wrongful termination and age and gender discrimination. Defense and indemnity payments exceeded $200,000. The general manager and a board member were named individually and they had to arrange separate counsel. How would the indemnification provisions of your policy respond?

Can’t anybody hit a hook?

A par four at a private club, designed many years ago by a prominent golf course architect, happens to be a “dog-leg” right. Since the course was built, homes have been constructed along the right side of the fairway, in striking distance of errant tee shots. While many a golfer would love to be able to carry the right corner of the dog-leg, allowing for a mere wedge into the green, the average duffer opens the face of the driver and proceeds to launch his newly purchased Pro-V towards the mahogany cabana of the neighboring property. This bombardment continues for some time, with the neighbors finally pleading their case by sending a request to the club that they take the necessary action to prevent golf balls from either striking their home or entering their yard. While the club considers its options, the neighbor files legal action claiming trespass, endangerment, and private nuisance. Defense costs exceed $100,000. Would your D&O coverage serve to fill any potential gaps in the overall claim costs?  

Don’t be fooled into believing that these types of claim scenarios could not happen at your club, as these are only a few of the many claims that are occurring in the industry today. Make sure the proper due diligence is done when procuring D&O coverage and trust in an insurance professional to evaluate the varying terms and conditions so as to avoid policy coverage gaps.