Nonprofits Insurance Alliance

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How Does the Liability Flow? A Discussion of Contractual Liability

“In any negotiated agreement each party should be liable for the things over which they have control.”

In my previous blog, I discussed four tips for how you and your insurance broker could better work together, and one of the topics discussed was reviewing a contract with your broker before you sign to make sure there’s no problematic wording.

In recent months, one of the questions we’ve received most often from our nonprofit members and our brokers has been concerning the contracts our members are being asked to sign by their local municipalities.  These contracts cover everything from work the nonprofit is doing for the municipality (i.e. family/child services, foster care agencies, etc.) to the simple use of public space for a fundraising event.  Recently, the contract wording has become increasingly draconian, often pushing all liability onto the nonprofit, and in many cases, inappropriately so.

Many of the questions we get are about the indemnification clause in the contract.  This clause determines how the liability flows in case of a claim against the nonprofit or against the municipality. You want to make sure your nonprofit is covered in cases where there’s a claim from an error or omission on your part.  Accidents happen and things are sometimes missed, which is why you buy insurance.  However, you need to make sure you’re not being forced to cover someone else’s liability because of onerous contract language. We always recommend that our members have someone with legal expertise review any contract before signing it.  We will only opine on sections of the contract related to indemnification.

Indemnification Clauses

An indemnity agreement is a risk transfer mechanism (a contract) in which one party (the indemnitor) transfers risk from (indemnifies) another party (the indemnitee).

What exactly does that mean in layman’s terms?  The indemnification agreement attempts to ensure that liability is assigned to the person responsible for causing that claim, or through whose negligence or omission the claim has occurred.  Again, each party should be liable for the things over which they have control.

Here’s an example of a nonprofit project and a typical indemnification clause:

The city of Mos Eisley has a contract with the nonprofit Solo Foundation to provide services to the homeless to help them obtain housing.  Solo meets with the clients at their office to provide job search services, financial counseling, and prescreening for city funded housing.  The city requires all of its contractors to include the following indemnification agreement in the Service Contract:

“Consultant agrees to add the city of Mos Eisley as an Additional Insured and to hold harmless and indemnify the city of Mos Eisley, its officers, agents and employees for all claims, legal expenses or judgements which is caused by any negligence, liable act or omission of the consultant or those acting in the consultant’s behalf in the performance of your ongoing operations with respect to this contract.”

A good contract would have mutual indemnification wording where each party agrees to defend and possibly indemnify the other party for claims caused by their respective actions.  That being said, the indemnification wording above would be considered a fair indemnification clause.  We will talk about why it is fair in a bit but first we want to explain the term Additional Insured.

Additional Insured

An additional insured (AI) is a person or organization that enjoys the benefits of being insured under an insurance policy, in addition to whomever originally purchased the insurance policy (the named insured).

Here’s a real-life example:

A nonprofit hires a psychologist as a consultant to council its clients on-site once a week, in a group session. The psychologist requires, by contract, that the nonprofit add her as an additional insured on the nonprofit’s insurance policy.  On the way to a meeting, one of the clients slips on a wet floor on the nonprofit’s premises and hurts their back.  The client then sues the nonprofit and the psychologist as a result of the incident.  As an additional insured, the psychologist would be defended by the nonprofit’s insurance policy.

So why would anyone want to be added as an additional insured?  Being added as an AI helps to ensure fiscal responsibility for a claim is allocated to the party liable for that loss.  Again, people should be responsible for the things over which they have control.  In the case of our previous example, the nonprofit should have been in control of keeping a safe environment (dry floors).  The additional insured is being covered only for claims caused by the actions of the named insured to the policy.  An entity/person should only be added as an AI when there is some legal relationship between the nonprofit and that entity.  In other words, if you are not being required by written agreement to add someone as an additional insured, you shouldn’t.

In some cases, the nonprofit will want to be added as an additional insured on another’s insurance policy.  As an example, if the nonprofit has hired a contractor to do construction at the nonprofits location, it is a good idea to have that contractor, by way of a written agreement, add the nonprofit as an additional insured to the contractor’s insurance policy.

“Arising Out Of” vs. “Caused By”

What makes the above indemnification clause fair?  Well, there are a couple phrases the nonprofit should look for and try to avoid with respect to the indemnification clause.  These phrases are: “arising out of” and “sole negligence.”  Here is the indemnification clause being referenced:

“Consultant agrees to add the city of Mos Eisley as an Additional Insured and to hold harmless and indemnify the city of Mos Eisley, its officers, agents and employees for all claims, legal expenses or judgements which is caused by any negligence, liable act or omission of the consultant or those acting in the consultant’s behalf in the performance of your ongoing operations with respect to this contract.”

Now, let’s change a few words:

“Consultant agrees to add the city of Mos Eisley as an Additional Insured and to hold harmless and indemnify the city of Mos Eisley, its officers, agents and employees for all claims, legal expenses or judgements arising out of the performance of your ongoing operations with respect to this contract.”

The first version states specifically that the claim must be “caused by” the nonprofit’s negligence.  This is preferable as the nonprofit should not accept liability for things outside their control.  The second version is much broader in scope.  It could be argued, inappropriately so, that any claim or loss that happens “arises out of” the nonprofits operations.  Here is a real-life claims scenario to illustrate that point (note that the names have been changed to protect the innocent):

Good Heart Housing leases apartments and houses to ensure the availability of low cost housing for their clients.  They lease an apartment from Dick.  Dick requires Good Heart to add him as an additional insured.  In one of the apartments that Good Heart is using to house a family, there is a fire.  The fire is caused by faulty wiring that Dick knew about but didn’t fix (or tell Good Heart about).

It is clear that it was not the family’s or the nonprofit’s fault that the fire started.  Should the nonprofit’s insurance (via the indemnification clause with “arising out of” wording) reimburse Dick for the loss?

Under “arising out of” scenario, Dick could argue that this fire loss should be covered under the additional insured language because the fire was “arising out of” the nonprofits actions (renting the house).  Under the “caused by” wording, it is clear that the fire was not caused by the actions of our insured (or the family).  It was not the fault of either that the fire started.

Sole Negligence

Now let’s discuss the concept of “sole negligence.”  Here is another example of a poor indemnification clause:

The Nonprofit agrees to indemnify, defend, and hold harmless The City, its  agents,  employees  and  officers,  from  any  and  all  liability,  cost,  or expense,  including  but  not  limited  to  attorneys’  fees,  arising  out  of  or  relating to  the  performance  of  the  work,  regardless  of  whether  caused  in part  by  the  acts  or  omissions  of  the Nonprofit.    Nothing herein  shall  be interpreted as obligating Nonprofit to indemnify The City against its sole negligence or willful misconduct.

Essentially, this clause means that if a claim is the result of the City being anything but 100% at fault, the nonprofit will be held responsible.  In other words, let’s say the City is 99% responsible for a claim/loss.  The City can point to the sole negligence clause and try to push 100% of the liability onto the nonprofit. To make matters worse, it is very rare that a judge (jury) would find either part 100% liable for any claim/loss.  That is why some municipalities insist on this wording. Better wording would be to suggest that indemnification for a claim will be allocated proportionally by the contribution of either party to that claim.

In summary, there are three things you would like to see in any indemnification clause for a contract you are going to sign:

  1. You want to make sure the wording refers to claims “caused by” your actions and not “arising out of” anything. The “arising out of” wording is too broad and could lead to liability being assigned to you that is out of your control.   Don’t agree to take on liability for things outside your control.
  2. If you are agreeing to indemnify another party via a written agreement you should ask that that party agree to also indemnify you (mutual indemnification). That way everyone is liable for the things over which they have control.
  3. You should ask that any “sole negligence” wording be removed. This type of wording will almost always lead to the indemnitor being responsible for all losses.

Lastly, it is always a good idea to have your broker review any contract before you sign it to ensure you will be compliant with the indemnification and insurance clauses.

From the Claims Files: Woeful Website Wording

The chances are that your nonprofit has a website. In the digital era, creating and maintaining a website is almost unavoidable. It explains your nonprofit’s mission and programs to current and potential supporters, solicits donations, and provides additional information on events and fundraisers. The fact of the matter is, your website is the face of the organization.

Given the importance of your nonprofit’s website, it shouldn’t be a surprise that choosing your wording with care and caution is a must – so that visitors are not only engaged and interested in your nonprofit, but also leave with a clear and accurate understanding of what your organization does. Without clear language, individuals in the general public may misconstrue what it is your organization does, and as a result, could end up suing for damages. Unfortunately, that’s exactly what happened to one of our nonprofit members.

The Claim

The nonprofit runs a halfway house for men with dual substance abuse and psychiatric issues. Their clients come into the program after being discharged from hospitals, to make sure they’re stable and can establish both a job and a place to live. One such client, who we’ll call John, entered the program to manage and treat both schizoaffective disorder and an addiction to methamphetamines. During the intake process, John told the organization that he was single and had no spouse – this turned out to be a lie and while John was in treatment, his wife filed for divorce. Despite this, John’s condition was stabilized, he found a job and an apartment, was discharged from the program, and by all accounts was doing well.

After seeing how well things were going for John after he was discharged from the program, his wife tried to re-enter the picture and showed up to his new apartment to reconcile. As the couple was about to become intimate, John’s wife discovered that he had a visible STD. It was subsequently discovered that John had been having an affair with a staff member at the nonprofit, and they were now in love.

The staff member was let go as a result, but John’s wife sued the nonprofit for emotional damages caused by the relationship. Initially, it was deemed that she had no standing in court as she was not a client of the nonprofit, so the judge dismissed the claim. However, she then amended her complaint based on the fact that the nonprofit’s mission, as listed on their website, was to help addicts and their families. The inclusion of families in the nonprofit’s mission meant that the wife could be included under the umbrella of who is being served by the organization.

In the end, it was ruled that the website’s text did not mean that John’s wife was owed anything by the nonprofit, and the suit was ultimately dismissed. However, this claim had the potential to cause of lot of problems for the nonprofit, had the court agreed with the wife that the word “families” meant she was a client of the nonprofit organization.

Lessons Learned

Although this claim did not result in liability for the organization, it highlighted the potential that words used in nonprofit marketing materials, such as websites, have the potential to create legal liability. Words describing services can be alleged to be an implied-in-fact contract or create a legal relationship which can create a legally-enforceable duty to act in a certain manner. So what’s the takeaway from this nonprofit’s story? Your organization’s wording, on its website and elsewhere, is critical. For that reason, carefully examining what you’re communicating and how, is essential – not only to ensure it’s accurate and engaging, but also to ensure that you’re not opening your organization up to unanticipated liability. Legal review of such materials or disclaimers may be appropriate risk mitigation tools for those nonprofits in highly regulated industries, such as health care.

Use of Non-Owned Autos

Does your nonprofit have employees or volunteers that use their personal vehicles on behalf of your organization, for purposes such as running errands, performing services, or transporting clients? Many nonprofits do not realize that their organization has an additional and potentially serious exposure to loss that arises from employees and volunteers using their personal vehicles. Unfortunately, this is a situation where what you don’t know may very well hurt you!

Your organization can be held responsible for any liability associated with operating that vehicle, since it may be held responsible for the actions of employees and volunteers during the course of service or employment. Although the individual has personal insurance to cover their own liability, that coverage may not be adequate to cover the full extent of damages incurred, in which case a claimant may then pursue your nonprofit.

If you have any individuals driving a personal vehicle on behalf of your nonprofit, even for short errands, at a minimum you should:

  • Have a written driver policy, which is signed by the individual driver (a sample policy is available on our secure site for current members of the Group)
  • Require that individuals have an authorization from your nonprofit before driving a personal vehicle
  • Get a copy of the employee’s current driver’s license
  • Require proof of personal auto coverage and get updated copies at each policy renewal
  • Purchase a non-owned auto insurance policy for your nonprofit

Accident claimants and their lawyers will seek recovery from as many sources as they can, so don’t leave your nonprofit vulnerable! Non-owned auto coverage applies when damages exceed the vehicle owner’s personal auto insurance limits, or in situations where a vehicle owner’s primary coverage declines a claim. We have seen both large and small claims related to non-owned auto use, one of the largest being $2 million. Without a non-owned auto policy to protect them, that nonprofit would likely not have survived.

For better risk management, also consider running an annual motor vehicle record check or use a “DMV pull program.” This is highly recommended for organizations that have a significant non-owned auto use related to the delivery of services (e.g., meals on wheels; neighbor-ride programs). Knowing more about this exposure and implementing some simple risk controls can help protect your nonprofit from financial loss.

 

Does My Organization Really Need an Employee Handbook?

Despite the fact that there are no state or federal laws that require an employer to have and provide handbooks to their employees, it’s almost universally agreed that having and using a well-drafted, comprehensive, and easy to understand handbook serves a number of legal, practical, and risk preventative purposes, and nonprofits are no exception.

Ideally, handbooks not only provide clear and specific information on a large number of important topics to employees, about both their employment and their employer, but they also provide specific notices to the employee about their rights. These often include rights to any job-protected leave, communication of zero-tolerance policies, information on employee benefits, and much more. If applicable, the handbook is also used to establish and clarify the at-will nature of the employment relationship, performance and disciplinary expectations, and policies on vacation and holiday benefits.

However, even well-crafted handbooks can be victims of the passage of time, as well as changes that take place in the law and in the workplace. Regulatory and legislative action can change what an employer is required to do with regard to their employees — often without time to adequately prepare for that change. In their efforts to remain compliant with these changes, employers should be prepared to revise and update any applicable policies in their handbook to reflect new legal realities.

Similarly, if an employer has always had fewer than 50 employees and later increases their workforce to 51 employees, they would then become subject to a number of new laws. The best example would be the fact this employer, who once was not subject to the Family Medical Leave Act (FMLA) leave laws, would now be required to provide their employees FMLA.  In this case, the handbook that never needed an FMLA policy would have to be revised to ensure employees were aware of their newly acquired rights.

Thus, by their very nature, employee handbooks should never be considered “carved in stone.”  They should be reviewed on a regular basis, annually at a minimum. This review should be performed by experienced employment law counsel to ensure that any and all recent legal and workplace developments are taken into consideration in the review and revision process.

 

Claims That Could Have Been Avoided: The Ill Effects of Poor Communication

A lack of communication can be detrimental to businesses and organizations alike, as well as the working relationship between employees, as it elevates stress levels and undermines confidence. However, as one nonprofit learned, that’s not the full extent of the damage that can result from poor communication. Poor or absent communication can end up costing tens of thousands of dollars. To learn just how damaging it can be, read below for one nonprofit’s experience.

The Claim

A nonprofit offering recovery services hired a short-term, part-time employee to their staff. The employee was given a verbal offer, as opposed to a written offer letter, and was under the impression that she would be in a position that would receive supervised hours, which she needed in order to obtain a professional license. Instead, the insured had hired her into a position that did not have the desired supervision, as she had understood. Once the employee began work, she complained that she was not being supervised, but nothing was done because she had been hired into a role that did not include supervised hours. Additionally, she objected to the client medication dispensing procedures and refused to perform this function.

After being employed for a mere six weeks and working just 48 hours, the employee’s job was terminated because: 1. the nonprofit could not give her the supervised hours that she desired and; 2. she refused to follow the medication procedures, which the nonprofit labeled insubordination. The employee responded by filing a complaint against the nonprofit with the professional licensing board, followed by a lawsuit in State Court. Although the claim relating to the employee’s lack of supervision had no merit, the suit brought several issues to light regarding the propriety of the nonprofit’s medication procedures, which ultimately supported the plaintiff’s claim of retaliation for whistleblowing. In the end, the nonprofit settled with the former employee for a significant amount of money, even though she had earned very little during her employment.

Lessons Learned

This claim likely could have been avoided if proper communication had been utilized at the outset of the hiring process. The expectations of the position should have been clearly communicated to the employee in a job description listing essential job functions with a written job offer establishing the terms of the employment.  If this had been done, the employee may not have accepted the job to begin with, or would have understood that professional supervision was not being offered so there would not have been the unmet expectation that motivated her filing suit. Written documentation would have supported the nonprofit’s hiring intent.

Additionally, the nonprofit should have investigated the concerns expressed by the employee to determine if proper medication procedures were being followed, rather than dismiss her objections as insubordination. Had it done so, the nonprofit would have been able to correct the internal errors and it would most likely have avoided liability. In essence, the lack of communication ended up costing tens of thousands of dollars, and hours of staff time, which far exceeds the staff costs associated with drafting clear on-boarding documentation and conducting an investigation into complaints related to operational compliance.

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