Breakout Session III The Insurance Breakdown: D&O and E&O Delineated Studio E 10:45 am 11:45 am

Transcription

1 Breakout Session III The Insurance Breakdown: D&O and E&O Delineated Studio E 10:45 am 11:45 am

2 Thank you to our Alliance Partners

3 Speakers Barry Peters, President Hays Insurance Henry Cifuentes, Vice President Hays Insurance John Evans, Executive Vice President and Credit Administrator Mountain West Small Business Finance Rhonda Pointon, Vice President of Regulatory Affairs National Association of Development Companies

4 Directors & Officers Liability (Governance Exposures) & Professional Liability for CDC Industry The Need for Directors & Officers Liability SBA Contractual Requirement Protection for the Entity, Board Members, Volunteers, etc. against litigation brought against the entity Board Members can be held Personal Liable for their decisions Corporate Governance refers to the decisions and actions of the CDC Board, Executive Director, Employees, etc. in the administration of the entity s business activities. Although the policies (D&O and Professional liability) covering these exposures often overlap, can still produce a grey area.

5 Directors & Officers Liability (Governance) and Professional Liability for CDC Industry Coverage under a single policy form Cross litigation The Need for Professional Liability Professional Liability protects against liabilities arising from the service it provides its clients that generate revenue for the entity. Similar to D&O Insurance, Professional liability protects the professional activities of the entity, it s employees, Board of Directors, independent contractors, etc. Nearly all non profit D&O policies includes exclusions for professional services activities

6 Non Profit Directors & Officers Liability Insurance Coverages Typical Insuring agreement include any loss for which the insured shall be legally obligated to pay resulting from a claim that is made against the insured for a wrongful act Claims Made (not occurrence) policy forms Coverage form is Duty to Defend underwriters not excited by extremely high of deductible (e.g. $50K and up) Understanding your Retro-Date

7 Directors & Officer Liability Insurance Coverage Coverage extends to employment practices liability (EPL) coverage. Employment related actions; Wrongful termination Harassment Discrimination Sexual Harassment Failure to hire, promote, grant tenure, etc. ADA Laws

8 Directors & Officer Liability Insurance Coverages Coverage extensions include; Include coverage for estates, legal representatives, spouses Personal Injury (libel, slander) Full Prior Acts Coverage Anti-Trust coverage Key Exclusions include; Fraud, Bankruptcy, Insolvency Bodily injury & property damage Prior & pending Litigation Insured vs Insured Breach of Contract

9 Professional Liability Insurance Coverages Named Insured Profession: Solely in the performance of services from lenders liability and other related liability arising out of the originating, closing, administering, and servicing loans, or the providing of related services for SBA 504 loans Providing technical assistance to small business Insurer has the right to investigate, defend, and conduct settlement negotiations important to report ASAP Supervising Law Firm searches for a qualified local firm smart to discuss w/attny regarding potential claims

10 Other Professional Liability Insurance Coverages Personal Injury such as libel, slander, defamation Outside Directorship coverage Breach of Contract coverage Punitive Damages coverage- where allowable by law

11 CDC Claims Statistics (5 year review) 45 Total Claims filed against CDC s since Claims (reported) were Directors & Officers 6 Claims resulted in defense and settlement 27 Claims (reported) were Professional Liability 14 Claims resulted in defense costs and settlement Average Directors & Officers Liability claims resulted in excess of $38,000 in defense costs and $63,000 in settlement costs. Average Professional Liability claims resulted in excess of $55,000 in defense costs and $105,000.

12 Directors & Officers Claims/EPL Examples Suit by former employee alleging sexual harassment, which included the boards negligent oversight of entities operations: $115,000 Settlement. Board Member received a finders fee from a third party for steering a contract to a vendor which resulted in an overpayment by the non profit. Claim resulted in six figure settlement. Alleged copyright infringement $55,900

13 Professional Liability Insurance CDC claims examples A CDC allegedly failed to accurately advise a client on payoff figures for all outstanding loans, and clients payments to creditors have been impacted. Alleged misrepresentation/fraud in the loan process. Allegation of fraud and negligent misrepresentation in the sale of a business opportunity to plaintiff which the defendants had a business interest. $245,929. Promise to provide SBA backed loan interfered with private lender financing. $50,640 Breach of contract- Failing to promptly Close a 504 Loan including allegations of negligence and misrepresentation $130,354

14 Professional Liability Insurance Claims against CDC s Prospective borrower alleges that errors by local CDC caused initial denial of loan, resulting in borrowers inability to close on property or business expansion: Suit named organization, board & individual employees. Sought $3.0 M in damages from lost profits/opportunities. Prospective borrow alleges the CDC attorney misled them into believing that the loan approval was imminent, leading plaintiff to incur costly bridge loan. DOJ investigating CDC for violations of the False Claims Acts $150,000 reserve.

15 Legal Horror Story Loan request for a start up second-run 8-plex movie theater No stadium seating or other upgrades ; Old Style theater Suburban/rural community. No nearby competition The borrower and CDC loan officer addressed a lot of questions and worked closely together during the protracted development of the project

16 Legal Horror Story The theater opened and, initially, did very well. The borrower was so grateful that he attempted to give gifts to the loan officer, to give him free tickets, and was anxious to let customers know of his gratitude for helping him fulfill his dream

17 Legal Horror Story Almost simultaneously, two other theaters opened in neighboring towns; A 16-plex in the larger town to the north A first run multiplex theater in the next town to the south These newer, more modern, theaters essentially blocked him out of the stronger market to the north and the south market, limiting him to that one suburban community Management decided to change from second-run to first-run movies

18 Legal Horror Story MWSBF (another loan officer) financed the south theater. His sales almost immediately dropped by25% The theater ultimately failed It was later discovered that each of the two principals was still taking out $120M/year, during the time they were not paying SBA

19 Legal Horror Story The borrower filed a Lender Liability lawsuit against MWSBF, alleging: The loan officer acted as their trusted financial advisor and that many of their decisions, in terms of design, equipping, snack bar, and operations were based on the advice and guidance given them by the loan officer Thus, their failure was our fault.

20 Legal Horror Story The outcome? The +$2,000,000 suit went to trial MWSBF won in District Court, in the Appellate Court, and in the Utah Supreme Court

21 Legal Horror Story Consequences? Minimized because MWSBF had good E & O insurance protection We had to pay the deductible The insurance company incurred $100 - $200M in legal fees in the defense. MWSBF management endured a lot of grief and lost time, during about a three-year time period. An immense amount of time was spent in meetings, gathering information

22 Legal Horror Story Lessons learned: Get good E & O insurance! Keep at a safe distance from borrowers We are creditors only Keep loan and servicing files well organized We could have saved a lot of time and grief, if we had not misplaced our Servicing Agent Agreement

23 Legal Horror Story Epilogue The south theater has struggled, but has since expanded and is still in business The north theater is doing just fine The subject theater is operating under new ownership

24 12:00 PM 1:15 PM What s Up Next? Innovation and Economic Development Awards Luncheon Keynote Speaker: Maria Contreras-Sweet, Administrator U.S. Small Business Administration Grand Ballroom Salons 1-4