McGowan & Company's umbrella program
provides extended D&O coverage
By Phil Zinkewicz
Thomas B. McGowan, IV, is Corporate Vice President/Operations for McGowan & Company in Fairview Park, Ohio.
Background mural depicts interior of Edward Lloyd's Coffee House, where modern insurance was founded. McGowan & Company's home office features several murals which depict historical places and scenes of importance to the insurance industry.
There was a time when serving as a director or officer of a community association, such as a condominium or homeowners association, was a desirable activity. It was prestigious, setting one apart as an important member of the community. Also, a person serving on the board of directors of an association might feel a sense of fulfillment from his or her contributions to the community. And, it looked good on a person's resumé. In short, it was an honor.
However, in recent years, more sophisticated plaintiffs, working with very enterprising attorneys, have managed to turn that honor into a potential financially perilous activity, especially if the association has not purchased the proper types and levels of directors & officers (D&O) liability and umbrella liability insurance protection.
"The fact is that in all 50 states, directors and officers of community associations can be sued and held personally liable for decisions they make in their capacities as board members," says Thomas B. McGowan, IV, J.D., M.B.A., corporate vice president of operations for the Fairview Park, Ohio-based McGowan & Company, Inc. McGowan & Company, a family-owned firm, is the largest managing general underwriter of specialized umbrellas and directors & officers liability coverage in the United States, working with more than 40,000 clients nationwide through its network of more than 10,000 retail agents. Its programs are open to all agents. McGowan & Company underwrites D&O and umbrella coverage for income-producing and habitational properties, such as hotels, apartment buildings, condominium associations, office buildings, shopping centers, and warehouses.
"If a plaintiff obtains a verdict against a board of directors," explains McGowan, "and that board of directors does not purchase the correct types and limits of insurance, that plaintiff can seek to attach the personal assets of the directors and officers--including their checking accounts, savings accounts, investment portfolios, their houses, cars, etc."
McGowan offers a case in point
Association "A" carries a $1 million D&O policy, but no umbrella. The buildings at Association "A" are 30 years old and soon will be in need of new siding, which will cost about
$3 million. A prudent board of directors, over the course of 30 years, would have set aside a certain amount of operating income each year towards a "siding reserve," so that, at the end of the usable life of the current siding, there would be a $3 million "siding reserve" fund to pay for new siding. However, the board of directors of the association has historically failed to set aside such reserves.
The board of directors decides to replace the siding. After selecting the lowest bid of $3 million to purchase the siding, the board informs unit owners that there will be a "special assessment" to cover the cost of the new siding. One of the unit owners believes that the board of directors was negligent in failing to set aside a "siding reserve" and sues the board. The court decides in favor of the plaintiff-unit owner and awards him, and the other unit owners on whose behalf he sued, $3 million. The board of directors submits the claim to its D&O carrier.
Background mural depicts exterior of Edward Lloyd's Coffee House, where modern insurance was founded.
Assuming that the D&O policy covers the claim, there is still a gap in coverage of $2 million. With a verdict in hand, the plaintiff-unit owner can seek to attach the personal assets of the board members. He can also sue the property manager for failing to provide the board with appropriate advice.
Says McGowan: "If the association had purchased a quality umbrella policy--one offering high limits and broad coverage, including excess D&O liability coverage--it would not have had a problem. After the D&O liability paid the first $1 million of the $3 million claim, a quality umbrella would have paid the next
$2 million. The fact that directors and officers of associations can be held personally liable should offend any rational person. Directors and officers volunteer to work for their community associations out of a sense of civic pride, and their efforts are altruistic. It offends any sense of fair play and righteousness to hold them personally liable for their volunteer activities, but this is the state of the law. As such, it is critical for an association to carry high limits of liability and broad coverage. That is where our Common Assurance Umbrella Program comes into play. By providing associations with high limits and broad coverage, we greatly reduce the likelihood that their directors and officers could be held personally liable."
"By providing associations with high limits and broad coverage, we greatly reduce the likelihood that their directors and officers could be held personally liable."
--Thomas B. McGowan, Vice President of Operations
McGowan & Company, Fairview Park, Ohio
Colin C. Dean, Msc., managing director-domestic operations of McGowan & Company, stresses that his firm is an "underwriter" specializing in umbrella and professional coverages, and not a "wholesaler." Retail agents approach McGowan & Company for its expertise in specific niche areas of insurance, and McGowan works with highly rated admitted markets. "McGowan & Company is one of the old 'quiet' houses in the industry," says Dean. "Underwriting is critical to our basic philosophy. We don't focus on short-term gains; rather, we focus on understanding each risk, then underwriting it properly so that the carrier earns an above-average profit." This would explain why McGowan & Company's carriers have been with McGowan & Company for decades.
"For the past 10 to 15 years, reinsurance has been priced inappropriately. That is, the rates charged were too low to accommodate the risks presented," says Thomas McGowan, IV. "Consequently, primary insurers just tacked on umbrella coverage to packages without being cognizant of the risks presented by excess liability losses. Now, because of the increasing litigiousness of our society, umbrella insurance must not be thought of as an addendum to package policies by either carriers or insureds. Proper umbrella coverage is of monumental importance to insureds. And, proper underwriting of umbrellas is of monumental importance to carriers."
In addition, according to Timothy G. Lee, AAI--one of the regional production underwriters at McGowan, who is in charge of the Texas and Missouri regions--retail insurance agents should be aware of the pitfalls that exist in the umbrella marketplace. "Because of the hard market, there is an umbrella product that has once again reared its ugly head, in one form or another--the shared umbrella program," says Lee. "There are two categories of Shared umbrella programs," he says. "One is the shared-limit umbrella program, and the other is the shared-policy umbrella program. A shared-limit umbrella program is just what it sounds like. One limit of liability is shared among all of the insureds in the program. In the eventuality that one insured of the program makes a claim which exhausts the limits, the rest of the insureds in the program have no coverage. In the last several years, an increasing number of wholesalers in the New York, New Jersey and neighboring areas have put together these types of programs. We believe that these programs are doing a terrible disservice to insureds and should be used by agents only in the most unusual of circumstances.
"Shared-policy umbrella programs avoid one of the dangers of shared-limit programs. In a shared-policy program, all of the insureds in the program are insured under a single umbrella policy, typically with a common expiration date, However, the limits of that policy apply on a "per-location" basis. The problem with these programs is that the insureds in the program are nothing more than certificate holders on the master umbrella policy; the wholesaler which manages the program is the First Named Insured. As there is only one policy in force, the only insured entitled to notice of cancellation is the First Named Insured--i.e.--the wholesaler managing the program. So, there is a real and significant danger that such a program could be cancelled without any legal notice required to the vast and overwhelming majority of insureds in the program."
Knowing the law is also important in underwriting specialty umbrella policies, says Terrence B. Phelan, vice pesident of the municipal risk division of McGowan & Company. In this regard, Phelan refers to what McGowan & Company calls "the immunity myth." Says Phelan: "Some states have provided 'blanket' immunity to directors and officers of nonprofit organizations, while others have provided immunity to directors and officers only when their boards have procured certain prescribed minimum limits of D&O coverage. There is an unfortunate myth circulating--perpetuated by well-meaning, but uninformed individuals--that these state immunity laws effectively shield members of boards of directors of nonprofit organizations from personal liability. The fact is that members of boards of directors can be held liable for decisions made in their capacities as board members in all 50 states, regardless of state immunity legislation."
Thom McGowan adds that, under federal and state constitutions, citizens are entitled to remedy in a court of law for injuries sustained as the result of another citizen's actions, whether intentional or negligent. When reviewed by various state and federal courts, immunity legislation has often been determined unconstitutional as depriving injured citizens their constitutional right to remedy, he says.
"In addition," says McGowan: The Supremacy Clause of the United States Constitution states that federal laws take supremacy over state laws. Therefore, in order to circumvent state immunity laws, a plaintiff seeking remedy against a member of a board of directors, the board itself, or its property manager, would merely need to bring his or her lawsuit in federal court, as opposed to state court. States cannot immunize individuals or entities, such as associations, against federal laws."
Again, McGowan gives an example
The president of Association "A" does not like the association's maintenance person because of his race, creed or color. The president terminates the maintenance
person, not because of the worker's incompetence, but rather because of the president's personal prejudices. The maintenance person consults with an attorney. The attorney advises him that the state in which the maintenance man lives has passed a law stating that, if an association purchases $2 million limits of D&O liability insurance, no member of the board of directors can be held personally liable. Relying on this advice, the maintenance person, rather than bringing an action in a state court for wrongful termination, brings an action against all and sundry--the directors and officers of the association, personally and corporately, the association itself, and the property manager--under Title VII of the Civil Rights Act of 1964, a federal law. That law states that no employment decision may be made solely or primarily based on color, ethnicity, or religious beliefs. By suing under federal law, the maintenance person has completely circumvented his state's immunity legislation. As such, the state's immunity legislation becomes useless.
"Furthermore, state immunity legislation often provides no protection against personal liability for acts deemed to be 'grossly negligent,' 'wanton,' or 'reckless,'" says McGowan. "These terms are vague and subject to the interpretation of the courts. Coupled with the fact that courts typically endeavor to find remedy for injured plaintiffs, a precarious situation results for board members. If no deep pockets are readily available--i.e., an insurance company--a court might determine an act of a board to be 'grossly negligent,' 'wanton,' or 'reckless,' even though most people would not deem it to be such, in order to attach the personal assets of board members. Therefore, despite the 'myth' of immunity, board members might find themselves, unwittingly, personally liable as a result of their volunteer activities."
McGowan says that understanding instances such as the ones mentioned above make McGowan & Company an "underwriter" as opposed to a "wholesaler."
Concludes McGowan: "To ensure that each one of our clients receives outstanding primary D&O and umbrella liability coverage, we have adopted Henry Ford's approach. Henry Ford said that his customers could purchase a Model T in any color, so long as that color was black. Like Henry Ford and his Model T, we do not offer options in our D&O and umbrella programs. From the outset, we offer each of our clients the finest coverage that we are able. We believe 'options' create the potential for catastrophe. D&O and umbrella coverages are so varying and sophisticated that property owners and board members cannot be expected to understand the intricacies of coverage. That is what we're for. We are hired to protect the best interests of our clients, and we will not allow insureds to purchase poor insurance coverage from us." *
For more information:
McGowan & Company, Inc.
Web site: www.mcgowaninsurance.com