Risk Management

POL or D&O

Public official liability policies may be available for unexpected entities

By Donald S. Malecki, CPCU

So much attention often is devoted to directors and officers liability (D&O) policies written for public and private entities that there is a tendency to forget that public official liability (POL) policies also are available. While the public official liability policy is commonly written for municipalities, it is not restricted to those exposures. It also can be written for other governmental agencies, which often are covered by directors and officers liability policies.

In fact, it would be a mistake to make the assumption that the POL policy is designed strictly for cities and counties. Any number of public organizations can be written, so long as they are considered to be legal entities. This means, for example, that a board, commission or agency would not itself be considered a legal entity. They would need to be included within the operating budget of a public entity to qualify as insureds.

Unless the insurer specifically precludes it, the POL policy, for example, also can be written for school boards in lieu of a school board liability policy, or for volunteer organizations instead of a nonprofit D&O policy.

Wrongful conduct

Both POL and D&O liability policies cover wrongful conduct arising from insureds’ administration of duties on behalf of the entity they serve, but there are differences between them. It is not the purpose here to compare and contrast the features of these policies but, instead, to provide some insight into why the POL policy rather than the D&O policy might be an important consideration.

When analyzing these policies, one of the first places to look is the definition of “wrongful conduct.” With very few exceptions, this term was at one time quite broad. These policies, for example, defined wrongful conduct to mean any actual or alleged error, misstatement, misleading statement, act, omission, neglect, and breach of duty, including misfeasance, malfeasance or nonfeasance.

Most POL policies today do not mention all of these characteristics by name, which makes it somewhat difficult to determine what is or is not potentially covered.

Without question, reference to “any act,” as opposed to “negligent act” within the above-defined term is a broad grant of coverage. The reason is that it is common for public entities, or anyone for that matter, to make conscious and intentional decisions to do or refrain from doing something.

A building inspector, for example, may decide, based on certain circumstances, to condemn a building, or a safety inspector may decide to close down a restaurant. A city council may decide not to apply or not to modify a zoning ordinance that has wide repercussions to a developer. All of these are examples of intentional conduct that can give rise to claims and suits.

Some POL policies either make no reference to “any act” with the definition of wrongful conduct or similar term, or these policies substitute the term “negligent act” in its place. The effect of this change may be to transform the coverage from a policy that covers intentional conduct to one that is limited to coverage of unintentional conduct or negligent (passive) conduct.

In other words, instead of covering liability emanating from the intentional acts of an insured, coverage is provided only for an insured’s failure to exercise the proper degree of care required by the circumstances, i.e., an unintentional act.

When a POL policy (or a D&O policy for that matter) limits wrongful conduct to negligent acts, the policy should be given a low priority of consideration, regardless of how competitive the premium may be. It also is a good idea that the entity’s attorney be queried about whether the policy’s definition of wrongful conduct is broad enough to satisfy the entity’s needs, particularly when that term does not include coverage for “any act.”

Insureds protected

Two aspects are involved when it comes to describing who is an insured. The first aspect involves identifying the nature of the entities that might qualify for coverage under the POL policy. Some policies address this issue by identifying the types of entities that are not to be covered under the POL policy.

It generally is a good idea to query an underwriter about an entity’s eligibility. Some insurers, however, try to eliminate this step by specifically listing the entities the insurer does not want to write, at least without some additional forms attached.

For example, a policy may specifically exclude as insureds such entities as airports, clinics, hospitals, housing authorities, juvenile detention homes, nursing homes, port authorities, transit authorities, utilities, and board members, commissions or any agency of the foregoing.

The second part of this subject entails the identification of who precisely are the persons and entities that are intended to be covered within an otherwise eligible risk. One of the distinctive features of many POL policies is that the entity, itself, is an insured.

If a claim or suit is made against the entity for its vicarious liability, i.e., liability imputed to the entity because of any act or omission that creates liability on behalf of insured persons of that entity, the insurer has the obligation to defend the entity and pay damages on its behalf—assuming the liability is otherwise covered.

This is unlike the nonprofit D&O policy where coverage for an entity has to be requested, subject to the possibility of an additional premium. On the other hand, when it comes to for-profit D&O policies, an entity may be covered, but only for securities violations.

Nomenclature is very important. In other words, a POL policy may have to be endorsed so as to specifically cover the types of insureds seeking coverage. Thus, for example, a POL policy designed for a city would have to be modified if that policy were to be issued to a school board, since the latter does not have a mayor or a city council.

Employees also are generally included as insureds in POL policies. Persons who perform services on a volunteer basis may be listed as insureds or it may be necessary to add them by endorsement. Since volunteer assistance is common with regard to public entities, it is important to see to it that volunteers are included as insureds.

Speaking about volunteers, the POL policy may be an excellent source of protection for volunteer firefighters, or contract or private fire-fighting companies. While some insurers offer a special form of errors or omissions coverage for fire departments, it may not offer as broad a coverage base as a POL policy. Be watchful, however, for the unusual POL policy that may exclude any type of fire-fighting unit.

It is not unusual for an attorney to serve as a member of a city council or as a law director advising the council. Insurers issuing POL policies may not be too keen on providing attorneys professional liability insurance, but they may accommodate a public entity by covering the attorneys for their wrongful conduct in a professional capacity on behalf of the public entity. So if the entity’s attorney were to be named in a suit, for example, the attorney should be protected to the same extent as other insureds of that entity named in a suit.

Exclusions

Those who are charged with analyzing the POL policy for a public entity (including attorneys) need to understand that these policies are subject to a variety of exclusions.

Generally speaking, there are three reasons for policy exclusions: (1) Exposures are insurable under other policies. (2) Coverage for exposures is available under the existing policy for an additional premium. (3) Exposures are not insurable because of public policy considerations, or insurers do not want to handle it, or reinsurance limitations preclude the insurer from doing so.

What may be insurable under the POL policy for an additional premium will depend largely on individual underwriting requirements. An insurer, for example, may be willing to delete the exclusion dealing with claims based on or attributable to any failure or omission of the insured to effect or maintain insurance of any kind.

The kinds of exposures excluded by the POL policy because they are considered to be uninsurable or potentially insurable under other liability policies are claims for bodily injury, emotional distress, humiliation, sickness, disease or death. Also, libel, slander, wrongful eviction, invasion of privacy, malicious prosecution and kindred intentional torts commonly defined as “personal injury” under the commercial general liability policy; and damage to, or destruction of tangible property, including resulting loss of use.

Some of the exposures commonly viewed as uninsurable include the following: claims or suits based on the insured gaining any profit, advantage, or remuneration to which the insured is not entitled; inverse condemnation, adverse possession, dedication by adverse use or eminent domain.

Briefly, inverse condemnation involves a cause of action to recover the value of property taken for public use without full compensation. Adverse possession, on the other hand, can entail a situation where a public entity has openly occupied or used land for public purposes on a continuous or exclusive basis without challenge by the legal owner. If not challenged by the legal owner, the owner risks granting an easement or possibly losing all title to that part of the property openly used or occupied by the public entity.

Claims, demands, or actions seeking relief or redress in any form other than monetary damages commonly are excluded. These usually are actions in equity involving injunctive relief, i.e., demand that the entity refrain from doing something or instituting something that the entity is not now doing. An example is an action against a municipality demanding or seeking to stop a change in a zoning ordinance.

Another exclusion that requires special attention involves damages arising out of the willful or deliberate violation of any federal, state or local statute or ordinance, rule or regulation committed by or with the knowledge and consent of any insured.

This exclusion of POL policies years ago barred coverage solely for the willful or deliberate violation of any penal statute or ordinance. The exclusion of current policies is much broader—potentially reaching any statute, law, or regulation, civil or criminal.

Conclusion

As has been mentioned, the public official liability policy should not be ignored when considering a professional liability-type policy for public agencies. It may turn out that the policy can be structured to fit a particular entity in a much better way than might otherwise be possible under a directors and officers liability policy.

What needs special attention, however, is that many, if not most, public agencies are interested in price. In many cases, this means that the price of a POL policy may be a lot less than a D&O policy. This, however, may be a trap because if one were to take any POL policy and compare it to any D&O policy, there are likely to be more exclusions under the POL policy.

Finally, considering that POL policies can be written on an occurrence basis, it becomes a problem to change from a D&O policy, written on a claims-made basis, to a POL policy on an occurrence basis. The POL policy would have to be exceptional before that kind of change is undertaken.