Archive for the ‘Directors & Officers’ Category

Most Youth Sports Organizations Don’t Have 501(c)(3) Tax-Exempt Status

Don’t assume yours does

According to Kids Non Profits USA, 75 percent of all youth sports organizations qualify for Internal Revenue Service 501(c)(3) status, but fail to apply for it as required by federal law. Unfortunately, many sports organizations have been under the mistaken belief for many years that they were tax exempt under federal law.

Below are the most common reasons that many sports organizations mistakenly believe that they are 501(c)(3) tax exempt:

  • On their application for a Federal Employer Identification NumbeTax exempt status for sports organizationsr, they indicate that they were a nonprofit and thought that this was all that was required.
  • They received state nonprofit corporation status, but they neglected to apply for federal 501(c)(3) status as a tax exempt organization.
  • The assumed that they were automatically tax exempt as a volunteer-run organization.
  • They assumed that the prior administrators properly applied for tax-exempt status many years ago.

The benefits of 501(c)(3) tax-exempt status are as follows:

  • Exempts the sports organization from paying federal income taxes
  • Allow a federal tax deduction for donors of cash, property, or equipment.

The risk of not properly applying for 501(c)(3) tax exempt status are as follows:

  • Sports organization is responsible for filing and paying federal and state income taxes as a taxable business.
  • The sports organization is subject to federal and state penalties as well as back taxes.
  • Donors may have taken improper tax deductions on their personal tax returns thinking that the sports organization was tax-exempt.

In addition,  the IRS revoked the tax-exempt status of some 250,000 organizations in 2010 for failure to file an annual information return for the three prior years. Such organizations are required to refile for tax-exempt status.

Directors & Officers liability policies may cover certain lawsuits alleging that managerial negligence led to loss of tax-exempt status and resulting damages. However, such insurance should not be relied upon due to common policy exclusions for knowing violation of the law.

Kids Non Profits USA offers a special 501(c)(3) application package starting at $399 (plus an IRS application fee).

Source: knpusa.org

Insurance Policies Needed by Sports Organizations

The minimum needed for maximum benefit

Because many sports organizations are run by volunteers, they are often under-insured. Insufficient insurance coverage may be a by-product of money-saving efforts or simply a matter of not understanding the risks of exposure to the athletes, coaches, staff and volunteers, and board members

Below is a list of the most important insurance policies that may be needed by community-based sports organizations such as teams, leagues, and municipal recreation departments.
  1. Accident: Pays medical bills on behalf of injured participants such as players and staff.
  2.  General Liability: responds to lawsuits arising from bodily injury, property damage, personal/advertising injury.
  3. Directors & Officers Liability (AKA Trustees Errors & Omissions for municipal recreation departments): Responds to certain lawsuitSports orginizationss not covered by General Liability such as discrimination, wrongful suspension or termination, failure to follow your own rules or bylaws, and violation of rights of others under state, federal, or constitutional law.
  4. Property/Equipment: Covers your buildings, equipment, and contents against loss due to fire, vandalism, theft, etc.
  5. Crime: Covers employee or volunteer embezzlement of funds or theft of property; forgery or alteration of checks by outsiders, and theft of money and securities by outsiders.
  6. Workers’ Compensation: May be required by state law if three or more employees and pays benefits to injured workers for “on the job” injuries including medical bills, lost wages, disability lump sums, disfigurement lump sums, and death benefits.
  7. Business Auto: Covers liability and physical damage to owned, non owned, and hired autos.
  8. Consult with your insurance agent about other types of policies such as Liquor Liability, Cyber Liability, Media, etc.

We provide more detailed information on each of these policy types and insider tips on purchasing insurance in our article, 7 Critical Mistakes to Avoid When Buying Sports Insurance. If you have questions or want assistance in deciding which policies your organization needs, call us at (800) 622-7370.

Copyright 2002-20014, Sadler & Company, Inc.

Employment Practices Liability

Understanding risks as an employer

Employment Practices Liability insurance (EPLI) is an important insurance policy for sports and recreation organizations to cover expensive claims. This policy is usually purchased either in combination with a Directors & Officers Liability policy or can be purchased on a standalone basis.

What’s covered

Employment Practices Liability insurance covers liabilities that can out of the employer – employee relationship. The primary types of covered liabilities include wrongful discipline or termination, discrimination, and sexual harassment. The better coverage forms typically Sports Employment Practice Insurancecover a number of other workplace liabilities that are created by state and federal statutes and case law.

Below are samples of the types of employment offenses that are covered by one of the broader forms on the marketplace through Chubb:

  • Breach Of Employment Contract can refer to an oral, written, or implied contract, including policy obligations listed in employee handbooks, manuals, etc.
  • Employee Discrimination is any violation of employment discrimination laws including wrongful termination, demotion, denial of tenure, refusal to hire, and refusal to promote based on person’s race, religion, creed, national origin, disability, sex, HIV status, sexual orientation or any other status protected by local, state, or federal  or common law.
  • Employment Harassment includes sexual harassment, unwelcome sexual advances, or requests for sexual favors as a condition of employment, basis for employment decisions, to create an intimidating and hostile work environment. In addition, non-sexual workplace harassment that creates an intimidating and hostile work environment.
  • Retaliation against an employee for exercising rights under law, refusing to violate law, or disclosing or threatening to disclose a violation of law.
  • Workplace Tort includes employment-related defamation, invasion of privacy, negligent evaluation, wrongful discipline, retention, supervision, hiring, misrepresentation, infliction of emotional distress/mental anguish/humiliation, failure to consistently enforce corporate policies and procedures.
  • Wrongful Employment Decision unsubstantiated demotion, denial of tenure, or failure to promote.
  • Wrongful Termination unsubstantiated termination, dismissal, discharge, or constructive termination.

 Third-party Discrimination/third-party liability

Many of the modern policy forms break out an optional coverage for third-party discrimination or third-party liability. A third party is often defined as someone other than an employee, which can be a customer, vendor, service provider, or other business invitee of the insured. In order to trigger coverage for third-party claims alleging discrimination  or sexual harassment, this coverage option must be triggered.

Common EPLI Policy Exclusions for Liability Or Benefits Arising Out Of:

  • Employment Retirement Income Security Act (ERISA)
  • Consolidated Omnibus Budget Reconciliation Act (COBRA)
  • Occupational Safety & Health Laws (OSHA)
  • Fair Labor Standards Act
  • National Labor Relations Act
  • Benefits under Workers’ Compensation, Unemployment Insurance, Disability Insurance or similar local, state, federal, or common law benefit laws
  • Racketeer Influenced And Corrupt Organizations Act (RICO)
  • Sherman Anti-Trust Act or similar laws
  • Punitive or treble damages
  • Intentional or criminal acts
  • Assumption of contractual liability (ex: indemnification / hold harmless provisions in PEO or employee leasing contracts)
  • Costs to modify building under Americans With Disabilities Act
  • Employee benefit stock options
  • Any employment practices wrongful acts that occurred prior to any “retro date” or “pending or prior date”
  • Prior employment practices claims subject to any notice given in any application for coverage

Important EPLI Underwriting Considerations

Some important underwriting considerations for acceptability of a risk or for pricing discounts include recent terminations, turnover rate, layoffs, mergers/acquisitions, salary ranges, incident and loss history, and risk management practices that have been implemented including the existence of an employee handbook.

Contact Sadler Sports Insurance at 800-7622-7370 if you are interested in getting a quote for this important coverage. We have existing programs for local sports and recreation organizations where Employment Practices Liability can be purchased in combination with a Directors & Officers Liability policy for as little as $300.

Directors & Officers Liability (D&O) Insurance

Sports and recreation organizations face common lawsuit exposures that require Directors & Officers Liability insurance

Sports Insurance policyOne of the most common misconceptions is that a Directors & Officers Liability policy covers directors and officers against all types of lawsuits. The fact is Directors & Officers Liability insurance protects the insured organization, its directors, officers, employees, and volunteers against lawsuits based on claims of financial mismanagement, discrimination, violation of rights of others under state, federal, and constitutional law, and failure to follow rules or bylaws when making an administrative decision.

These types of lawsuits are not covered under a General Liability policy, which only responds to lawsuits alleging bodily, property, advertising, or personal injury Likewise, a Directors & Officers Liability policy specifically excludes coverage for the types of lawsuits  covered by a General Liability policy.

Claims Made Coverage Form Challenges

Directors & Officers Liability is written on a “claims made” form instead of an “occurrence” form. Under the claims made form, coverage problems can arise in the event that the policy is cancelled, non-renewed, or transferred to a new carrier. The insurance agent must provide guidance on how to handle these situations, including advice on retro dates, pending or prior dates, and extended reporting periods.

Non-profit vs. for profit organizations

Directors & Officers Liability policies for non-profit sports organizations are relatively inexpensive and typically include broad coverage terms. Minimum premiums may start out at $300 for smaller local organizations and $1500 for larger associations or sanctioning bodies. Of course, pricing will increase with higher revenues, weak financial statements, high-risk nature of operations, if members are to be included under a group program, or if there is a past history of losses. On the other hand, the premiums for profit sports organizations tend to be more expensive with less favorable coverage terms.

Favorable D&O coverage provisions:
  • The insurance carrier must “Pay On Behalf Of” instead of “Indemnify”.
  • Broad definition of “Wrongful Act” as “any” error, misstatement, misleading statement, act, omission, neglect, breach of duty, etc. instead of “negligent” error, misstatement….
  • Defense is included outside of the limits of coverage
  • Broad definition of insured persons to include the entity and its directors, officers, trustees, managers, employees, volunteers, committee persons, etc.
  • Addition of coverage for “personal injury wrongful act” and “publishers wrongful act”.
  • Loss prevention and consultation services.
Common D&O policy exclusions:
  • Deliberately fraudulent act or willful violation of statute or regulation
  • The gaining of any in fact profit or advantage to which the insured person was not legally entitled
  • Any wrongful acts that occurred prior to any “retro date” or “pending or prior date”
  • Prior claims subject to any notice given in any application for coverage
  • Violation of certain securities laws such as Securities Act of 1933
  • Bodily injury or property damage (should be covered under General Liability)
  • Release of pollutants
  • ERISA violations (should be covered under Fiduciary Liability)
  • Employment related wrongful acts (should be covered under Employment Practices Liability)
  • Punitive or treble damages exclusions
  • Insured vs. Insured exclusions are common to provide a disincentive for internal lawsuits between insured persons. Some insurance carriers will eliminate or modify this exclusion.
  • Breach of contract (should try to negotiate removal of exclusion or defense only)
  • Liability assumed under contract
  • Claims arising from serving on board of any outside entities
  • Non-monetary damages such as injunctive relief
Problem D&O exclusions for sports organizations to avoid:
  • Breach Of Contract:: If this exclusion is on the policy, attempt to remove it or amend it so that it does not apply to legal defense for breach of contract. Some lawsuits filed against sports organizations for failure to follow their own rules or bylaws are framed as breach of contract with members.
  • Antitrust Or Restraint Of Trade: This type of litigation occurs in the sports context when a sports organization implements rules that inhibit participation in other sports organizations.
  • Certification, Accreditation, and Peer Review: Many sports organization have training programs where coaches, umpires, or instructors are certified or accredited. Even if this exclusion is not on the policy, a strong argument could be made for a Professional Liability policy to cover this exposure.
  • Non-Monetary Relief or Injunctive Relief Claims: If this exclusion is on the policy, an attempt should be made to amend it so that coverage applies for legal defense. Many lawsuits arise in the sports context when a player is disqualified from participation in a tournament and such player files an action with a judge for injunctive relief to have the tournament postponed until a determination can be made.

Directors & Officers Liability Insurance can include coverage for Employment Practices Liability (EPLI) or EPLI can purchased as a separate component coverage depending on how the policy form is written. EPLI will be discussed in a subsequent blog.

Sadler Sports & Recreation Insurance provides an existing D&O program for local community based sports and recreation organizations for as little as $300 and we can customize a policy for sanctioning/governing associations which will of course be more expensive.

Directors & Officers Liability Insurance for Leagues/Associations

When a General Liability policy isn’t enough

Directors & Officers Liability insurance for sports organizations covers certain types of lawsuits that are not covered by the more common and better known General Liability policy. General Liability covers certain lawsuits alleging bodily injury, property damage, personal injury, and advertising injury.  Directors & Officers Liability typically covers the following broad classes of lawsuits:

  • Discrimination based on race, sex, age, or disability
  • Wrongful suspension or termination of league personnel or players
  • Failure to follow own rules or bylaws when making an administrative decision
  • Violation of rights of others under constitutional, federal, or state law
  • Financial mismanagement

The Directors & Officers Liability policy pays covered legal defense costs. It also pays up to the policy limit in the event of settlement or adverse jury verdict.

Over the past 10 years, the types of claims that are potentially covered by the Directors & Officers Liability policy have increased dramatically as the public has become more litigious. The most common categories of lawsuits include disability discrimination under the Americans With Disability Act (ADA), player eligibility disputes, and league administrators not following their own rules or bylaws when making decisions. We have also seen claims involving breach of contract (usually excluded by most policy forms), race discrimination, violation of expression of religious freedom, failure to make all-star team, improper coaching resulting in loss of college scholarship, violation of Sherman Anti-Trust/Restraint of Trade, internal board disputes (usually excluded by most policy forms), injunctive relief to halt a tournament due to player eligibility issues (often not covered by most policy forms), etc.

The Directors & Officers policy form varies greatly from one carrier to the next. As a result, a detailed review is required to uncover dangerous exclusions that would take away essential coverages. Some important policy provisions include employment practices liability and 3rd-party liability, including discrimination. Unfortunately, most insurance agents are not competent in this area. The insurance experts at SADLER SPORTS & RECREATION INSURANCE can easily guide you through such a review.

Call us today at (800) 622-7370.