Voluntary Reaction?

It is hard to imagine a sector of society more vulnerable to the whims of the insurance cycle than the more than 161,000 registered non-profit and charitable organizations across Canada. Operating on limited budgets and dependent on government grants or fundraising, voluntary organizations have seen their insurance rates rise anywhere from 50%-100%, with some notable cases as high as three times higher.

Price increases are not the only problem for volunteer groups. A lack of availability of some crucial forms of insurance, such as professional liability, crime and sexual abuse, is increasing exposure for some organizations. In other cases, volunteer groups say they have been refused coverage or denied renewals without any change in claims history or risk profile. “Insurance is supposed to moderate the cost of risk for organizations, but it is not doing that,” contends Connie Berry, policy analyst, liability issues for the Voluntary Sector Forum, an association that represents the non-profit sector. “In fact, you could say that premium increases of 50%-300% represent a kind of catastrophe for voluntary organizations. These increases are crippling our organization and causing cutbacks in programs and services.”

The plight of voluntary organizations has resonated among politicians, regulators and media in various regions of Canada. This is particularly true for any form of activity dealing with the care of children, health clinics or premises where alcohol is served. In one well-publicized case, HIV Edmonton took its case to the media a year and a half ago when it was refused coverage by several insurance companies. Although it now has more extensive coverage (including insurance for a needle exchange and methadone program), it is paying much higher premiums, up from $3,500 in 2002 to about $20,000 for last year. A report from the Nova Scotia Insurance Review Board released last November cited several cases of dramatic rate hikes for voluntary groups. It concluded: “Volunteerism itself is threatened by the cost and availability of insurance.”

According to Statistics Canada, the gross domestic product (GDP) of the non-profit sector for 1999 was estimated at $61.8 billion, accounting for 6.8% of the total economy. The fields of social services, culture and recreation, development and housing, religion, business and professional associations, unions and health (excluding hospitals) account for more than 80% of this total. In all, the non-profit sector’s extended GDP share is 50% greater than Canada’s entire retail trade industry and more than eleven times that of the auto manufacturing industry.

LITIGATION HAZARD

The past year has seen a spate of insurer-related activity on the voluntary sector. The Insurance Bureau of Canada (IBC), in particular, has recognized the effect of the hard market on non-profit organizations, and has taken several steps to bring together volunteer groups, insurers and, in some cases, regulators. A national task force is looking at possible solutions, while similar regional task forces are also meeting in Atlantic Canada and Alberta. “I think both non-profit groups and insurance representatives now realize that this is not simply an insurance problem – it is a Canadian problem,” says Jane Voll, vice president, policy development, IBC. “There are societal issues, such as increased litigation, that are pushing liability costs higher for all consumers. Rising costs present a special challenge for often cash-strapped charities.”

What is driving the insurance challenges that voluntary groups face across the country? Several factors are spurring rate jumps and coverage withdrawals, but current discussions are focusing on liability/tort reform, risk management, insurance guidelines and better data about the voluntary sector and claims history. The fear of litigation, whether real or perceived, is behind the increased profile of liability issues. Many insurers are concerned about the extension of host liability for serving alcohol, injury settlements and vicarious liability.

In 1999, the Supreme Court of Canada made a ruling in Bazley vs. Curry that held the Vancouver-based Children’s Foundation vicariously liable for the actions of a staff member. Curry, who worked at the non-profit residential care facilities for children, was found guilty of 19 counts of sexual abuse in 1992.

Vicarious liability is one area in which IBC would like to see changes. In particular, it wants the legal doctrine suspended in cases where wrongdoers deliberately commit acts outside the course or apparent authority of their employment. “The issue is how far supervision can realistically extend,” says Randy Bundus, vice president, general counsel for the IBC. “Is it fair to hold the entire organization accountable in these circumstances?”

There are several other areas of tort law that the IBC is working with the voluntary sector to address. Bundus points to reform of joint and several liability, repeal of the collateral source rule, and the establishment of net income as a basis for determining damage for loss of income as other important elements in the push for change. He says a paper on tort reforms jointly developed by insurance and voluntary groups will be delivered to provincial governments later this year. “Insurance is like a barometer of what is going on in society,” says Bundus. “If there is a certain kind of legal environment that drives up costs and creates exposures, then insurance rates will rise.”

BETTER MANAGEMENT?

Risk management is one area many insurers argue non-profit groups must improve to see any premium stability. “I think there is a greater need for discipline in the design and administration of risk management programs,” says Rick Patina, president of Lombard Canada, and chair of the IBC’s CEO steering committee on the voluntary sector. “Non-profit groups have to conduct themselves better when it comes to a range of things, such as hosting events or handling wrongful dismissal lawsuits.”

Voluntary groups, in turn, express frustration about the “disconnect” between risk management programs and premiums. “I think a lot of insurance companies are unaware of how organizations use risk management, ” says Berry. “In many cases, they are surprised at the sophistication of risk management programs, especially among larger groups.”

Bruce MacDonald, president of Big Brothers/Big Sisters of Canada, says risk management programs are often in vain when it comes to insurance rates. “In our organization, we have 20,000 volunteers across the country and we have an excellent risk management program that involves national standards, child safety training and strict volunteer screening,” he says. “The frustration is that it doesn’t seem to matter a hill of beans.”

“Perceptions of risk are making people twitchy and nervous,” observes Penelope Rowe, chief executive officer of the Community Services Council, Newfoundland and Labrador. “It has got to the point where it is having a negative effect on peoples’ willingness to get involved.”

But, Don Forgeron, vice president of the IBC’s Atlantic Region office, comments, “there are two issues with risk management – are the risk management programs that voluntary organizations are pursuing the right ones, and are insurance companies aware of these programs?”

“GUN SHY”

Exactly what kind of insurance a non-profit organization requires has also become a hot topic for voluntary groups. The two main areas are general liability and directors’ and officers’ (D&O) insurance, and Berry says each presents its problems. In particular, voluntary groups are often surprised when they are suddenly placed in high-risk categories for general liability policies. Rowe cites examples of a regional economic development agency being placed in a higher-risk financial lending risk classification and a trail-building organization categorized as an adventure sports group. “We get the same thing with D&O,” says Berry. “We are asking whet her insurance companies are distinguishing between the risks and exposures in private sector companies and not-for-profit organizations.”

In specialty lines like professional liability and crime and sexual abuse, many voluntary organizations say coverage is simply not available. “It’s impossible for us to compare the price of coverage we have now for what we had four years ago,” says MacDonald. “We do not have the same level of coverage so it is not [a case of] ‘apples and apples’. We are struggling with availability because we cannot get coverage for sexual abuse. Insurers are just not writing anything in this area.”

“We have to distinguish between availability and affordability,” notes Patina. “In Canada, there is no shortage of [insurance coverage] availability and capacity in the marketplace right now. However, in some regional markets, non-profit groups may not have access to carriers or may not know how to reach them. There is an education issue here.”

This is a point echoed by both volunteer groups and insurance representatives. “We need to work on accessing what is available in the insurance market,” says Berry. “Right now, there are gaps in the system. There may be an insurance solution, but organizations don’t necessarily know where to find it.” And, Forgeron says “we have had frank discussions with the provincial broker associations about access to markets. Some small, rural brokers may not have the same market access as a large, urban broker. There has to be a role for the association and it could be a positive marketing role.”

RISK DATA

One stumbling block for the insurance industry is the lack of solid data on the voluntary sector and coverage issues, particularly aggregate loss experience. “As it stands right now, we don’t break out specific information about the voluntary sector in our industry-wide data,” says Voll. “We are increasing the level of awareness, understanding and research about the voluntary sector, but we lack a strong database for assessing its claims history, risk profile and insurance needs.”

But, Berry says insurers should have this data on-hand to justify any premium increases. “It has been frustrating for us, and even many insurance companies, to find that the data are simply not there due to problems with internal (IT) systems,” she says. This is a point reinforced by the Nova Scotia Insurance Review Board, which noted, “industry data collected by IBC…is limited, but to the extent that it exists, seems to support the anecdotal position that non-profit organizations have experienced few claims”.

Forgeron says the call for more data is a frequent one by regulators and consumers, but the request needs to be specific. “We can provide all sorts of data that would be totally useless [for their needs],” he says. “But we need to know exactly what kind of data. Part of the task force’s role will be to determine what kind of information we need.”

So far, much of the work done by insurance and volunteer groups has involved opening up lines of communication and framing the problems. Jim Rivait, vice president, Prairie Region for the IBC, says working groups like the “Voluntary Sector Insurance Council” in Alberta represent an important first step in solving coverage-related problems. “There are some things that I call the ‘low-hanging fruit,'” he notes. “For example, if people are concerned about driving vehicles as part of an organization’s activities, this can potentially be handled through endorsements. In one case, a non-profit organization owned more than 100 properties and insured some with different policies. We helped show them it could be cheaper to insure all properties under one policy.”

Several insurers want these examples translated into broader solutions. “I would like to see insurance industry solutions as opposed to something imposed by regulators,” says Patina. “If the issue is affordability, we have to look at what exactly is behind the increase in rates, what the specific exposures are and how we can help develop solutions, such as better risk management practices, appropriate deductibles or aggregate loss programs.”

But, many involved with trying to find a solution to the problem acknowledge there are structural issues to bridge, such as the relatively low number of insurers that specialize in the non-profit sector and the cost of risk management programs for smaller players in the voluntary community. At present, Berry says non-profit organizations are examining diverse options, including self-insurance, reciprocals and group programs. The Voluntary Sector Forum is studying how other groups in the U.S. have dealt with similar insurance problems. The Nonprofits’ Insurance Alliance of California, a liability insurance pool, was established in 1989 to provide a stable market for voluntary groups. This concept was expanded across the U.S. in 2001, when the Alliance of Nonprofits for Insurance, Risk Retention Group began operations.

“We can’t be nave about the process,” says Rowe. “Insurers need to make profits and control costs. We can’t simply expect them to lower prices because we cannot afford to pay the premiums. We have to look at real solutions and I don’t think this will be a one-size-fits-all approach.” Volunteer-based sources also note that provincial governments could play a role in creating indemnification for non-profit groups that provide services on the government’s behalf. Legislation, such as Volunteer Protection acts, could be drafted to limit the liability of non-profit organizations. Nova Scotia currently has such legislation, but it extends to individual volunteers only, not organizations. “We are looking at the voluntary sector in terms of problems that need to be solved,” says Forgeron. “Frankly, no one has done a lot to solve these problems on a sector-wide basis so far,” he concedes.