Retaliation – The Role of Insurance (Part 2)

Retaliation – The Role of Insurance (Part 2)

As HomeFirst’s CFO, I worked regularly with our insurance broker and Nonprofits Insurance Alliance of California (NIAC), which provided our liability insurance coverage including the Directors and Officers policy.  It was the D&O policy that protected the corporation, management and members of the Board in the event of a wrongful termination lawsuit.  The insurer encouraged us to check with NIAC’s labor attorneys prior to terminating an employee so that any legal exposure could be minimized, and I routinely passed by them facts about planned terminations.

If a to-be-terminated employee seemed to have a possible claim for wrongful termination, NIAC’s attorney often recommended that we offer the employee a separation agreement that promised a severance payment in exchange for the employee’s giving up rights to sue the company.  Historically, all HomeFirst employees whose jobs were eliminated were given severance equal to one week for every year of service with a minimum of two weeks and a maximum of six weeks in exchange for that agreement.  When a 67-year old Development Director was fired after her first year, she was given a month of severance following a two-week work-from-home period plus two months of health benefits, successfully mitigating the risk.  Whether necessary or not, these agreements had protected us against any successful suit during my seven years.

In September 2013, when HomeFirst's CEO Jenny and the Board were moving so slowly on the residential licensing issue, I posed a theoretical question to NIAC’s attorney: “If a corporate officer is aware of a violation of statute (e.g., State of California) by the corporation, does that officer have a personal responsibility under the law to disclose that wrong-doing in a timely fashion? Or does the responsibility reside solely with the corporation?”  She assured me that the officer would not have legal liability, but she also pointed out that laws protect a whistleblower in such a situation.

During her March 2014 discussions with the Board about firing me, Jenny asked me about the limits on our employer practices liability coverage.  She wanted to compare our coverage to what other companies had described at a meeting she recently attended, she claimed.  Silly, I thought, but I gave her the information.  Later she and the Board Chair double-checked with our broker that the Directors and Officers coverage and employer practices policy totaled $2 million with no deductible.  The Treasurer cautioned, “Mike will sue everyone including the corporation.” 

Informed by emails I had read, I posed another question to the NIAC attorney: “Management is considering the termination of an employee who has filed certain whistleblower complaints, internally as well as to government agencies. The basis for termination may be something along the lines of inappropriate tone in interaction with team members rather than the complaints themselves although there may be some debate whether insubordination could be involved as well.  If the company were to proceed on this line, what coverage might be available under our general liability and D&O policies in the event of a settlement or adverse judgment (I suppose for things like lost wages payable to the person, pain/suffering, employee or company legal fees, fines/penalties)?”  She thought the situation was risky, but she recommended that I check with our broker on coverage questions.

The broker’s senior claims consultant assured me that our policies would pay whatever settlement resulted from the lawsuit, but we would eventually have to pay somehow through higher premiums or deductibles.  She advised that sometimes “legal advice is too conservative and you have to take the risk of not paying, giving in to the threats and let them sue.”

The pool of money available from the insurance company and the expectation that an attorney engaged by the insurance company would handle the intricacies of a lawsuit simplified the Board’s decision.  The policies, however, would pay only for damages arising out of a lawsuit.  HomeFirst would have to pay the full amount of a severance agreement outside of a suit.  Even if it paid higher premiums over time following a legal settlement, HomeFirst’s immediate financial pressures made a voluntary settlement unattractive.

Insurance has been tied to moral hazard – doing something risky knowing that someone else will pay if things go wrong – in the context of the 2008 financial crisis and health care decisions.  NIAC offered good nonprofits like HomeFirst insurance that covered 100% of D&O losses, accentuating the moral hazard involved.  Consequently, insurance guided HomeFirst in dealing with its whistleblower: good insurance effectively eliminated penalties for retaliation, and legal action was to be preferred over voluntary settlement.  With insurance in place, “let them sue” ruled the day.