Improving The Insurance and Public Policy Environment For Non-Profit and Voluntary Organizations In Atlantic Canada

Presented To

Insurance Bureau of Canada And Community Services Council Newfoundland and Labrador

By

Wolfgang Uebel & Associates Inc.

And

BizNext Management Consultants

October 2005

TABLE OF CONTENTS

INTRODUCTION ...... 1

BACKGROUND...... 1 METHODOLOGY...... 2 THIS REPORT ...... 2 THE INSURANCE MARKET...... 3

INSURANCE PRINCIPLES ...... 3 THE RECENT HARD MARKET ...... 6 PROPERTY AND CASUALTY INSURANCE IN CANADA ...... 7 ATLANTIC CANADA ...... 12 FINDING THE RIGHT COVERAGE AT THE RIGHT PRICE ...... 15 THE VOLUNTARY SECTOR...... 21

SECTOR CHARACTERISTICS...... 21 FUNDING...... 26 DISTINCTIVE RISKS...... 29 RISK MANAGEMENT ...... 34 NEEDS FOR INSURANCE...... 35 THE PUBLIC POLICY ENVIRONMENT...... 40

INCENTIVES FOR DEVELOPMENT OF THE VOLUNTARY SECTOR ...... 40 IMPEDIMENTS TO THE SECTOR’S CAPACITY AND GROWTH POTENTIA L ...... 41 PUBLIC POLICY CHOICES ...... 44 PROVIDE ADDITIONAL FUNDS/REDUCE TAXES ON PREMIUMS...... 46 REGULATION OF THE INSURANCE INDUSTRY ...... 46 TORT LAW REFORM...... 48 A COMPROMISE POSITION...... 50 EXPERIENCE IN OTHER JURISDICTIONS...... 53

A RECURRING PROBLEM – AN ONGOING SEARCH FOR SOLUTIONS...... 53 THE UNITED STATES...... 53 THE UNITED KINGDOM...... 60 AUSTRALIA...... 64 NEW ZEALAND...... 73 SOLUTIONS...... 77

UNMET NEEDS...... 77 AVAILABILITY – THE SUPPLY OF INSURANCE PRODUCTS...... 77 AFFORDABILITY – THE COST OF INSURANCE...... 80 AN UNATTRACTIVE MARKET SEGMENT ...... 86 REDUCING THE LIKELIHOOD AND MAGNITUDE OF CLAIMS...... 87 CHANGING THE WAY INSURANCE IS BOUGHT...... 88 FUNDING...... 93 PUBLIC POLICY ...... 95

APPENDIXES (BOUND SEPARATELY)

A Bibliography B The Property and Casualty Insurance Market in Canada C Risk Management D Insurance Programs for the Voluntary Sector E Tort Reform F Insurance Reform G The Nova Scotia Trails Association Insurance Program H Experience in Other Jurisdictions

INTRODUCTION

Background

Insurance availability and affordability have received a lot of attention over the past few years. Starting in 2001, insurers both

§ reduced their risks by denying coverage to some applicants and/or for some perils, and § increased the premiums they charge for coverage they do provide.

In some cases, insurers simply withdrew from whole segments of the market they had been serving.

The voluntary sector was hit particularly hard by these developments. Many volunteer organizations had difficulty finding insurers willing to provide coverage. And when coverage was available, sharp increases in premiums put strains on financial resources, requiring organizations to seek additional funding or divert funds from their core activities.

Assessments done in response to the crisis found that many voluntary groups do not carry adequate insurance coverage. And volunteers have become increasingly aware of exposure to personal risk, in some cases making them reluctant to offer their services. As a result, some needed and worthwhile community services have been lost.

However, the implications have reached much further, affecting vehicle owners, homeowners, businesses, and Availability and affordability municipalities, even influencing the outcomes of of insurance have become provincial elections in Nova Scotia and New Brunswick. major issues over the past few years, not just for the

voluntary sector but for Because of the magnitude of the problem, the Insurance vehicle owners, Bureau of Canada (IBC) Atlantic Region has created a homeowners, businesses, Task Force on Insurance Availability and Affordability. and municipalities, as well. The mandate of the Task Force is to develop recommendations and communications intended to increase insurance availability, affordability and understanding for both the commercial and non-profit sectors in Atlantic Canada.

Related to the work of the Task Force, IBC Atlantic Region, in cooperation with the Community Services Council Newfoundland and Labrador (CSC), requested proposals to undertake a study to identify ways to im prove the insurance and public policy environment for non-profit and voluntary organizations in Atlantic Canada. The project was awarded to Wolfgang Uebel & Associates Inc. in association with BizNext Management Consultants.

Page 1 INTRODUCTION

Methodology

Issues related to insurance availability and affordability have been widespread, affecting individuals, businesses, and voluntary organizations around the world. These issues have been studied extensively, leading to a wealth of literature. A bibliography of some of the more significant reference materials used in preparing this report is provided in Appendix A. A good summary of the issues can be found at: http://www.voluntary-sector.ca/eng/liability/bkgd.cfm

Because the problems related to insurance availability and affordability have been very well documented in various studies and reports – including some in Atlantic Canada – we conducted an extensive review of the work already done. We supplemented that work by consulting with voluntary organizations, lawyers, government officials, insurers, and insurance brokers serving the market in the Atlantic Region.

This Report

The purpose of the present report is to identify workable solutions suited to the particular needs of voluntary organizations in Atlantic Canada and to show the rationale for recommending those solutions.

Fundamentally, understanding the availability and cost of insurance requires an understanding of demand for insurance and how that demand attracts supply. In other words, it requires an understanding of market operations – the numbers of buyers and sellers, how they find each other, how they interact, and how prices are set.

Based on the work done during the project, we believe the issues related to availability and affordability of insurance for the voluntary sector in Atlantic Canada flow from a confluence of issues related to the distinctive characteristics of

§ the voluntary sector, § the insurance industry, § insurance market operations, § Atlantic Canada, § the legal system, and § the overall public policy environment.

To be workable, solutions must take these distinctive characteristics into account.

In the material that follows, we

§ outline what we believe are the most important dimensions of the overall problem, § discuss potential solutions, and § make recommendations to improve availability and affordability of insurance for voluntary organizations in Atlantic Canada.

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THE INSURANCE MARKET

Insurance Principles

Insurance policies are complex legal contracts based on sophisticated mathematical relationships. Recognizing that few people understand them well, it will be helpful for the discussion that follows to describe some of the principles on which they are based.

Insurance is a very important financial service. It is not an instrument of social policy to compensate victims who suffer losses. And it is not a tax that leads to redistribution of wealth. It is simply a mechanism for transferring and reducing risk. And its fundamental functions are in pricing and spreading the risk.

In essence, insurance is a means for managing the financial implications of risks related to owning assets and carrying on activities. For this purpose, risk has two principal dimensions:

1. the probability that an adverse event will occur; and 2. the consequences of the event.

On an ongoing basis, individuals, families, and organizations are exposed to a broad range of risks related to property they own or activities in which they are engaged. Although the probability of an adverse event is typically fairly small, the consequences can potentially be large and devastating. To reduce their potential for loss, they are usually willing to transfer their risks to an insurer in return for the certainty of a smaller, much more affordable payment – the premium charged for an insurance policy.

Under the terms of such a policy, the insured’s risk of loss is transferred to the insurer for a period of time. The insurer agrees to pay specified amounts should specified events occur during that time, allowing lost or impaired assets and incomes to be replaced, thereby preserving individuals’ and families’ lifestyles and organizations’ operational capacities.

Insurers take on others’ risks of catastrophic loss. They must manage those risks well to remain in business. By law, the overall magnitude of the risks they take is limited by the amount of capital they have available to cover claims. Limits can vary, depending on the risk characteristics of assets it owns, the policies it writes, its returns on investment, and other factors.

Because they need capital to support their operations, insurers must ensure they provide good returns on investment to their investors. Consequently, they are under contin ual pressure to be profitable. On the other hand, they must also compete for customers and satisfy the requirements of regulatory authorities.

Once a claim is made, an insurer is required to set aside reserves to pay it, even though the eventual payout si not necessarily known. And putting the capital into a reserve

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reduces the amount available for other potential claims, thereby reducing the insurer’s capacity to write new policies.

An insurer’s biggest concern is that it will have to pay a particularly large claim or that there will be a concentration of substantial claims in a short period of time. Large risks are often spread among several insurers, to limit the payouts any one insurer must make.

Insurers are able to accept the substantial risks of others, because they can combine them in a pool and take advantage of the law of large numbers – which says that the difference between the observed characteristics of a sample and the overall characteristics of the population from which it is drawn will diminish as the number of observations in the sample increases. In other words, because of the law of large numbers, insurers’ own protection from catastrophic loss comes mainly from pooling the risks of many potential catastrophic losses, each of which has a relatively low probability of occurrence. As long as the risks in the pool are independent of each other, the probability of a large combined overall loss remains a possibility – but mathematically is very small.

However, risks in a pool are not always truly independent. For example, an insurer carrying a lot of insurance policies covering a particular geographical area hit by a hurricane or other natural disaster can suffer a very substantial combined loss. Insurers exposed to such risks usually purchase reinsurance from companies that specialize in offering them coverage for their own risks, thereby spreading them over a larger pool.

Diversity in the risks accepted is an important element of the protection an insurer is able to offer. Insurers try to diversify their exposure by type of insurance, sector, and/or geography, depending on their marketing strategies. Consequently, their operations often cover large geographical areas.

In any given pool, the risks do not have to be exactly the same for insurance to work. The key lies in understanding the expected loss – the potential loss multiplied by the probability of occurrence – and charging an appropriate premium for it. If each risk is priced properly, the actual losses from the risks combined in a pool should be reasonably close to the combined expected losses.

Unlike most other products, insurance costs ultimately depend on the characteristics of the buyers. Each applicant has some distinctive needs for coverage. And each brings a distinct set of risk characteristics to the common pool. Insurance suffers from “adverse selection”, because the greater the risk, the more likely someone will want to buy insurance but the less attractive it is to an insurer. Denying or limiting coverage can help an insurer reduce its costs – and premiums.

To know what premium to set for any particular policy, insurers must assess the risk. Human errors tend to be fairly predictable but natural events are not. Some risks – such as terrorism – are not insurable, because either the probability of an adverse event is too high or the potential consequences of the event are too large. Consequently,

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insurers are not obligated to accept all risks offered to them. In some instances, such as natural disasters, governments are the insurers of last resort.

The process of selecting acceptable risks, classifying them, and setting premiums is referred to as underwriting. Risk selection is partly about managing the risks accepted but it is also about marketing and competition – identifying market niches with limited competition that are potentially profitable. Consequently, some insurers specialize in risks others are reluctant to take and build up distinctive knowledge of those risks over time, giving them competitive advantages.

Classifying risks is about placing applicants in groups with roughly equivalent levels of risk. Ideally, classifications should be well-defined, homogeneous, and practical to use. Unfortunately, however, risks are seldom truly homogeneous.

Premiums charged for insurance policies should vary in proportion to the risk. For any one policy, the premium should reflect the incremental risk added to the pool. Otherwise, the policyholder is either subsidizing others or being subsidized by others. Pricing risks appropriately has the beneficial effect of encouraging behaviours that lead to risk reduction, while discouraging those that increase risks.

Expected costs related to adjusting, defending, and paying claims are the major factor considered in setting premiums. However, premiums must cover other costs as well. Specifically, they must cover selling and administrative costs and provide a return on investment – which are much easier to estimate than claims.

Costs create a floor for premiums. Below cost, an insurer does not have a sustainable business. But insurance must be priced before claims costs are known. Sometimes, those costs are determined through legal proceedings that can take years to resolve.

On the upside, premiums can be set at whatever the market will bear. For some types of coverage, there can be many insurers willing to underwrite risks, so premiums are significantly influenced by competition. To attract customers, an insurer must offer competitive premiums – but its costs may be significantly different from those of its rivals. If its costs exceed the premiums it can obtain from the market, it must either find a way to improve its costs or withdraw from offering coverage for the risk, recognizing it is at a competitive dis advantage.

Because the insurance market is competitive, each insurer tries to distinguish itself from others to gain competitive advantage and avoid competition solely on the basis of price. For example, it can choose to focus on a market segment that is specialized and has relatively little competition or it can modify the coverage offered in its policies either to provide more extensive coverage or limit the potential for loss.

Automobile insurance is mandatory and policy conditions are standardized. There are also some commonalities among provisions of property policies. However, insurers have a lot of flexibility to vary the terms of their policies to attract customers, meet particular needs, and limit risks. To understand the coverage offered by any one policy, it is essential to read its specific conditions, to see what is included and excluded.

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Insurers receive premium payments long before they have to pay claims related to them. In the meantime, they are able to invest the incoming cash to obtain returns on the investment. The funds invested effectively belong to the policyholders. And the returns on investment provide a subsidy for the premiums they are charged – but the magnitude of the subsidy can vary from time to time.

Insurance premiums are established to cover expected future losses – and predicting the future is seldom easy. In some cases, claims arise long after the events that led to them. And the total cost of a claim may not be known for years, sometimes being determined through lengthy and expensive proceedings in court. They can even include punitive or exemplary damages that go beyond the costs of repairing damaged property or restoring a person to health. Over time, claims and costs have tended to increase, driven by lawyers creating new areas of liability and broadening the range of people and organizations liable.

Essentially, there are three methods for determining expected losses and setting premiums:

1. the informed judgment of the underwriter, based on wisdom and experience – not necessarily the most accurate method; 2. the insured’s actual losses over a long period of time – i.e. experience rating – but the data are not always available and they may not reflect significant changes in circumstances; and 3. observation of the experience of a group of similar risks over a much shorter and more recent time period – i.e. risk classification.

Historical data – which will be presented later – indicate risk assessments and underwriting often are not very well done.

Availability and management of relevant data are essential to understanding risks, developing insurance products, and setting premiums. But, for some risks, data are not available. In such cases, as long as the risk is clearly not excessive, insurers may calculate premiums by pricing in the uncertainty – the greater the uncertainty, the higher the price. Over time, the accumulation of experience allows premiums to be adjusted up or down.

Actuaries help underwriters classify risks by showing clear relationships between particular risk factors and costs. They try to reflect accurately the cost of a given risk characteristic, so it can be applied objectively and consistently. Prior years’ experience is a guide but expectations change in response to changing circumstances, so actuaries are not restricted to using only insurance data.

The Recent Hard Market

From 2001 to 2004, there was a “hard” market for insurance that led to the present study. For some voluntary organizations, coverage was not available. For those that could obtain coverage, affordability was a big issue.

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Because insurers depend on the law of large numbers, they typically offer coverage to insurance buyers in fairly large geographical areas. Furthermore, they buy reinsurance from other companies whose scope of operations is probably even larger than their own. Consequently, their profitability and capacity to offer coverage are very much influenced by world events.

The hard market was caused by a combination of several factors:

1. substantial claims due to terrorism and natural disasters that led to a reduction of underwriting capacity by reinsurers and costs for reinsurance; 2. increases in claims under tort law – notably for abuse claims and corporate wrongdoing – that similarly led to reductions in profitability and underwriting capacity; 3. a drastic reduction in the returns on investment available to subsidize premiums; and 4. changes in underwriting assumptions about future costs, because of these developments.

More recently, the influence of some of these factors has moderated, so the insurance market has softened. However, hard markets are a recurring phenomenon in the insurance industry. Sometimes – such as recently – they are broad-based. Sometimes they are more focused on particular sectors or types of coverage, such as daycare centres or medical malpractice. And another one could easily be triggered by world events or a major catastrophe that leads to substantial claims – such as Hurricane Katrina.

A report on the subject by the Office of the Insurance Commissioner in Washington State observed that,

“When a hard market cycle hits the economy, the most serious effects show up in the narrow sub-classes of the market – areas where even slight corrections in coverage availability and affordability have a volatile effect. Typically, these are markets where only a few companies are offering coverage, and products are limited. These sub-classes are too narrow or too specialized to absorb adverse effects.”

Property and Casualty Insurance in Canada

Suppliers of insurance coverage are generally divided between those that specialize in insuring human lives and others that offer property and casualty (P&C) insurance. The present study has been focused on property and casualty coverage.

Needs for property and casualty insurance are related to assets people and organizations own and activities in which they are engaged. An overview of the market for such coverage in Canada is provided in Table 1.

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TABLE 1 THE PROPERTY AND CASUALTY INSURANCE MARKET IN CANADA OVERVIEW

APPROXIMATELY: • 200 Insurers – not all of which offer the same coverage • 25,000 Brokers – not all of which represent the same insurers and some of which have exclusive programs • 161,227 incorporated nonprofits and registered charities (Atlantic Canada = 8.0%) • 977,022 businesses with paid employees (Atlantic Canada = 9.2%) • 11,562,975 Households (Atlantic Canada = 7.6%) • 25,100,296 Motor Vehicle Registrations (Atlantic Canada = 6.9%) • $20,208,060,000 Net Premiums Earned in 2004 (an average of nearly $100,000,000 per company)

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According to data compiled by the Office of the Superintendent of Insurance (OSFI) for Canada, over 200 insurers provide P&C coverage in Canada. The largest of these has a market share of less than 10%, indicating that the market is very competitive and not very concentrated. However, that picture is somewhat misleading. These companies do not offer coverage in all markets across the country, in many cases they offer different product lines, and some specialize in particular segments, as is illustrated by data provided in Appendix B. In any one province, a few insurers provide most of the coverage.

Data compiled by the Federal Office of the Superintendent of Insurance show that, in 2004, property and casualty companies earned net premiums ni Canada totalling in excess of $20 billion – up from $17.5 billion in 2003, a 15.6% increase. However, claims costs increased only slightly, so the ratio of claims costs to earned premiums fell from 70.20% in 2003 to 62.87% in 2004, due to the increase in premiums.

A more detailed breakdown of premiums and claims is provided in Table 2. In essence, it shows that, in 2004

§ automobile coverage represented 56.2% of the total net premiums earned, § property lines – including personal, commercial, aircraft, boiler and machinery, and marine – represented another 29.0%, § liability coverage represented 9.5%, and § other lines represented a total of 5.3%.

Figure 1 shows that the different lines of coverage represented similar proportions of total earned premiums in 2000 – prior to the hard market that began in 2001.

Similar to other industries, the insurance industry has been on a trend toward increasing specialization. For the different types of coverage, the level of competition can vary a lot. For example, one company had 53.93% of the market for legal expense insurance in 2003 and the top two companies had 80.54% of the market. Four insurers shared 57.31% of the market for fidelity insurance. Three companies accounted for 53.40% of the market for surety coverage.

On the other hand, the market for other types of coverage was much more fragmented. The top three providers of automobile insurance accounted for 29.73% of the Canadian market in 2003 and 27 companies wrote premiums in excess of $100 million. Simila rly, the top three providers of property insurance accounted for 26.41% of the market and 26 companies wrote premiums over $100 million. The largest liability insurer had only 7.75% of the Canadian market in 2003 and the top ten accounted for 57.19%.

As the figures in Table 1 show, there can be very substantial variations in claims ratios, reflecting significant differences in both competition and underwriting quality among the different types of coverage available. And data included in Appendix B show the experience can vary considerably from year to year. Over the 5-year period from 1999 to 2003, claims ratios for all classes of insurance combined varied from a low of 73.49% in 2003 to a high of 81.07% in 2001.

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TABLE 2 PROPERTY AND CASUALTY PREMIUMS AND CLAIMS, CANADA

Net Premiums Earned, $000 Claims Ratio, % 2004 2003 2004 2003

Property – Personal 3,226,428 2,764,237 62.31 63.30 Property – Commercial 2,336,007 2,017,914 47.04 52.70 Aircraft 2,629 (283) 24.27 (691.17) Automobile – Liability 5,315,221 4,549,915 74.80 88.81 Automobile – Personal Accident 2,271,481 1,832,506 72.30 99.22 Automobile – Other 3,765,719 3,421,659 53.64 60.25 Boiler & Machinery 189,345 165,340 43.46 47.85 Credit 2,652 9,119 139.44 154.16 Credit Protection 7,460 6,327 8.67 26.05 Fidelity 70,098 60,872 46.72 22.25 Hail 8,380 12,658 50.18 36.44 Legal Expense 1,311 1,391 15.03 (9.42) Liability 1,924,097 1,672,697 72.62 61.13 Mortgage 218,293 167,341 11.35 4.31 Other Approved Products 13 0 11.35 4.31 Surety 191,817 175,088 29.58 30.30 Title 1,555 1,291 15.24 21.38 Marine 106.957 97,079 45.54 47.18 Accident and Sickness 568,597 526,017 53.66 56.14

Total 20,208,060 17,481,168 62.87 70.20

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FIGURE 1 NET PREMIUMS BY LINE OF BUSINESS, 2000

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For particular categories of insurance, the variation was even greater. Claims ratios for property insurance varied from 55.66% in 2003 to 74.96% in 2001.

Atlantic Canada

The Atlantic Region has a combined population of about 2.3 million, 7.3% of the Canadian total, so it is a significant but still relatively small part of the national market for insurance. However, the region is divided into four provinces, each of which has distinctive characteristics.

Each province has jurisdiction over insurance market operations. Specifically, the provinces require automobile owners to have liability insurance and standardize policy provisions. They also regulate the activities of insurers, agents, brokers, and claims adjusters who carry on business in their respective jurisdictions. And they impose taxes on insurance premiums, as is shown in Table 3.

Canadian Underwriter magazine publishes statistics related to Canada’s insurance market. In its 2004 statistical issue, it reported that total direct written premiums in Atlantic Canada during 2003 amounted to $2.275 billion, made up as follows:

Newfoundland and Labrador $416.015 million Nova Scotia $894.854 million Prince Edward Island $134.586 million New Brunswick $829.664 million

In Newfoundland and Labrador, eight insurers had total premiums in excess of $10 million but only three – Royal & Sun Alliance, Aviva Canada, and Co-operators General – accounted for 55.5% of total premiums written. ING Canada, the largest insurer in the country, ranked seventeenth in the market.

In Nova Scotia, seventeen insurers had total premiums in excess of $10 million but four companies – ING, Aviva, The Economical Insurance Group, and Royal & Sun Alliance – accounted for 48.6% of premiums. In New Brunswick, twenty-two insurers had total premiums greater than $10 million but the top five – Wawanesa Mutual, Co-operators General, Aviva, ING, and Royal & Sun Alliance – accounted for 41.6% of the market. In Prince Edward Island, six companies – Co-operators General, Dominion of Canada General, Aviva, Royal & Sun Alliance, SGI Canada, and PEI Mutual – had total premiums above $10 million and, together, they had 61.1% of the market.

A summary of premiums and claims in the Newfoundland and Labrador market during 2003 is provided in Table 4. Data in the table were compiled by the province’s Superintendent of Insurance and premiums are slightly different from the numbers provided by Canadian Underwriter. As with the data for Canada as a whole provided in Table 2, the data for Newfoundland and Labrador show large variations in claims ratios by type of coverage. The ratio for liability coverage was by far the highest – at 130%, much higher than the corresponding ratio of 61% included in the national data.

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TABLE 3 TAXES ON INSURANCE PREMIUMS, %, 2003

PROVINCE/TERRITORY PREMIUM TAX SALES TAX FIRE TAX

NL 4 15 PE 3.5 1 NS 4 1.25 NB 3 1 QC (excluding auto) 3.35 1 9 QC (auto) 3.35 1 5 ON (excluding auto) 3 8 0.5 ON (auto) 3 12 MB 3 1.25 SK (excluding auto) 4 1 SK (auto) 5 AB 3 BC 43 YT 2 1 NWT 3 1 Nunavut 3 1

SOURCE: IBC NOTES: 1. QC premium tax includes 0.35% compensation tax for financial institutions. 2. Drops to zero in April 2004 3. Becomes 4.4% effective January 1, 2004

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TABLE 4 PREMIUMS AND CLAIMS, NL, 2003

# of Net Premiums % of Claims Insurers Earned, $000 Total Ratio, %

Property – Personal 43 62,631 15.0 45.9 Property – Commercial 61 46,706 11.2 16.0 Aircraft 13 6,882 1.6 (22.8) Automobile – Liability 50 170,931 40.9 81.0 Automobile – Personal Accident 42 15,296 3.7 68.1 Automobile – Other 50 69,925 16.7 53.4 Boiler & Machinery 32 3,447 0.8 23.8 Fidelity 20 606 0.1 20.8 Liability 62 29,424 7.0 130.0 Surety 19 3,475 0.8 68.2 Marine 16 4.465 1.1 106.3 Other 12 4,565 1.1 13.4

Total 110 418,353 100.0 64.0

SOURCE: Superintendent of Insurance website NOTE: # of Insurers = # with premiums written or earned during the year

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Unfortunately, no data are available for premiums and claims specifically related to the voluntary sector. Insurers and/or brokerage firms may have such data but there is no ongoing effort to collect it on an industry-wide basis.

For the most part, the major insurers providing coverage in Atlantic Canada do not offer programs specifically designed to suit the needs of the voluntary sector. Whatever coverage they do provide is usually written as part of their coverage of the commercial sector. Royal & Sun Alliance – a major player in all four provinces – did offer some coverage to voluntary organizations but it withdrew from the sector in 2003. Because the major players do not offer coverage to the sector, voluntary groups have to depend on specialty insurance programs.

Nova Scotia is the largest provincial insurance market in the Region. A report prepared by the Nova Scotia Insurance Review Board in 2004 said,

“The Board was advised by the insurers, IBC, and IBANS that insurance is generally available to the types of groups in Nova Scotia that are part of the focus of this study, and that it is provided by ‘specialty markets,’ that is, general agents that specialize in markets that have difficulty in finding insurance. These general agents, who for the most part are based outside of Nova Scotia, work with brokers and insurers to develop programs to insure “hard to place” risks. But while insurance may be available, the general agents acknowledged that the premiums may be high, particularly for those groups or associations with few members, where minimum premiums ranging from $750 to $5,000 could be considered to be unaffordable. Those seeking insurance from the specialty markets appear to have difficulty accessing these markets – the process often taking months, and many consider the costs prohibitive. The public interprets this as a lack of availability.”

Part of the problem in Atlantic Canada is the Region’s relatively small and dispersed population, as is illustrated in Figure 2. The populations of the four provinces are spread over large geographical areas, which can make it difficult – and expensive – to provide them with goods and services of all kinds. The situation in Newfoundland and Labrador is particularly challenging, because the province has the second smallest population in the country spread over a huge territory.

According to data from the 2001 census, the Atlantic Provinces have the highest proportions of rural population in the country – 55.5% in Prince Edward Island, 49.8% in New Brunswick, 44.4% in Nova Scotia, and 42.4% in Newfoundland and Labrador. These figures compare to 19.8% in Quebec, 15.4% in Ontario, 28.3% in Manitoba, 35.9% in Saskatchewan, 19.3% in Alberta, and 15.4% in British Columbia.

Finding the Right Coverage at the Right Price

For an insurance buyer, finding the right insurance coverage at the right price is a big challenge. Both needs for insurance and coverage offered by insurers vary a lot. Policies are complex legal documents. Premiums depend on the assumptions used to

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FIGURE 2

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calculate them – which can vary from one insurer to another – so it is seldom clear that a particular policy represents the best possible deal that can be found.

Most insurance buyers do not have sufficient knowledge to sort through the complexity. Insurance is more likely to be sold than bought. Consequently, a very important consideration is how the insurance market operates – the numbers of buyers and sellers, how they find each other, and how prices are set.

As was indicated above, over 200 property and casualty insurers operate in Canada – but they do not all operate in all parts of the country or provide similar types of coverage. Insurers manage large pools of capital accumulated from the premiums they collect, so they tend to be located in larger population centres. In Atlantic Canada – and elsewhere – their products are distributed through networks of agents and/or brokers who serve local markets and act as intermediaries between buyers and sellers.

Distribution of insurance products in Atlantic Canada suffers from the same challenges as distribution of other goods and services. Because of the Region’s low population density and large rural population, the full range of insurance products is not necessarily available everywhere.

Agents represent a single insurer, while brokers may represent several different insurers. During 2003, nearly 75% of the premiums earned by property and casualty insurers in Canada were sold through brokers, with the rest sold through agents.

Approximately 25,000 individual brokers serve local markets for insurance across Canada. The vast majority work in firms that employ a number of individual brokers and the sizes of the firms can vary a lot. Very small markets may be served by a single firm but larger markets are typically served by several different firms and they must compete to attract customers.

Both agents and brokers are compensated through commissions on the sales they make on behalf of the insurers they represent. Those commissions are paid by the insurers, from the premiums collected. The figures in Table 1 represent “net” premiums earned after payment of commissions – the amounts insurers have available to pay claims, cover administrative costs, and provide a return to investors.

In effect, the buyer pays for services provided by the agent or broker through the premium – but the agent or broker receives the payment from the insurer writing the policy. Furthermore, the insurer is likely to pay additional commissions that depend on the total premiums written. A sample commission structure is provided in Table 4.

Because the market is competitive at both the insurer and broker levels, both groups are continually looking for ways to gain competitive advantages. The competition can lead to creativity and a better level of service. For example, some brokers work with insurers to develop exclusive programs aimed at particular segments of the market. By specializing in those segments, they gain more knowledge than their rivals about the segments and can offer better coverage, often at a better price.

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TABLE 4 SALES COMMISSIONS – AN EXAMPLE

Sovereign General Insurance Company Independent Broker Compensation

Line of Business Standard Commission,%

Commercial - Property 20 – 25 - Casualty 17.5 – 25 - Automobile 12.5 Personal - Habitational 20 – 25 - Private Automobile 12.5 Specialty - Surety 30 - Errors & Omissions 15 - Directors & Officers 15 - Warranty 15 – 30 - Marine 24 – 32

Plus: 1 – 2% contingent commissions, based on broker’s gross written premiums.

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On the other hand, competition can lead to effects that are not as desirable. When insurers and brokers enter into exclusive arrangements, those arrangements do not always serve the best interests of insurance buyers looking for help and advice or affordable products that suit their needs. That puts an onus on buyers to know where to look for the coverage they need.

A buyer who deals with an agent for a particular insurer at least knows about the agency relationship. However, most buyers who deal with brokers expect them to have access to a broader range of insurers and insurance products. Very often, that is not the case. Some brokers, often those who work for smaller organizations in smaller communities, have exclusive arrangements with only a few insurers. Even larger broker organizations that serve broader markets and have access to more insurers are likely to have exclusive arrangements for certain types of coverage. Consequently, distinctions between agents and brokers are not always clear – but the buyer is not necessarily aware of that.

Furthermore, brokers do not all have the same knowledge of the different market segments or types of insurance. Brokers promote themselves as “independent insurance professionals” working on behalf of insurance buyers. Because they often have exclusive arrangements and the insurers they represent pay them commissions, they have much deeper relationships with insurers than with insurance buyers and their independence is at best questionable. In addition, the standards for becoming a broker vary by province but are typically fairly low.

A brochure published by the Insurance Brokers Association of Ontario – the Province with largest population and the biggest market for insurance – says,

“While most brokerage firms will hire high school graduates with potential and train them, they would prefer an employee who has a good working knowledge of computers and popular software programs.

College training may also assist brokers in grasping the technical aspects of insurance policies, as well as the fundamentals and procedures of selling insurance. Courses in finance, accounting, economics, business law, government, business administration, sociology, psychology and public speaking enable a broker to understand how social, marketing, and economic conditions relate to the insurance industry and prove beneficial in improving sales techniques.”

The brochure goes on to say that

“In order to become an Insurance Broker, you must be licensed by the Registered Insurance Brokers of Ontario (RIBO), a self regulating body governed by provincial statute. Insurance brokers require this RIBO license in order to sell property and casualty insurance. There are two levels of licensing ..

§ LEVEL 1 – requires the broker to operate under supervision.

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§ LEVEL 2 – permits a broker to own and operate a brokerage firm, and allows them to employ other brokers (must have held Level 1 license for a minimum of 2 years.”

Furthermore, it says,

“Being an Insurance Broker can be a very rewarding career choice building on solid relationships with clients based on trust.”

Pretty clearly, the emphasis is on sales, not providing advice. Whether or not clients place their trust wisely is not entirely clear.

Nevertheless, the industry does have some training programs and professional designations for brokers interested in pursuing them, so there are some very good, knowledgeable brokers. The issue is they do not need much in the way of qualifications to acquire a licence and buyers do not necessarily know or understand the qualifications of the brokers they depend on to help them cut through the complexity of the insurance market.

The problem is not so bad for home and auto insurance, the major lines all brokers handle, which are relatively standardized and with which they are most familiar. But it is much more significant for buyers who have special needs, because finding the best ways to serve those needs requires greater depth of knowledge and access to a broader range of insurance products.

In Atlantic Canada, requirements for licensing of brokers vary by province. Both Nova Scotia and Prince Edward Island have one class of broker’s licence. Newfoundland and Labrador has three classes and New Brunswick has four.

In 2001, the Financial Institutions Section of Nova Scotia’s Department of Environment and Labour – the Department with responsibility for regulating the insurance industry – published a proposal to amend general insurance agent/agency licensing regulations under the Insurance Act. In part, it says,

“(Please note that in this document, in legislation and in regulations, an “agent” includes a “broker”.) A proposal has been received from the Insurance Brokers Association of Nova Scotia (“IBANS”) to introduce a three-tiered licensing regime for general agents in Nova Scotia. The proposal recommends licensing standards similar to what is in place in Newfoundland and New Brunswick. Since it is recognized that Nova Scotia’s current licensing standards are considered to be among the lowest in Canada, the proposal has generally been well received. Step-licensing would enhance the educational requirement for a general insurance agent, and would move to harmonize licensing requirements in the Atlantic region.”

Comments on the proposal were requested by January 31, 2002. However, the new provisions do not come into effect until January 2006. Even then, extensive grandfathering provisions limit effectiveness of the changes for a long time to come.

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THE VOLUNTARY SECTOR

Sector Characteristics

In 2003, Statistics Canada undertook a National Survey of Nonprofit and Voluntary Organizations (NSNVO) to provide a comprehensive profile of the country’s voluntary sector. Highlights of the survey were first published in September 2004 under the title, Cornerstones of Community and a revised version was released in June 2005.

The introduction to the report says,

“Nonprofit and voluntary organizations, for the purposes of this study, are defined as organizations that meet all the following criteria:

§ non-governmental (i.e., are institutionally separate from governments) § non-profit distributing (i.e., do not return any profits generated to their owners or directors) § self -governing (i.e., are independent and able to regulate their own activities) § voluntary (i.e., benefit to some degree from voluntary contributions of time or money) § formally incorporated or registered under specific legislation with provincial, territorial or federal governments.

The scope of the NSNVO excludes grass-roots organizations or citizens’ groups that are not formally incorporated or registered with provincial, territorial or federal governments. It also excludes some registered charities that are considered to be public sector agencies (e.g., school boards, public libraries and public schools).”

Because of the exclusions, the survey covered only part of the voluntary sector. It did not investigate insurance issues specifically. Nevertheless, its findings are helpful for the present study.

Overall, the report found the sector was very diverse both in terms of activity and organizational characteristics. It classified organizations based on the International Classification of Nonprofit Organizations developed through the Johns Hopkins Comparative Nonprofit Sector Project that is now commonly in use and a summary of the results is provided in Table 5. Each of the primary areas shown in the table can be broken down further into different sub-groups.

Of the 161,227 organizations included in the survey, 12,881 (8.0%) were in the four Atlantic Provinces. The breakdown by Province was Newfoundland and Labrador 2,219, Nova Scotia 5,829, New Brunswick 3,890, and Prince Edward Island 943.

The survey showed that voluntary organizations serve very localized areas, as is illustrated in Table 6. They serve a variety of needs, as is shown in Table 7. And activities in the sector are supported by very little revenue, as shown in Table 8.

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TABLE 5 CANADA’S NONPROFIT SECTOR, BY PRIMARY AREA OF ACTIVITY

# of Incorporated Primary Activity Organizations % Charities

Arts and Culture 13,770 54 Sports and Recreation 33,649 27 Education and Research 8,284 55 Universities and Colleges 502 71 Health 5,324 79 Hospitals 779 87 Social Services 19,099 72 Environment 4,424 41 Development and Housing 12,255 23 Law, Advocacy and Politics 3,628 35 Grant-making, Fundraising, and Voluntarism Promotion 15,935 79 International 1,022 75 Religion 30,679 94 Business and Professional Associations and Unions 8,483 7 Organizations Not Elsewhere Classified 3,393 32

Total 161,227 56

Source: Statistics Canada, National Survey of Nonprofit and Voluntary Organizations 2003

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TABLE 6 MAIN GEOGRAPHICAL AREAS SERVED BY NONPROFIT/VOLUNTARY ORGANIZATIONS

%

Neighborhood, city, town, rural municipality 63.7 Region of a province 19.3 Province 8.6 More than one province 1.5 Canada 3.2 International 3.2 Other 0.5

Total 100.0

Source: Statistics Canada, National Survey of Nonprofit and Voluntary Organizations 2003

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TABLE 7 CANADA’S NONPROFIT/VOLUNTARY SECTOR, BY POPULATION SERVED

Population Served %

Children or young people 23 Elderly people 11 People with disabilities or special needs 8 Aboriginal peoples or organizations 2 General public 46 Population in a particular geographic areas 8 Men only or women only 3 Ethnic groups, visible minorities, immigrants 5 Religious community 2 Professionals or professional groups 5 Parents or families 3 Organization members 4 Disadvantaged, needy, offenders 4 Adults 1 People with particular medical problems 2 Athletes, participants, enthusiasts 2 Students or schools 1 Other 5

Source: Statistics Canada, National Survey of Nonprofit and Voluntary Organizations 2003

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TABLE 8 CANADA’S NONPROFIT/VOLUNTARY SECTOR, BY REVENUE

% of Incorporated # of Annual Revenue Organizations Volunteers

<$30,000 41.5 2,244,583 $30,000 to $99,999 21.3 1,996,220 $100,000 to $249,999 16.3 5,069,313 $250,000 to $499,999 8.3 2,197,432 $500,000 to $999,999 5.3 1,148,298 $1,000,000 to $10,000,000 6.3 2,632,233 $10,000,000+ 0.9 3,889,213

Total 100.0 19,177,292

% of Province National Revenues

NL 1.4 NS 3.6 NB 2.4 PEI 0.6 Atlantic Region 8.0

Source: Statistics Canada, National Survey of Nonprofit and Voluntary Organizations 2003

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Overall, the picture presented by the survey is one of a large sector made up of many small organizations with very diverse mandates, serving predominantly local needs but varying a lot in organizational characteristics, and supported by relatively little revenue. It is worth noting, however, that 21% of the organizations had sports and recreation as their primary activity and another 19% were religious organizations, so most of the diversity was included in the remaining 60%.

Because the survey focused only on incorporated organizations, the results are really only the tip of a much larger iceberg. In reality, there are many more voluntary groups. For example, the survey included only 2,219 organizations in Newfoundland and Labrador but the Community Services Council in that Province includes over 4,300 voluntary organizations in its database. It seems reasonable to say that the additional organizations not included in the survey are likely even smaller, serving even more localized needs, and supported by even less revenue than those covered in the survey.

Funding

Cornerstones of Community, the report based on the National Survey of Nonprofit and Voluntary Organizations referred to above, observed that,

“With revenues totalling $112 billion, nonprofit and voluntary organizations play a substantial role in the Canadian economy. Although one-third of this is attributable to a relatively small number of Hospitals and Universities and colleges, the remaining organizations still report revenues of $75 billion. Nonprofit and voluntary organizations are also signif icant employers, with paid staff totalling just over 2 million people.”

The report went on to say,

“Governments provide 49% of the funds that organizations receive; 35% of revenue is earned income from non-government sources, generated by memberships and sales of goods and services. Thirteen percent of all revenue is received in the form of gifts and donations from individuals, corporations and other organizations. Excluding Hospitals and Universities and colleges, 36% of revenues come from government, 43% from earned income from non-government sources, 17% from gifts and donations, and the remaining 4% from other sources.

Forty percent of the funding for all organizations comes from provincial governments. The federal government provides 7% of all funding, and municipal governments, 2%. Of the funding coming from government, almost two-thirds is in the form of grants and contributions (31% of total revenues for nonprofit and voluntary organizations). The remaining revenues (18% of total revenues) from government are received as payment for goods and services that nonprofit and voluntary organizations have delivered.”

And it observed that,

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“… difficulty obtaining funding from other organizations appears to be a major problem for many organizations, and 20% report it to be a serious problem. It is worth noting that 48% of incorporated organizations that had been active for at least three years reported receiving external funding from governments, foundations or corporations over that period.

Organizations that were externally funded were asked to report on specific issues related to this type of funding. Sixty-five percent report reductions in government funding to be a problem; 36% consider it a serious problem. Sixty- one percent report problems with the unwillingness of funders to fund core operations; 27% considered it a serious problem. Similarly, 61% experience difficulties because of an overreliance on project funding; 25% call it a serious problem. Forty-seven percent report that a need to modify programs in order to receive funding creates problems, and 43% report problems with the reporting requirements of funders.”

In 2004, Katherine Scott, Vice President, Research of the Canadian Council on Social Development wrote a report titled, Funding Matters: The Impact of Canada’s New Funding Regime on Nonprofit and Voluntary Organizations. It says,

“The study of funding reveals the inherent contradictions of current funding practices. Indeed, the unintended consequence of funding diversification, as this paper will argue, has been the rise in financial volatility as organizations experience huge swings in income – volatility that is systematically undermining efforts to achieve greater financial security and independence. These findings are clearly linked to the proliferation of contract and project funding – as seen in the changing mix of income sources and mechanisms – as well as intensified competition for resources, both of which are characteristic of Canada’s new funding regime. …

In the 1990s, in an environment of fiscal constraints, governments cut direct financial support to many nonprofit and voluntary organizations that they had funded for decades. But the changes in funding mechanisms were more profound than just cutbacks – the relationship itself between external funders, notably government, and nonprofit and voluntary sector organizations changed. A new funding regime emerged.

The new funding regime is reflective of a philosophy that introduced values and expectations associated with the private marketplace – competition, diversification, entrepreneurialism, innovation, focus on the bottom line – into the mix with more traditional public sector values of accountability, stability, responsiveness to clients and community, and serving the public interest. Organizations were told to diversify their funding base and become less dependent on tax dollars. A number of organizations that had traditionally received an annual government grant to support their work, which left them a degree of autonomy in directing their own affairs, lost all or most of that core funding. Instead, many were left to apply for project-based funding targeted to

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certain priority areas or to enter into purchase-of-service contracts with government ministries and departments for the delivery of specified programs.

From the funders’ perspective, governments – as well as other private sector funders – have implemented mechanisms to ensure the most effective use of dollars by: targeting funding to programs and projects that meet, in this instance, the elected government’s priorities and focus on the results to be achieved; reducing support for administration to increase the proportion of funding that goes into programs and services; monitoring contracts closely and requiring organizations to demonstrate that they have used the funds for the intended purposes and have achieved the expected results; encouraging groups to show how they can do business differently and do more/better with less; reducing duplication and gaps in service and enabling more integrated and holistic solutions to complex problems by making organizations collaborate through partnerships; and retaining flexibility to meet changing priorities in a volatile environment by avoiding long-term financial commitments.

The reality for organizations struggling with change, however, is much different. Organizations that survived government funding cutbacks of the 1990s are now financially fragile because they are dependent on a complex web of unpredictable, short-term, targeted project funding. Indeed, their efforts to create greater financial stability have led to greater instability for many.”

Regardless of the source of funds, obtaining additional funding is an ongoing challenge. Organizations that earn revenue may have some flexibility to increase their prices – but the flexibility can also be very limited. In some cases, they serve disadvantaged groups with little ability to pay.

Organizations that provide services on behalf of government are funded through either sustaining grants or fees for service. As was indicated above, the general trend has been away from sustaining grants and toward fees for service. Sometimes, those fees are set through a tendering process. Other times, they are negotiated. In some cases, fees set many years ago have simply been adjusted over time based on increases in the general cost of living, when government felt it could afford to do so.

Regardless of how the fees are set, governments typically do not look too deeply at the costs they support. Government officials consulted during the project said they view the organizations receiving the funds as contractors and expect them to manage their own affairs as effectively and efficiently as possible. And they do not feel an obligation to respond when there is an increase in any particular component of their costs, partly because they do not want clients or employees of those organizations to view them as extensions of government. Consequently, they do not adjust fees – at least right away – if there is an increase in wage rates because of a new collective agreement or an increase in the minimum wage. Nor do they feel compelled to adjust fees in response to increases in insurance premiums or the current rise in energy costs.

Some voluntary organizations obtain funds from funding agencies but there is no guarantee they can get what they need. For example, the United Way of Halifax sets

Wolfgang Uebel/BizNext Page 28 THE VOLUNTARY SECTOR fundraising goals based on what it thinks it can raise, considering the particular donor groups it is targeting. Demand for those funds is typically double the amount it can raise. It does not allocate the funds based on how badly an applicant needs them. People from the community assess applications using the agency’s criteria. A representative of the organization said that the cost of insurance might be a “tidbit” of information that would be looked at but would not be a significant factor in allocation decisions.

Many organizations undertake their own fundraising activities. But it is a very competitive market – for fundraisers, donors, and donor contributions. There is no guarantee an organization can raise the money it needs or obtain additional funds to offset increases in costs.

As the foregoing indicates, funding is the single biggest challenge for the voluntary sector, despite its extensive contributions to the quality of life and the economy. Organizations achieve a lot with limited resources. But they must continually struggle to obtain those resources and, when they get them, they typically have limited flexibility in how funds are spent.

Distinctive Risks

In some respects, the risks to which voluntary organizations are exposed are no different from those faced by individuals, families, governments, or commercial organizations. They flow from ownership of assets and the activities in which the organizations are engaged. However, there are also some significant differences.

The principal risks covered by property and casualty insurers are outlined in Table 9. As the industry’s name implies, it primarily insures property. For the most part, casualty insurance is an extension of property coverage, because the casualties covered typically flow from ownership and/or use of property. Similarly, insurance to cover income lost during business interruption is an extension of coverage offered for damage to property.

Risks in the voluntary sector fall into the same general categories. However, most voluntary organizations have little investment in assets, so they have correspondingly little need for property insurance. Instead, their risks are primarily related to their activities, which lead to liabilities for personal injury and damage to property. Injuries can be physical or economic. Liabilities for such injuries can extend beyond clients, volunteers, and employees to third parties not directly involved in program activity. And they can come in a variety of forms – e.g. general, professional, vicarious, directors and officers, errors and omissions, employment practices.

Unlike risks related to property ownership, liability risks are open-ended in terms of the number and severity of injuries and the duration of loss. Some Canadian examples cited by Elliott Special Risk LP are provided in Appendix B.

Because voluntary organizations have little property of their own, their activities frequently involve use of assets owned by others – the federal or provincial governments, municipalities, school boards, churches, commercial organizations, private

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TABLE 9 PRINCIPAL INSURABLE RISKS

RISK NATURE DIRECT CAUSE WHOSE LOSS? MAGNITUDE

PROPERTY Mobile Equipment – Loss Causal agent, e.g. Property owner Property value automobiles, aircraft, Damage § Fire marine vessels § Theft Buildings § Flood Fixed Equipment § Use Money Event due to Data/Information § Accident § Deliberate acts § Errors and omissions § Natural causes

INCOME Earned Income Loss due to business Same as above Property owner Dependent on income, interruption duration of loss

PERSONAL INJURY Physical – death, injury Property Clients Dependent on number Economic – loss of Activity Volunteers of participants, severity income, cost of Employees of injury, and duration treatment Third parties of loss

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citizens, and the volunteers who work for them. For understandable reasons , the owners of these assets are usually reluctant to carry the risks related to the voluntary organizations’ activities, so they require the voluntary groups to have their own insurance to cover their use of the facilities. Consequently, voluntary groups can be liable for damage caused to property they do not own, in addition to being liable for personal injuries flowing from their activities.

As was discussed earlier, insurance-related risks are defined in terms of both the probability of an adverse event and the consequences of such an event.

The potential for loss flows mainly from an organization’s mandate – what it does. The magnitude of the liability to which a voluntary group is exposed depends on what it owns and the scope and duration of its operations.

Mandates taken on by voluntary organizations are quite diverse. The Johns Hopkins Comparative Nonprofit Sector Project developed the International Classification of Nonprofit Organizations referred to earlier. It classified nonprofit organizations into 12 major activity groupings, each with different sub-categories. In doing its National Survey of Nonprofit and Voluntary Organizations, Statistics Canada used a modified version of that classification system comprising 72 different categories.

In responding to social needs, many voluntary organizations take on mandates that are inherently risky. For example, organizations that serve vulnerable groups with special needs are exposed to greater risk than those serving the general public. And organizations’ liabilities can potentially be very high, due to the numbers of people affected by their activities, the opportunity for severe injuries, and the possibility of lengthy periods of treatment, rehabilitation, and income loss.

Some voluntary organizations have risks that extend beyond those of the commercial sector. For example, availability of workers’ compensation coverage varies by province in Atlantic Canada. It is mandatory for practically all employers in Newfoundland and Labrador and New Brunswick. In Nova Scotia, it is mandatory only for some businesses and for employers with three or more employees but there is provision for voluntary coverage. Similarly, only some businesses are covered in Prince Edward Island but excluded businesses can obtain coverage voluntarily.

At least in Nova Scotia and Prince Edward Island, employees of voluntary organizations may not be covered for workers’ compensation. And no equivalent coverage is available for volunteers. If they are injured as they carry out their duties, they must either be compensated by the organization they work for or fall back on their personal resources.

Similarly, it is not always clear that volunteers are protected under their personal automobile insurance policies if they use their vehicles for their voluntary work.

Two other categories of risk are particular concerns in the voluntary sector: special events and use of alcohol. In each case, voluntary organizations can have trouble finding suitable insurance at a cost that fits within their means.

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Almost every community is home to a number of special events over the course of a year, nearly all of which are organized by volunteers who come together, create an organization, put off the events, and disband afterwards. These organizations do not own any long-lived assets but use assets owned by others. They raise money through sponsorships and, in some cases, earn revenue from sale of goods and services. In the process, they can be exposed to substantial liability risks – the probability may be small but the consequences can be great.

In many cases, community-based special events include significant use of alcohol – such as a “beer tent” that can be linked to a sponsorship arrangement or a need to earn revenue. Again, the availability of alcohol under its auspices can expose a voluntary organization to liability risks.

If an adverse event leads to a claim under an insurance policy, the costs can be substantial. As a minimum, the person and/or organization must incur costs to defend against it, whether or not the claim is true. And just the costs of the defence can sometimes be considerable.

The second dimension of risk is the probability that an adverse event will occur. That probability depends to some degree on an organiz ation’s mandate – the clientele served and services offered – but it also depends heavily on how it carries out its mandate. Specifically, it depends on organizational characteristics, including its

§ assets – their design features, condition, and ownership, § mode of service delivery – processes and use of volunteers or paid staff, § operations – scope and duration, and § governance – organization structure, risk management, and continuity of leadership.

Through their control over these characteristics, voluntary organizations have some control over the probability of an adverse event. And, for that reason, they have vicarious liability for losses or injuries to or caused by employees or other agents working on their behalf.

Frequently, volunteers are not recruited in the same way as paid employees. They simply offer their services. And organizations are often happy just to get help. However, voluntary groups can sometimes attract people whose skills are not well suited to the task or whose motives are less than admirable, exposing organizations to considerable risk due to a poor standard of service or even criminal activity.

Unfortunately, voluntary organizations typically have limited administrative infrastructure and are often under-managed, similar to smaller organizations in the other sectors. Pressure from funding agencies for them to minimize overhead costs and operate efficiently contributes to the problem. Organizations with ongoing mandates often suffer from lack of continuity in leadership positions.

In short, risks are related not only to an organization’s mandate but also to the characteristics of the organization itself. For example, an organization with a volunteer board delivering services primarily with paid staff has a different risk profile from one

Wolfgang Uebel/BizNext Page 32 THE VOLUNTARY SECTOR made up exclusively of volunteers. And an organization with a well-defined and well- executed risk management program can reduce both the probability of an adverse event and the consequences should one occur.

For these reasons, in considering voluntary organizations’ risks, it is important to distinguish between possibilities and probabilities. While the possibilities for loss may be very high, it seems the probabilities are much more constrained.

Unfortunately, there is a remarkable lack of hard data related to either the probabilities or consequences of adverse events in the voluntary sector. Anecdotal evidence both within Canada and elsewhere indicates that voluntary organizations do not have many insurance claims and that payouts are typically fairly low. A study in the UK suggested claims made by charities there represented only about 20% of premiums, much less than the 50%-60% insurers needed to be profitable. In the absence of reliable data, however, premiums are calculated to cover the uncertainty – and that means they are likely higher than they should be.

Partly, the lack of data can be attributed to the fact that insurance for voluntary sector organizations is provided by a number of different insurers, usually as a relatively small part of the coverage they provide to the commercial sector. Partly, it is also because there is no organized program to collect the data from the insurers providing the coverage, as there is for some other categories of insurance – most notably, auto.

As the foregoing discussion indicates, voluntary sector risks can be characterized as having low loss frequency but potentially high severity. The low loss frequency should lead to low insurance premiums. But the potentially high severity means the cost of a claim can be substantial. Because the difference between possibilities and probabilities can be large, it is an area of substantial uncertainty. These characteristics make assessing and pricing the risks a big challenge for underwriters – and they have relatively little reliable data to help them.

Because of the possibility for large losses, insurers need the protection that comes from large numbers and reinsurance. But the voluntary sector is a relatively small part of the overall market for property and casualty insurance and it encompasses a very diverse set of risks. It is the combination of these characteristics that distinguishes the sector from other buyers of insurance.

Premiums for liability insurance represent less than 10% of the total premiums written in Canada for property and casualty insurance. Consequently, the voluntary sector is essentially made up of a large number of small but diverse organizations with specialized needs for a category of insurance that, itself, is not a major focus of the insurance industry.

Because of their distinctive needs, voluntary organizations often must depend on coverage provided through niche products offered by specialists. Finding those products is sometimes difficult, because they are tied up through exclusive distribution arrangements. And specialized coverage is generally more expensive than coverage offered through mass-market programs.

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Risk Management

As a rule of thumb, it seems fair to say that the more an organization does and the larger the scope of its operations, the more likely it is to be sued and found liable – unless it takes measures to mitigate the risk. Consequently, the organization’s directors and officers have a duty to manage the risks to which it is exposed.

Insurance is a part of risk management. But it is not the only means available. And it is not intended to be a substitute for other measures to reduce risks.

In looking at risks, it can be helpful to divide them into groups with different characteristics. One particularly useful way of dividing them is between ongoing risks that can lead to fairly frequent but relatively small losses and others that lead to infrequent but potentially catastrophic losses. Frequent small losses are a nuisance for brokers and insurers, because they result in substantial administrative costs, consuming resources for relatively little benefit. Quite often, it is better to handle them through the normal budgetary process and establish a higher deductible, buying insurance mainly for the infrequent but potentially catastrophic losses.

Voluntary organizations have a number of different resources available to help them manage their risks. A good article from the United Kingdom that discusses risk management for voluntary organizations is included in Appendix C. It outlines an overall approach and some specific strategies. Another excellent resource is a book titled Coverage, Claims & Consequences published in 2002 jointly by the Nonprofit Risk Management Center and the Public Entity Risk Institute in the United States, which should be in the library of every voluntary organization. The Table of Contents and the Introduction to the book are provided in Appendix C.

As part of its overall program of risk management, voluntary organizations have the option of judgment proofing – i.e. organizing themselves so their assets are protected from claims against them. Such a strategy has long been commonly used in the commercial sector but not commonly in the voluntary sector.

Judgment proofing involves using well-established legal principles, including

§ shareholders or members can limit their liability through incorporation, § the assets of a non-profit corporation are not available for the benefit of its shareholders or their creditors, and § assets held in trust are not available to personal creditors of a trustee.

Application of these principles can get to be quite complex. An article discussing how they can be applied is provided in Appendix C. It says, in part:

“The key to effective judgment proofing is for an enterprise that is likely to incur liabilities to ensure that it holds as few exigible assets as possible, thus becoming merely what I will refer to as an 'operating entity.' Ideally, even assets that the operating entity needs to conduct its operations will be held by a separate entity

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that I will refer to as the 'asset-owning entity.' If necessary, the asset-owning entity can then make the assets available to the operating entity pursuant to one or more contracts, with the parties taking care to ensure that the operating company's interest in the contracts is of negligible value to its creditors.

It is often useful to distinguish two forms of judgment proofing – transactional and structural. Transactional judgment proofing involves an exis ting integrated enterprise either transferring ownership of its assets to a separate asset-owning entity, and then distributing the value received in exchange to its beneficiaries, or transferring the potentially liability-generating components of its business to a new operating entity. Thus, transactional judgment proofing shields existing assets from creditors. By contrast, structural judgment proofing shields assets to be acquired in the future from creditors. Structural judgment proofing involves simply ensuring that assets are initially acquired by a separate entity from the one that will conduct the potentially tortious activities. …

The key to success for both transactional and structural forms of judgment proofing is that the assets 'owned' by the asset-owning entity not be available to the creditors of the operating entity. …

By exploiting these legal principles, non-profit entities should be able to judgment proof themselves just as effectively as for-profit entities.”

Good risk management is essential. But its benefits accrue only over time, through preventing adverse events and reducing their severity. On the other hand, costs of good risk management can be high and must be incurred in the present. Smaller, poorly funded organizations are often reluctant to incur those costs. Even when they do manage their risks, there are sometimes questions as to whether the programs used are the right ones, because they lack the expertise required to design a proper program.

Needs for Insurance

Except for automobile coverage, voluntary organizations are not required by law to have insurance. However, some are required to have insurance under terms of contractual service delivery and/or funding arrangements. Others need it primarily to preserve their operating capacity should they suffer from adverse events.

As television ads from Ace Group Insurance used to say, “It’s not what it insures you against; it’s what it lets you do.” A reasonable argument can be made that much of the rapid expansion of economic activity and improvement in the standard of living over the past three hundred years has been due to the availability of insurance to reduce risks. Insurance is no less important in developing and preserving the capacity of the voluntary sector.

In part, voluntary groups need coverage to protect assets and, in part, they need it to protect staff, volunteers, and clients from physical and/or economic harm. A report based on data from the National Survey of Nonprofit and Voluntary Organizations was

Wolfgang Uebel/BizNext Page 35 THE VOLUNTARY SECTOR published under the title, The Capacity to Serve, A Qualitative Study of the Challenges Facing Canada’s Nonprofit and Voluntary Organizations. It observed that,

“There are three main types of organizational capacities that organizations can draw upon to achieve their missions and objectives. These are:

1. Financial Capacity – the ability to develop and deploy financial capital (i.e., the revenues, expenses, assets, and liabilities of the organization).

2. Human Resources Capacity – the ability to deploy human capital (i.e., paid staff and volunteers) within the organization, and the competencies, knowledge, attitudes, motivation, and behaviours of these people. Human capital is considered to be the key element that leads to the development of all other capacitie s. For example, the creation and maintenance of financial capital requires human capital with competencies in finance. Planning and development capital requires competencies in leadership and strategic management.

3. Structural Capacity – the ability to deploy the non-financial capital that remains when the people from an organization have gone home. There are three types of structural capacity:

a. Relationship and Network Capacity: the ability to draw on relationships with clients, members, funders, partners, government, the media, corporations, volunteers, and the public. b. Infrastructure and Process Capacity: the ability to deploy or rely on infrastructure, processes and culture; products related to internal structure or day-to-day operations (e.g., databases, manuals, policies and procedures); information technology; and intellectual property. c. Planning and Development Capacity: the ability to develop and draw on organizational strategic plans, program plans and designs (including fundraising and volunteer management), policies, and proposals.”

This is certainly a very good analysis. However, it can also be observed that insurance provides an important component underpinning all these capacities. Insurance is needed to preserve the investments financial capacity allows. It is also needed to protect volunteers and staff from personal liability that could result from their voluntary work, because they would be reluctant to contribute their talents and energy otherwise. And it is needed to protect the infrastructure and process components of structural capacity.

As was discussed above, most of the voluntary sector’s needs for insurance are related to liability under tort law for property damage and/or personal injury. Consequently, the sector’s needs for lia bility insurance coverage are due to the overall framework provided by tort law. The fundamental issue is: who should bear losses that result from the actions or inactions of a volunteer or voluntary organization?

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Courts have long held that victims are entitled to compensation for wrongs inflicted upon them. In its Church Law Bulletin No. 11, Issued May 31, 2005, Carter & Associates, a law firm in Ontario that has done a lot of work related to charities and voluntary organizations provided a useful summary of the law related to vicarious liability, which is included in Appendix C. It said, in part,

“The doctrine of vicarious liability imposes liability upon an employer or principal for the conduct of an employee or agent, on the grounds that the employer or principal should be held accountable for losses to third parties that arise from the actions of the employer or principal. Unlike the principle of direct liability, vicarious liability does not require that the employer or principal actually cause the loss sustained by the third party. Liability is imposed on the employer or principal with the rationale that the loss is the result of a reasonably foreseeable risk and attributable to the employer's or principal's activities, and that it is reasonable that the employer or principal should be liable for the risk.

From a public policy point of view, vicarious liability is designed to ensure that parties undertaking risky enterprises take all reasonable measures to reduce the risk. It is a form of risk allocation, in keeping with the logic behind tort law in Canada; namely, losses will be suffered in our modern world, and we should be aware of the losses we cause, and should try to reduce the risks of such losses, or compensate for such losses when appropriate. As Chief Justice McLachlin stated in Bennett:

"Vicarious liability is based on the rationale that the person who puts a risky enterprise into the community may fairly be held responsible when those risks emerge and cause loss or injury to members of the public. Effective compensation is a goal. Deterrence is also a consideration. The hope is that holding the employer or principal liable will encourage such persons to take steps to reduce the risk of harm in the future."

The Bulletin went on to discuss the particulars of the Bennett case and said,

“This decision should be profoundly disturbing for churches, as well as other charitable, and non-profit organizations ("non profit organizations"), as it clearly affirms that they can be held vicariously liable for the conduct of their employees and agents. As such, it imposes a significant obligation upon them to supervise and control the conduct of employees who are in a sufficient position of power over others. Clearly, it can be assumed that a lack of awareness will not relieve non-profit organizations from being held vicariously liable for the misconduct of their employees or agents.

What should also be clear to non-profit organizations as a result of the Bennett decision is that they will be treated no differently from any other type of organization, including for-profit businesses, when it comes to the imposition of the doctrine of vicarious liability. If the two-part test described above is met,

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vicarious liability will be imposed on non-profit organizations for the intentional torts committed by their employees.”

As the foregoing indicates, victims are entitled to be compensated for losses as a matter of public policy. On the other hand, voluntary organizations’ limited resources mean they cannot provide much compensation themselves. For victims to be adequately compensated, volunteer groups must transfer their risks to others who have the resources to pay any claims that may be made. In other words, they need insurance.

In effect, insurance is a fairly inexpensive alternative to saving to build up reserves against loss – which would likely take a long time and restrict activities while reserves were built up. Furthermore, because their activities are not designed to earn profits and funding is usually barely sufficient to support what they do, most voluntary organizations do not have much opportunity to build up reserves to reduce their needs for insurance.

How much insurance a voluntary organization needs is difficult to estimate. Ultimately, it depends on the claims that may be filed against it. And there is a lack of reliable data to provide guidance. That is an impediment to obtaining the right coverage at a reasonable price. Due to the lack of data, organizations tend to buy an amount of coverage they can afford – which may be too little or too much.

Many groups do not have any insurance. In 2004, the Community Services Council Newfoundland and Labrador conducted an online survey to explore concerns related to availability and affordability of insurance for voluntary organizations. Of 106 respondents, 38 (36%) said they operated without any insurance coverage whatsoever and few had a full range of coverage. The 68 organizations that had at least some coverage were predominantly larger, incorporated groups and mainly categorized as faith-based or sporting/recreational with head offices located in the Northeast Avalon, where much of the Province’s population is concentrated.

The main reasons reported for not purchasing insurance were:

§ too costly (40%) § do not know what coverage to look for (20%) § do not need insurance coverage (20%) § cannot find a broker with appropriate coverage (6%)

More than half the organizations in the uninsured group said they had made an overt decision to operate without any coverage.

The report of the survey observed that, “Small, unincorporated and rural organizations tend to have lower rates of insurance coverage, regardless of policy type.” And it went on to say that, “Although concerned about risks facing their operations, very few groups have formal risk management programs in place or the planning underway to result in formal risk management strategies.”

Also in 2004, the Lunenburg Queens Regional Development Agency (LQRDA) in Nova Scotia surveyed organizations in its area related to their liability insurance. It found that

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§ 43.8% said they did not have any liability insurance, § only 32.4% of the organizations had Directors and Officers liability coverage, with some believing they did not need it because they were protected by Nova Scotia’s Volunteer Protection Act, § 25.7% said they did not have liability coverage related to a facility they use or own, § over 30% of the organizations indicated they did not buy liability coverage for special events, because it was too costly or because the event was not seen as being sufficiently risky to require insurance.

Some of the organizations surveyed indicated they were insured through a program offered by Recreation Nova Scotia for a nominal fee. Organizations not covered by that program said they had been asked to pay premiums ranging from $500 to $2000 to cover Directors and Officers (D&O) liability insurance for their boards.

Specifically related to D&O coverage, it is worth noting that the premium usually depends on the number of people covered. Many voluntary organizations have larger boards than are really necessary for governance purposes, thereby increasing their costs for insurance.

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THE PUBLIC POLICY ENVIRONMENT

Incentives for Development of the Voluntary Sector

In essence, the role of the voluntary sector is to serve individual and community needs not adequately met by the commercial and governmental sectors. And the sector’s recent growth has partly been in response to governments’ withdrawal from providing services as they struggled to cope with substantial spending deficits.

Collectively, voluntary organizations make a huge contribution to both the economy and the quality of life. Statistics Canada’s National Survey of Nonprofit and Voluntary Organizations found that:

“With revenues totalling $112 billion, nonprofit and voluntary organizations play a substantial role in the Canadian economy. Although one-third of this is attributable to a relatively small number of Hospitals and Universities and colleges, the remaining organizations still report revenues of $75 billion. Nonprofit and voluntary organizations are also significant employers, with paid staff totalling just over 2 million people.”

But the Survey covered only incorporated organizations. The overall size of the sector is actually much larger.

Furthermore, revenues and employment do not really provide adequate measures of what voluntary organizations do. Because it does not result in a monetary transaction, the value of volunteer labour does not get included in measures of Gross Domestic Product. The overall value of the effort contributed by volunteers and the expenses they incur from their own resources as they make that contribution is undoubtedly several times larger than the revenues and employment measured in the Survey. The leverage – output value relative to input cost – the voluntary sector provides is huge.

Even based on its limited scope, the Survey found that

§ nonprofit and voluntary organizations are vehicles for citizen engagement, § they focus on community and provide benefits, § their scope of activities is very broad, touching on nearly every aspect of Canadian life, and § capacity problems may keep organizations from fulfilling their missions.

Another survey was carried out in December 2004 by Strategic Counsel for Infrastructure Canada (the Cities Secretariat). The objective was to solicit Canadians’ opinions about their issues and priorities for community life and the results were published in a report titled, National Overview of Findings from a National Survey on the Quality of Life in Canadian Communities. According to the findings, Canadians view volunteer groups as having “the biggest impact on the quality of life in their communities”.

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For all these reasons, both the general public and the governments elected to represent them have very strong incentives to foster development of the voluntary sector.

Impediments to the Sector’s Capacity and Growth Potential

As was discussed in the previous chapter, the voluntary sector’s capacity depends on money, human resources, and structure. Access to funding and availability of affordable insurance are probably the two principal impediments to strengthening and increasing that capacity.

The sector’s needs for insurance are primarily due to its potential liabilities under tort law. And tort law is in an ongoing state of evolution, seemingly addressing an ever- larger range of wrongs, increasing the number of individuals and organizations potentially liable for them, and providing larger amounts of compensation. In part, that evolution has been driven by a growing number of lawyers working on contingency fees and being creative in presenting their cases.

Tort law has evolved at a particularly rapid pace in the United States. A commentary on developments there contained in a review of a book written by Peter W. Huber titled LIABILITY: The Legal Revolution and its Consequences is provided in Appendix E. The reviewer says,

“Huber tells the fascinating story of how a handful of activist judges, law professors and attorneys, motivated by the best intentions, in less than a quarter century completely rewrote the centuries-old Common Law rules regarding victim's rights and tort liability. But it is not a story with a happy ending; its genre shares much in common with the Steven King horror novel: a peaceful, stable, bucolic setting destroyed by sinister evil. … Huber's story reads like absurdist fiction when he explains how the activists vulgarized justice in order to implement their agenda. The activists found the traditional principles of tort law simply weren't expansive enough to fill the void left by contract law. The problem was that tort law was guided by venerable Common Law principles of justice tracing their pedigree back to the Bible. According to these principles, if a person did not cause the victim's injury or was not at fault in the matter, then that person could not be made to pay for the victim's injury. Establishing a party's culpability, then, was a prerequisite to requiring that party to pay damage compensation. The activists turned this on its head. Since their primary objective was to compensate victims, they viewed fault and causation as troublesome roadblocks to awarding money to victims. Therefore, their new strategy was to discover first who had the financial resources to compensate the victim and then, working backwards, construct a rationalization for the court's picking that ‘deep pocket’. Courts found a number of ways to accomplish this. Courts stopped taking into account the injured party's share of blame for his injury. A drunk driver who crashed his car into a telephone pole could now collect from the telephone company for damage to his car and himself. Manufacturers were found liable for damages even when they gave explicit warnings not to misuse

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their product and consumers did so anyway. New theories were introduced in order to make determinations of fault irrelevant. Joint and severable liability enabled courts to assess 100% of a victim's damages against a party that was a nominal 1% at fault. Strict liability held a provider liable for damages on a mere showing that he had sold the product and a person was injured by it; a showing of negligence was unnecessary. …

Juries with no scientific expertise were called upon to evaluate high tech products and determine whether these sophisticated products were unacceptably dangerous. What Huber calls "junk science" is a constant bane in the courts. … And in case after case, clever attorneys manipulate statistics in order to persuade juries that a causal connection exists between an injury and a product, when the best scientific evidence says otherwise.

While Huber expresses disdain for the way the new liability system perverts traditional principles of justice, the centerpiece of his critique lies not in ethics but economics. What is most alarming about the new liability system for Huber is the way it has acted to produce greater economic inefficiencies in our society. His focus here centers on two areas: insurance and innovation.

According to the activists, the new liability system was supposed to increase the availability and affordability of insurance. The reality is just the opposite. As courts invented ways to levy damages against insurers for injuries sustained outside policy coverage periods, insurers fled the marketplace. Availability of insurance has substantially decreased and in some areas has disappeared altogether.

Innovation has likewise been a casualty of the new system. Innovative, safer products actually found it more difficult and expensive to obtain insurance than older, more dangerous products. As insurers reeled from the uncertainties the new rules injected into their actuarial predictions, they grew increasingly cautious. They preferred underwriting older, less safe products with an established safety record, rather than risk being thrown a curve by an innovative product without one. Innovation was penalized in the courts as juries, the newly -appointed experts in matters of technology and engineering, scrutinized new products according to that basic human tendency: trust the old and familiar; distrust the new and unfamiliar. The net result has been a precipitous drop in innovation and invention in the United States. Ironically, as Huber points out, it is from innovation that we historically have acquired our greatest windfalls in safety. Yet the new liability system operates to frustrate innovation. If the system is such a disaster, what keeps it afloat? In a word: money. The new system is labor intensive and virtually guarantees full employment for attorneys. Thousands of attorneys have become rich by working the system, some fabulously so. With money comes political clout, and these attorneys zealously resist any reform of their cash machine.”

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Tort law has not evolved as rapidly or in all the same directions in Canada or other jurisdictions but the US experience has been influential, setting precedents and providing examples for lawyers elsewhere to follow.

Elliott Special Risk LP describes itself as “Canada’s leading independent insurance market for sport, leisure and recreation risks.” Its clients include “commercial businesses, non- profit organizations and member-owned clubs”. And it has an ownership interest in All Sport Insurance Marketing Ltd., whose programs are marketed across Canada. The company’s web site provides the following commentary:

“Sport, leisure and recreation accidents cause many of the most serious injuries to young Canadians, with tragic consequences for the victims and their familie s.

Contemporary case law is shifting the risk of compensation for such injuries away from the victim. This shift increases the financial risk of others involved in sport whether amateur, professional or commercial.

The main legal defence in sport injury cases is the rule of implied assumption of risk. Usually, sport participants are presumed to accept the risk of injury associated with their sport. But in several landmark cases, the courts have failed to enforce this defence in actions against national and provincial associations, local leagues, coaches, referees, arena operators, and even opposing players.

We are alarmed by the escalating damages awarded here in Canada for sport injury cases, especially awards for serious injuries which have reached staggering proportions.

The threat of under-insured litigation can cause havoc with your clients financial stability. Their ability to borrow, build and attract members or customers can be compromised. It may become much more difficult to attract and retain top quality directors, executives and coaching staff.

The uncertainty of injury litigation may be especially difficult for non-profit organizations, who, unlike businesses, cannot ‘earn’ their way out of the cost of litigation.”

The site provides examples of damages awarded by courts to participants and spectators of sporting events, which are included in Appendix E. One of the cases cited was from Nova Scotia:

“An Appeal Court ruling has upheld a $2.7 million award to a 14-year-old boy who was rendered quadrip legic while playing in a rope game at an adventure camp outing organized by a school board.

The boy fell from a rope about four feet off the ground, hitting his head. The lower court had apportioned liability 59% to the school board, 32% to the camp operator and 9% to a third party hired to assist in the camp.

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The Appeal Court found no contributory negligence on the part of the plaintiff. The school board was held vicariously liable for the negligence of the other two parties, so in spite of the lower courts apportionment of liability, the plaintiff recovered 100% of his damages from the school board.”

And there have been similar developments in other countries. Sport Industry Australia provided a commentary on developments in that country:

“Since 1997 product and public liability insurance in Australia has run at a loss with the revenue from premiums falling well short of the cost of claims. One of the major drivers is the increase in the number of claims, which have risen from 48,000 in 1996 to 88,000 in 2000. More importantly, claims expenses have risen by 22% per year over 4 years, with expenses exceeding gross premiums by $300m.”

Under tort law, a victim’s access to compensation is ultimately limited by the wrongdoer’s ability to pay. As the foregoing commentary illustrates, when lawyers search for pools of money to compensate the victims they represent, they cast the net broadly. For claims in the voluntary sector, they look at individual volunteers, the organizations for which they work, the directors and officers of those organizations, and the owners of properties used by the organizations. And they typically try to find the quickest and easiest route to a payment, even if that is not necessarily equitable to the parties concerned. Very often, that is the insurers providing coverage for one or more of the parties.

Because of the way tort law has evolved, the actions of voluntary organizations and volunteers have come under increasing scrutiny. Organizations have sometimes found it difficult to recruit volunteers and directors, raise money, obtain access to facilities owned by others, and focus their effort on providing services that make society better.

In effect, there is a conflict between two social values – the benefits obtained from the voluntary sector and the rights of victims to be compensated for wrongs inflicted upon them. Whether or not an appropriate balance is being struck falls into the realm of public policy.

Public Policy Choices

Governments play several different roles with respect to voluntary organizations and the insurance industry that influence the availability and affordability of insurance. Specifically, governments

§ plan and coordinate delivery of public services, § buy services from voluntary organizations, § provide a variety of business and community supports, § pass laws and issue regulations that create the legal framework within which voluntary organizations and the insurance industry operate, and § levy taxes on goods and services.

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Because of these different roles, they are often faced with making trade-offs among competing considerations. And they can be challenging decisions.

In planning and coordinating delivery of public services, governments must assess needs, set priorities, determine how priorities can be met, and allocate resources for the effort. Because both the federal and provincial governments were dealing with big spending deficits and accumulated debt during the 1990s and into the current century, they have made some significant changes in their priorit ies, approaches to service delivery, and allocation of resources. Some of these changes have impacted directly on the voluntary sector and were discussed in the previous chapter.

Among the changes that were made was an effort to offload responsibilities previously carried by governments. In some cases, the offloading meant discontinuing services they previously provided. In other cases, it meant buying services from either the commercial or not-for-profit sectors or offering grants to organizations willing to provide them. However, they also changed their approach to allocation of resources. Specifically, they changed their approaches to funding the not-for-profit sector and the changes make it difficult for organizations in the sector to pay for organizational overhead costs, including insurance.

On the other hand, governments have a vested interest in developing the capacity of the voluntary sector to provide services to the public and relieve pressure that might otherwise be focused on them. In its 2004 budget, the federal government put a special emphasis on the social economy and allocated a total of $132 million to be spent over 5 years. In this region, the Atlantic Canada Opportunities Agency is administering a fund valued at $1.7 million over 2 years to encourage capacity building.

Governments also provide the legal and regulatory framework within which voluntary organizations and the insurance industry operate. An important part of that framework is tort law, which is the basis for much of the insurance industry’s business and most of the voluntary sector’s distinctive risks.

In addition to their other roles, governments levy taxes on insurance premiums, as was illustrated earlier in Table 3.

Unfortunately, governments tend to pursue their different roles somewhat independently of each other. Their overall approach to the different issues that impact on the voluntary sector is not well coordinated, so their policies can sometimes be in conflict.

In considering the availability and affordability of insurance for voluntary organizations, governments must choose between preserving and building the capacity of the sector and protecting the rights of people who may suffer harm through their activities. In making that trade-off, they have a range of options to choose from. They can

§ do nothing and maintain the status quo, thereby limiting the capacity and growth potential of the voluntary sector, § provide additional funds to voluntary organizations, so they can afford to pay for insurance,

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§ reduce or eliminate the taxes levied on insurance purchased by voluntary groups, § increase regulation of the insurance industry, to increase availability and improve affordability, § reform tort law to reduce need for insurance and/or the cost of insurance claims by limiting victims’ rights, and/or § find a better compromise among the competing interests – for example, by facilitating voluntary organizations’ access to insurance coverage.

Doing nothing is always an option. In effect, it means allowing the market to decide which services should be provided by the voluntary sector and how much the sector should pay for insurance related to its activities. If that means limiting the capacity and growth potential of the voluntary sector, however, it may not be in the best interests of either government or society as a whole.

Provide Additional Funds/Reduce Taxes on Premiums

Availability and affordability of insurance would not be much of a concern, if funds were readily available to pay the premiums. It could even be improved somewhat, if governments were prepared to reduce or eliminate the taxes they levy on those premiums. Unfortunately, however, governments seem unlikely to pursue either of these options.

The Federal and most provincial governments have been trying to control their spending, eliminate current account deficits, and reduce debt accumulated during the 1970s, 1980s, and 1990s. On the whole, the Federal government has been more successful than the provinces, which have been faced with increasing demands for spending on health care and education, among other things. Provincial governments, the principal sources of funds for many voluntary organizations, have been reluctant to initiate new programs that require spending. And they have been using the voluntary sector as a means to reduce their spending.

Consultations with government officials during this study made it very clear that governments do not want to take responsibility for providing insurance for voluntary organizations. Furthermore, they vie w such organizations as falling into two categories:

§ those that provide services on behalf of government, and § others that may improve the quality of community life but provide services government does not need to provide – e.g. festivals and events.

They particularly feel no obligation toward the latter group, which makes up a very substantial component of the voluntary sector.

Regulation of the Insurance Industry

During hard markets, recommendations have continually been made for greater regulation of the insurance industry, with a view to increasing availability of insurance and making premiums both more affordable and more transparent. Much the same recommendations are made in response to every hard market.

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For example, Americans for Insurance Reform is a group in the United States that describes itself as “a coalition of over 100 consumer and public interest groups, representing more than 50 million people from around the country, which supports effective insurance industry reforms to end the price-gouging of policyholders”. A letter from that organization addressed to Insurance Commissioners in all 50 states and the District of Columbia is included in Appendix F. It outlines a number of complaints against the insurance industry and makes recommendations for greater regulatory control of the industry and premiums for policies.

Similar recommendations have been made in Atlantic Canada. In the report of its review of industry practices, the Nova Scotia Insurance Review Board recommended, among other things, that

2. “Government require that policyholders be given at least 45 days prior written notice of non-renewal, cancellation, coverage restrictions and premium increases, along with a full explanation of the reasons.

3. IBANS upgrade the continuing education program for its members and include legislative updates affecting the insurance industry.

4. (a) Government work with industry and the non-profit sector to ensure full awareness and clear understanding of the protection offered by the Volunteer Protection Act. (b) Government require, through the Board, that by a special data call, insurers provide detailed historical liability claims data for non-profit organizations, for Nova Scotia and Canada – by organizations that are solely volunteer and organizations with employees - and that the Board conduct a special study of the industry data to determine if the premiums being charged reflect the liability risk of the non-profit sector.

5. (a) Government require, that the Board, in conjunction with Recommendation 4(b), make a further special data call, requiring insurers provide detailed historical liability claims data, for Nova Scotia and Canada – by type of injury, nature of injury, cause of injury, number of claims, amount of claims, etc. and have the data analy zed to gain a better understanding of the costs attributed to liability claims and the factors that may be contributing to those costs (b) If the analysis finds that non-automotive minor personal injuries and/or liquor liability are significant factors in rising insurance premiums, legislative action limiting recovery for non-automobile minor personal injuries and legislation limiting liquor liability should be considered.

6. Government charge the Insurance Consumer Advocate with the responsibility of maintain ing an insurance complaint database, and require the Insurance Consumer Advocate to report on it annually to the Board and to the Minister responsible for insurance.”

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The problem with such recommendations is that they may ultimately be counter- productive in improving the availability and affordability of insurance. Insurers are not required to serve any particular market, write any particular type of coverage, or charge any particular premium. If they find the regulatory climate in a particular jurisdiction too onerous, they can simply withdraw from the market. For example, ING, the largest property and casualty insurer in Canada stopped writing new business in Newfoundland and Labrador, because the company did not like changes proposed by the provincial government. Maybe for this simple reason, calls for increased regulation seldom seem to be acted upon.

In Atlantic Canada, the insurance industry is regulated by five different governments – the Federal government and four provincial governments. That often leads to inconsistencies in regulation, effectively fragmenting an already small market even more and making it less attractive to insurers.

Furthermore, even when governments initiate regulatory action, it can take a very long time. The Nova Scotia government was asked by the Insurance Brokers Association of Nova Scotia to improve regulations governing licensing of brokers. By the time the new regulations come into effect in 2006, it will have been five years since the process was initiated. And the grandfathering provisions included in the regulations will delay the effectiveness of the new regulations even longer.

Tort Law Reform

Claims represent the principal cost covered by insurance premiums. And, as was described above, there is considerable evidence from different jurisdictions that claims have been increasing in both frequency and cost on a long-term trend. In response, people and organizations – most notably, insurers – that have been adversely affected have applied pressure on governments to reform tort law.

These initiatives have led to a broad range of recommendations for reform aimed at the factors perceived to be underlying the trend. Some of the initiatives are designed to limit payouts and ensure damage awards are shared equitably among potential payers. Others are aimed directly at reducing lawyers’ motivation to pursue claims. And no-fault schemes have been proposed to avoid the legal overhead costs that often accompany claims settlements. However, such recommendations have significant consequences and can be considered controversial, because they interfere with well-established practices in a legal system guided primarily by precedent.

In an initiative separate from this project, the Insurance Bureau of Canada has set up a working group in conjunction with the voluntary sector to examine tort reform. A report from that working group will be released in early 2006. It will recommend reforms that would reduce the potential liabilities facing the sector. Specifically, the wo rking group has identified seven reforms expected to be beneficial, as follows:

1. volunteer protection legislation to limit the scope of legal liability of individual volunteers to narrowly defined circumstances;

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2. affording voluntary sector organizations that provide public services the same legal protection available to public authorities; 3. recognition that risks are inherent in certain activities, so those who participate in the activities accept those risks; 4. eliminating double recovery, by taking into account compensation received by victims from collateral sources; 5. reform of the joint and several liability rule, so a co-defendant would be liable only for the proportion of the harm for which it was found to be responsible; 6. elimination of vicarious liability, if the actions of an employee are outside the scope of his/her employment; and 7. recognition that apologies should not constitute an admission of guilt.

Based on work done during the present study, a few comments on initiatives to reform tort law are provided below.

Limitations on Liability

Governments have tried to find ways to limit the liabilities of volunteers and the organizations they work for. In particular, they allow voluntary organizations to incorporate as a means of limiting liability. And, in some jurisdictions, they have passed laws to limit the liabilities of volunteers and organizations. In the Atlantic Region, Nova Scotia is the only province to have legislation protecting volunteers. Many voluntary groups think they are protected through such means, as was discussed earlier, which is erroneous.

Neither the legal profession nor the insurance industry is currently paying much attention to governments’ efforts to limit liability. Giving volunteers protection does not eliminate liability; it merely transfers the liability to the organizations they work for. The majority of voluntary organizations are not incorporated. For those that are, lawyers have found ways to sue directors and officers personally for their actions or inactions – creating a need for Directors and Officers liability insurance.

Nova Scotia’s Volunteer Protection Act attempts to limit the liability of volunteers related to their voluntary duties. However, the Act has not been tested in court, similar acts elsewhere have been found to provide very limited protection, and insurers typically ignore them in assessing potential liabilities. Indeed, at least some insurers do not particularly like the idea that a volunteer cannot suffer any consequences from his/her actions.

As Australia’s Centre of Philanthropy and Nonprofit Studies said with respect to volunteer protection acts: ‘The good news is that volunteers receive a measure of protection from legal liability and a fear of being caught up in legal costs. The bad news is that any liability of the volunteer is transferred to the volunteer’s organization.’

Furthermore, the Nova Scotia Insurance Review Board observed in its report that,

“Any attempt by Government to limit the liability of volunteer organizations, for example to gross negligence, should be balanced against the resulting cost to

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parties that are injured by the actions of volunteer groups. Part of this balancing is the consideration of how any such limitation would apply. For example, would protection be offered to organizations that have employees? Would protection only be offered to certain types of organizations, or those meeting specific criteria? And, of course, the rights of the victims must be considered. An injury compensation plan would be an option to address the needs of the injured persons.”

Caps on Non-Economic Damages

Caps on non-economic damages are effectively limitations on victims’ rights and courts’ discretion to award compensation. They have been imposed in some jurisdictions. Most notably, the Nova Scotia government chose to impose a cap on claims for soft-tissue injuries in 2003, as a means to deal with a dramatic rise in premiums for automobile insurance. On the other hand, it creates inequities that can be very difficult to justify. For example, two people with similar injuries could be compensated differently, simply because one was injured in an automobile accident, while another was injured in a different way.

Introducing No-Fault Coverage

The present system of making claims is adversarial in nature, often requiring reference to the judicial system to determine fault, claims amounts, and allocation of claims among payers. That legal overhead makes the whole process very costly. Some jurisdictions have eliminated the need for such a process by adjusting and paying claims on a no-fault basis. Workers’ compensation insurance is typically provided on a no-fault basis. In Canada, several provinces have no-fault schemes for automobile insurance.

A Compromise Position

The choices outlined above would require governments to provide funds for voluntary organizations to obtain insurance coverage, reduce the need for coverage through tort reform, or take regulatory action designed to ensure the insurance industry provides coverage at a reasonable price. Tort reform and increased regulation of the insurance industry are long-term initiatives, if they are considered worth undertaking at all. Providing additional funds for voluntary organizations is likely to be considered a very undesirable option, considering governments’ policy positions and budgetary constraints. However, there is another approach that could represent a reasonable compromise.

Table 9 presents a hypothetical – but instructive – example, based on fairly conservative assumptions. It shows that, if just the incorporated not-for-profit organizations in Atlantic Canada purchased Directors and Officers Liability insurance for an average of 6 people each through a program offered by Volunteer Canada, the overall cost would be over $33 million, including taxes on the premiums – a very substantial amount.

It seems doubtful that anything like that amount of money would be required annually to settle claims under such coverage for voluntary organizations in the Region. In other words, insurance costs imposed on the voluntary sector due to the threat of tort liability

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TABLE 9 A PUBLIC POLICY TRADE-OFF – AN ILLUSTRATION

# Vol # D&O Prov. Total Orgs Directors Premium Taxes Cost

NL 2,219 13,314 $ 5,325,600 1,043,818 6,369,418 NS 5,829 34,974 13,989,600 734,454 14,724,054 NB 3,890 23,340 9,336,000 373,440 9,709,440 PE 943 5,658 2,263,200 101,844 2,365,044

Total 12,881 77,286 $30,914,400 2,253,556 33,167,956

NOTES: 1. This illustrates the hypothetical collective cost of D&O insurance for voluntary organizations in the Atlantic Region – if they all had D&O insurance. 2. Each organization is assumed to have 6 directors/officers. 3. The annual premium for each director/officer is assumed to be $400, based on Sovereign General’s Canadian Association Program. 4. Costs related to risk management are in addition. 5. Total direct claims, all liability coverage, NL 2003 = $38,261,000.

Wolfgang Uebel/BizNext Page 51 THE PUBLIC POLICY ENVIRONMENT are very likely much greater than the actual costs of settling claims. The problem is that individual organizations that may be faced with claims do not have the resources to defend and/or pay them – so they need insurance.

The example shows that the current public policy position is likely not a good one, because it results in the voluntary sector’s spending more of its scarce money than it should on insurance protection. Considering that much of the money very likely comes directly or indirectly from government, government has an incentive to help the sector obtain greater value for its money.

It seems unlikely that the sector could take such an initiative on its own. Organizations are too small, too fragmented, and have too limited resources to be able to do it. If the four provincial governments in the region could facilitate access by voluntary organizations to suitable insurance coverage at reasonable cost, the sector could benefit greatly. And the costs for the coverage probably would not be any more – if as much – than is being spent now.

Such an approach was taken recently in Nova Scotia in developing a new insurance program for the Nova Scotia Trails Association. A description of that program is included in Appendix G.

The power in the model provided by the program is that all the parties with a vested interest participated in finding a solution to a difficult problem. Members of the Trails Association pay a premium for insurance coverage. The provincial government, through the Department of Transportation and Public Works, is guaranteeing the first $1 million of any claim involving a trail covered by the program – essentially providing a high deductible. Lombard Insurance Canada is providing general liability insurance protection up to a total of $5 million for any claim that exceeds the amount guaranteed by the provincial government – but it doesn’t have to set aside reserves for every claim, because of the deductible. And Marsh is the broker facilitating delivery of the program on a fee-for-service basis.

The program has been put in place for five years. During that period, the parties will accumulate data that will likely lead to refinements. If the insurer’s loss ratio is less than 35%, trail associations receive rebates on their premiums.

It is a creative approach. By the next fiscal year, the program developed in Nova Scotia will very likely become national in scope. Provincial and territorial risk managers met in Montreal in the middle of September to discuss the issue but much of the groundwork had already been done prior to that meeting.

It is also worth noting that the provincial government’s Occupiers’ Liability Act is supposed to provide a limitation on the liability of trail associations – in some ways, a counterpart to the Volunteer Protection Act. In assessing the risk and determining premiums, however, Lombard ignored the provisions of the Occupiers’ Liability Act, believing that it would not have much effect in limiting liability.

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EXPERIENCE IN OTHER JURISDICTIONS

A Recurring Problem – An Ongoing Search for Solutions

Because hard markets are a recurring feature of the insurance industry, they have affected buyers of insurance in many jurisdictions around the world for a long time. And there has been an ongoing search for solutions.

Different solutions have been found in different areas, reflecting local circumstances, with different results. In particular,

§ the United States has largely focused on group buying, alternative risk transfer mechanisms, and – more recently – tort reform, § the United Kingdom has put a lot of emphasis on risk management, § Australia has undertaken extensive revision of its tort law system, and § New Zealand has essentially done away with the tort law system and replaced it with a no-fault compensation program.

The experience in each of these areas is discussed below.

The United States

Simila r to the situation in Canada, voluntary organizations in the US have long had difficulty finding adequate, affordable insurance coverage. Because it is a much bigger market, however, a broad range of options has evolved over time.

For example, The CIMA Companies, Inc. is a network of insurance brokers and agents based in Baltimore, Maryland and Alexandria, Virginia. Established in 1949, the company is “one of the largest property/casualty and employee benefits brokers in the United States”, with clients nationwide. One of its programs is the Volunteers Insurance Service (VIS), which “was established nearly 40 years ago to address the liability concerns that are shared by many volunteers, would-be volunteers and the nonprofit organizations that use their help”.

The VIS website – http://www.cimaworld.com/htdocs/volunteers.cfm – says,

“The VIS insurance programs are available exclusively to members, who pay an annual $135 membership fee. VIS provides the following services to members:

· Publishing VIS Connections as one of our information resources for members; · Maintaining for members' use a library of information relating to management of risks in the nonprofit organization; · Researching availa ble and appropriate insurance relating to volunteer activities; · Designing and administering insurance programs, and compiling underwriting information;

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· Providing consultation on risk management issues at no charge to our members, via a toll-free line (1-800-468-4200); · Assisting members, on request, with matters relating to insurance.”

The search for solutions to the availability and affordability of insurance for voluntary organizations intensified in response to the hard market of the 1980s. During the recent hard market, The Nonprofit Risk Management Center issued a newsletter titled, “Riding Out the Hard Insurance Market, What Your Nonprofit Can Do to Survive and Thrive in Deteriorating Market Conditions”. It provided some commentary on developments there, as follows:

“In the early 1980s, nonprofits were relatively modest consumers of insurance products. Some purchased common coverages — property, general liability (GL), directors' and officers' liability (D&O) and employment practices liability. Many went about the process in isolation, rarely relying on organized programs developed specifically by and for groups of nonprofits. Very few took advantage of opportunities to gain control over their insurance destinies by forming self - managed alternatives such as sponsored insurance programs, pools and captive insurers.

The late 1980s were a wake-up call for consumers of commercial insurance, including nonprofits. True to the characteristics of a hard market, some companies decided to exit certain lines of business or geographical areas, or offer drastically reduced limits of liability, unprecedented restrictions, or sublimits for certain coverages. Others simply raised premiums by large sums, from 50 percent to several hundred percent.

Stunned nonprofit consumers were left deciding between paying a larger-than- budgeted premium, going without coverage ("going bare"), or settling for vastly reduced coverage at the renewal rate. And these were the lucky ones. Some organizations were "nonrenewed" and found it impossible to obtain coverage elsewhere.

From this difficult environment arose a new commitment to avoid being at the mercy of the insurance marketplace. Associations and umbrella groups began developing creative responses to control their insurance destinies. Interest in preventing losses, minimizing liability and controlling premiums began to take hold. By the time the black cloud cover dissipated and the situation began improving in the early 1990s, many nonprofits had taken steps to protect themselves from future market fluctuations. Others were simply relieved to have or be able to afford coverage once again.”

One of the outcomes was creation of risk retention groups. For example, the Nonprofits’ Insurance Alliance of California (NIAC) was created in 1989. NIAC is “a liability insurance pool which was established in 1989 exclusively for 501(c)(3) tax-exempt nonprofit organizations in California. NIAC provides a stable source of reasonably priced liability insurance coverages tailored to the specialized needs of the nonprofit sector.

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NIAC also assists these organizations to develop and implement effective loss control and risk management programs.”

Its website – http://www.niac.org/ – says,

“Now in our sixteenth year of operation, NIAC has annual premium in excess of $42 million, and has more than 5,000 member-insureds. In November 2004, A.M. Best upgraded NIAC to A (Excellent) from A- (Excellent).”

NIAC’s success led to creation of the Alliance of Nonprofits for Insurance Risk Retention Group, a similar organization set up to serve the needs of voluntary organizations in other states. Its website – http://www.ani-rrg.org/ – says,

“The Alliance of Nonprofits for Insurance, Risk Retention Group (ANI-RRG) is a 501(c)(3) tax-exempt nonprofit insurance company whose mis sion is to be a stable source of reasonably priced liability insurance for 501(c)(3) nonprofits.

ANI-RRG and an affiliated reinsurance captive company, have been capitalized with $10 million in grants from the Bill & Melinda Gates Foundation and the David and Lucile Packard Foundation.

Modeled after the Nonprofits' Insurance Alliance of California (NIAC), which was founded in 1989 and which has brought stability in price and coverage to thousands of nonprofits in California, ANI-RRG is also governed by its nonprofit organization members. ANI-RRG also assists nonprofit organizations to develop and implement effective loss control and risk management programs.

ANI-RRG is currently writing coverage for 501(c)(3) nonprofits in Colorado, Connecticut, Delaware, District of Columbia, Iowa, Kansas, Maryland, Michigan, Missouri, Nebraska, Nevada, North Carolina, Ohio, Oregon, Pennsylvania, Utah, Vermont, Virginia and Washington.”

These organizations were modeled after risk retention groups that had been set up in the commercial sector to handle specialized insurance needs that were hard to meet through conventional market operations. An article in the January, 2003 issue of the Insurance Journal is included in Appendix H. It says, in part,

“Due to the restricted coverages available in the market today, risk retention groups (RRGs) have experienced a significant amount of rapid growth over the past year. At a time when the industry is facing what is perhaps the most serious availability crisis for many types of coverage, risk retention groups represent a viable option to those unable to obtain liability coverage.”

Overall, approximately 25% of property and casualty coverage in the US market is provided through such risk retention groups and other alternative risk transfer mechanisms.

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The initiatives described above were designed to increase the supply of insurance to voluntary organizations. Another outcome of the hard market in the 1980s was creation of the Nonprofit Risk Management Centre referred to above – http://nonprofitrisk.org/. That Center was established in 1990, “to provide assistance and resources for community-serving nonprofit organizations”. Its website says,

“Our mission is to help nonprofits cope with uncertainty. We offer a wide range of services (from technical assistance to software to training and consulting help) on a vast array of risk management topics (from employment practices, to insurance purchasing to internal controls and preventing child abuse). We do not sell insurance or endorse organizations that do.”

In 1996, the Public Entity Risk Institute was established, based in Fairfax, Virginia. Its mission is to “serve public, private, and nonprofit organizations as a dynamic, forward thinking resource for the practical enhancement of risk management”.

Other initiatives attempted to reduce the liability of volunteers and voluntary organizations. Various laws were passed at the state and federal levels for that purpose. New Jersey provides a particular example of a charitable immunity law. It is described by the state’s Center for Non-Profit Corporations, as follows:

“The key statutory protection for many non-profits is New Jersey's charitable immunity law (N.J.S.A. 2A:53A-7 et seq.). Originally enacted over twenty-five years ago, the law has been broadened several times since then, most recently in 1995. In its current form, the law provides that a non-profit corporation organized exclusively for religious, charitable, educational or hospital purposes is not liable for damages arising from the ordinary negligence of someone acting on behalf of the non-profit if the person suffering those damages is a beneficiary of the group's services. Case law provides some guidance as to the kinds of organizations protected by this statute and the definition of ‘beneficiary.’ The latest revision to the law also extends immunity to ‘trustees, directors, agents, servants or volunteers,’ and to employees of organizations other than hospitals. The law does not cover independent contractors, hospital employees, or other health care professionals who are compensated for their services by non-hospital organizations.

Another section of the immunity law (N.J.S.A. 2A:53A-7.1) provides that uncompensated volunteers, trustees and officers are not liable for damages related to their services on behalf of charitable non-profits, in cases of ordinary negligence. No distinction is made between recipients of the non-profits' services and strangers, meaning that unpaid trustees, officers and volunteers are covered in their individual capacities regardless of whether the person suffering damages is a beneficiary of the group's services. New Jersey law does allow non-profits to amend their certificates of incorporation to limit liability of compensated trustees in cases of breach of duties owed to their members and to indemnify such trustees or officers.”

The Center also commented on the federal Volunteer Protection Act, as follows:

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“On June 18, 1997, President Clinton signed into law S.543, the ‘Volunteer Protection Act of 1997.’ The legislation, which took effect 90 days from the date of enactment, was the culmination of over ten years' effort to enact a federal law to provide some protection from liability for volunteers. The Act provides civil liability protection for non-profit or government volunteers if:

· the volunteer was acting within the scope of his/her responsibility; · the volunteer was properly licensed, certified or authorized to engage in the activity or practice (if required by the state in which the damage occurred) and those activities were within the scope of the volunteer's responsibility; · the harm was not caused by willful or criminal misconduct, gross negligence, reckless misconduct or a ‘conscious, flagrant indifference’ to the rights or safety of the individual harmed by the volunteer; and · the harm was not caused by the operation of a motor vehicle, aircraft, or other vehicle for which an operator's license or insurance is required by the state. …

Much publicity was recently given to the federal ‘Volunteer Protection Act of 1997,’ which was signed into law by President Clinton in June of 1997. The new law provides civil liability protection for non-profit or government volunteers under certain circumstances. The federal Volunteer Protection Act pre-empts existing state laws except those (like New Jersey's) that provide broader volunteer protection than the federal law. However, the new law does allow states to enact their own legislation to make the federal law inapplicable in a particular state. The federal statute allows states that have certain existing restrictions on volunteer immunity to retain those limitations without having to take the affirmative step to enact new legislation.

Despite the attention given the Volunteer Protection Act upon its passage, for the time being at least, its impact on New Jersey non-profits will be minimal. New Jersey already has broad immunity laws protecting uncompensated trustees, officers and volunteers, as well as charitable organizations, under specific conditions. These statutes already exceed the breadth provided for in the new federal law. And, like the federal Act, New Jersey's immunity does not apply to acts of gross negligence, willful or wanton misconduct, or the negligent operation of a motor vehicle. Unless the State enacts new restrictive legislation, this situation will not change. Whether the new law will affect rates for directors' and officers' or volunteer liability insurance remains to be seen.”

And the Center notes some important exceptions to the coverage these acts provide:

“Although the immunity statutes provide broad protections for non-profits, important exceptions remain. The law provides immunity from damages, and therefore increases the likelihood that an organization will prevail in certain lawsuits. However, it does not prevent an organization from being sued and thus incurring legal defense costs. Secondly, in no case does charitable immunity or trustee/volunteer immunity provide protection in cases of gross negligence or willful or wanton misconduct. There is no clear definition that separates what

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constitutes simple negligence from gross negligence in this context, meaning that the distinctions are left for the courts to decide on a case-by -case basis. Finally, the exact scope of what kinds of organizations are covered and who is a ‘beneficiary’ is continuously being tested in the courts. A non-profit manager should take these factors, as well as the group's own potential liability exposures, into account when assessing its insurance needs.”

Currently, effort in the US is shifting to tort reform, to reduce the cost of claims – and the premiums that must cover them. Tort reform is now a major part of the Bush Administration’s agenda. A commentary on the effort is included in Appendix E. It says, in part,

“The first major Republican victory in its efforts to achieve meaningful tort reform occurred in February 2005 when Congress approved a class action reform measure. The legislation authorizes federal courts to hear class-action suits involving over $5 million and involving persons or companies from different states. The objective in moving the suits to federal courts is to make it significantly more dif ficult for the lawsuits to be approved. The bill would also crack down on ‘coupon settlements’ in which plaintiffs get little but their lawyers get big fees. It would link lawyers' fees to the amount of coupons redeemed. …

Proclaims the Republican platform: ‘America’s litigation system is broken. Junk and frivolous lawsuits are driving up the cost of doing business in America by forcing companies to pay excessive legal expenses to fight off or settle often baseless lawsuits.’

In its political context, ‘tort reform’ generally refers to proposals to limit the prevalence of legal claims prosecuted with the assistance of personal injury lawyers which are perceived to unfairly burden insurance policy holders with exorbitant premiums. …

In actuality, the ‘tort system’ is part of an overall system for compensating victims who suffer from accidental injuries. Accidents are a part of our human experience. Studies indicate that over the course of a year, approximately 20% of Americans suffer some type of accidental njuryi and most of these require a doctor's attention. The vast majority of accidents causing economic loss are either work-related or automobile -related. Many of these accidents do not involve potential liability of a third party. The primary source of com pensation for medical treatment of these injuries is the victim's health insurance.

To the extent that compensation is provided through legal claims, critics of the present tort system maintain that it is too expensive and inefficient. Even when non-economic ‘pain and suffering’ awards are included, it has been estimated that claimants ultimately collect only 46 percent of the total cost of the tort system. The amount of per capita tort costs varies significantly from state to state. Tort costs, as a percentage of the GDP, exploded in the decades of the '70's and '80's. Although the increase declined slightly in the past decade, they are again rising. In actual dollars, adjusted for inflation, the increase is even

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more dramatic. The system is also not even-handed. An important variable in determining the value of a given personal injury claim is the locality where the claim is filed. A case with the same type of liability and injury can be worth variable amounts in different jurisdictions. This factor accounts for much of the regional variance in insurance rates.

Proponents of the tort system argue that it deters accidents by combining compensation for victims with negligence. They also maintain that the system provides necessary compensation for victims who would not otherwise be sufficiently compensated by other social insurance programs.”

The commentary outlines a number of causes of the increases in liability costs, including:

§ expanded bases of liability, § increase in the number of lawyers, § increase in legal specialization and technology, § the investment market, § the contingency fee system of compensating attorneys, and § promotion of attorney services.

On the other hand, some pressure has also been applied to increase regulation of the insurance industry, arguing that tort reform is unlikely to improve availability or affordability of insurance. One of the groups applying that pressure is Americans for Insurance Reform, which was referred to earlier.

In June 2003, AIR issued a release titled, “Industry Insiders Admit – and History Shows: Tort Reform Will Not Lower Insurance Rates”. A copy of the release is included in Appendix E. It presents a series of quotes, some of which are reproduced below:

Patricia Costante, chairman and CEO of the MIIX Group of Insurance Companies: When asked by New Jersey Assemblyman Paul D’Amato whether, if caps are enacted in New Jersey, her insurance company will not raise premiums and will, in fact, reduce them, she said, “No, we’re not telling you that.” (Meeting of the New Jersey Assembly Joint Committee of Banking & Insurance and Health & Human Services on Medical Malpractice, June 3, 2002) American Insurance Association: “[T]he insurance industry never promised that tort reform would achieve specific premium savings.” (American Insurance Association Press Release, March 13, 2002) Sherman Joyce, President, American Tort Reform Association: “We wouldn’t tell you or anyone that the reason to pass tort reform would be to reduce insurance rates.” (Liability Week, July 19, 1999) Dick Marquardt, Washington Insurance Commissioner: It was “impossible to attribute stable insurance rates to tort-law changes or the damages cap,” since rates also improved in states that did not pass tort reform. (The Seattle Times, May 16, 1991)

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Vanderbilt University: A regression analysis conducted by Vanderbilt University economics professor Frank Sloan found that caps on economic damages enacted after the mid 1970's insurance crisis had no effect on insurance premiums. (Sloan, “State Responses to Malpractice Insurance Crisis of the 1970’s: An Empirical Assessment,” 9 Journal of Health Politics, Policy & Law 629-46 (1985))

The United Kingdom

In the United Kingdom, the National Council of Voluntary Organizations (NCVO) website, http://www.ncvovol.org.uk/Asp/search/ncvo/main.aspx?siteID=1&sID=20&subSID=119 &documentID=1391, provides the following commentary on developments there, under the title “Taking Cover”:

“Along with pensions, insurance problems have climbed to the top of the intray for many charity finance directors in the past year. Charities have been slapped with stiff increases in premiums, often at short notice, and in some cases refused cover altogether.

The situation became so difficult last year that the Active Community Unit at the Home Office set up a working group to look at the problems facing the sector. It also appointed the consultancy, Alison Millward Associates, to explore possible solutions. They are expected to make recommendations to the working group in June 2003 on ways forward. …

John Parker, head of general insurance at the Association of British Insurers (ABI), says 11 September, combined with falling stock markets and under pricing of insurance in the late 1990s, means there has been a big change in the market. He points, in particular, to areas like employers' liability, where there have been premium increases of up to 50 per cent in the past year and where further increases are on the cards.

There have been meetings between the ABI and the Charity Finance Directors' Group (CFDG) on ways forward, and the ABI has agreed to take part in a joint education day with charities, to be held in May or June.

According to Parker, insurers are demanding higher levels of risk management by charities, although he acknowledges that some insurers have preconceptions about voluntary sector activities and their risks.

An NCVO survey last year found that increases in premiums for charit ies were running at 30-100 per cent and were leading to a scaling down of activities or even closure. The problem is particularly acute for the voluntary and community sector as it is unable to pass on higher costs, and so organisations have had to meet increases from reserves or re-allocate funds from existing budgets. …

Among the solutions suggested by the Home Office's working group are:

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· the development of a tool aimed at helping charities to carry out risk management or a good practice guide, perhaps in partnership with the ABI · the abolition of insurance premium tax for voluntary groups · that requirements for public liability insurance be reviewed to take into proper account the real risks of an activity · an emergency funding pool to help those groups on the verge of collapse · bulk purchasing arrangements for conglomerations of smaller groups. …

The idea of a group of charities coming together is not new. British Trust for Conservation Volunteers (BTCV) administers a scheme on behalf of 1,000 small groups working in conservation and the environment. This group scheme, which mainly covers public liability insurance, has been in operation for 20 years but was threatened last year when the insurer Ecclesiastical withdrew cover. Fortunately, the charity managed to get cover from another insurer, Zurich.

The advantage of this group scheme, says Martin Hall, insurance manager at BTCV, is it offers economies of scale. 'It costs the group members half what they would normally pay if they went to a broker,' he says. Even so, premiums have risen sharply in the past year, from around £40 per group to £140. BTCV's chief executive Tom Flood is now investigating whether the scheme could be extended to other, non-conservation charities. …

Another approach, similar to BTCV's group scheme, is pooling different charities' insurance needs into a mutual. Paul Koronka of Charles Taylor Consulting, which manages a number of insurance mutuals in the UK and US , believes this is a possible way forward in keeping premium costs down.

In an insurance mutual, he says, the member organisations analyse trends in claims and agree to pay for lower-level claims collectively, but contract out catastrophe cover to the big insurers. 'The mutual becomes a shock absorbing system and allows the members collectively to get a better deal from the insurance industry,' says Koronka. …

Other ways that charities can protect themselves include using sector-specific schemes, such as the NCVO Encompass policy, run through broker Keegan and Pennykid.

NCVO head of membership Lucy French says the deal, which was launched two years ago, has been successful in cutting premiums for charities that sign up. 'For example, NCVO's insurance premium was cut in half as a result of the scheme, although it has obviously gone up since then,' she says.

Whatever 'solutions' are identified for the sector's insurance problems, it looks unlikely that there will be a return to the low premium environment of the late 1990s, at least in the medium term.

'There's been a profound change in the insurance industry and it's become much more risk averse,' says the ABI's John Parker.”

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As was indicated above, the Active Community Unit of Britain’s Home Office commissioned Alison Millward Associates to study the situation and propose some solutions. The firm’s report is included in Appendix H. It said, in part,

“The Insurance Industry has a major influence on the viability of VCS organisations in terms of both provision of adequate cover and premium setting, which is sustainable for the individual groups. Having said that, the response of the Industry to the VCS issues was on the whole disappointing.

Many Insurers lack understanding of the sector and as a result are reluctant to provide cover. They prefer to involve themselves with risks that have a large degree of uniformity in terms of the activities undertaken and the processes taking place.

Risk management has become the major focus of attention in the Insurance Industry. Insurers are attracted to business where Health and Safety and Risk Management are maintained to a very high standard. Good working practices and effective training and supervision are considered to be of paramount importance. It was clear that the VCS suffers from the perception that the people involved tend to be well meaning volunteers with a lack of understanding regarding risk assessments, health and safety responsibilities and the management of risk. Evidence suggests this perception to be without justification.

Many insurers are not prepared to offer cover for liability classes in isolation and this has had a very detrimental effect on small voluntary and community groups where there are no assets that could also be insured. …

The general view amongst members of the ICWG (Insurance Cover Working Group) was that the majority of local authorities have been trying to distance themselves from the insurance difficulties VCS organisations have been facing. They too have faced spiralling insurance costs and have been trying to minimise the number of claims being made of their insurers. If they are not able to retain control over a VCS organised activity, they are frequently not prepared to assist with insurance for that activity. Yet, a primary role of local authorities is to maximise the use of premises and equipment for local communities.

On a more positive note we found a number of local authorities to be using a variety of helpful strategies including: • Use of blanket cover arrangements for public liability insurance for the VCS hirers of premises • Umbrella arrangements for organisations delivering public services to be covered by the local authority’s own insurance policies where the VCS organisation has been unable to arrange it for themselves • Inclusion of insurance for VCS premises hirers under the local authority’s own policies • Accepting the insurance responsibilities for the activities of all members in a partnership initiative, where the local authority is the lead partner

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• Waivers or reductions in premiums • Signposting VCS organisations to helpful brokers. …

A series of practical solutions which could be actioned, by the various interested parties in the insurance for the VCS issue, are outlined in section 11 of the main report. These include:

Government • Establish a body to act as “honest broker” in the high level discussions required • Abolish Insurance Premium Tax (IPT) • Ring-fence use of IPT for an Emergency Funding Pool or Indemnity Fund to support small organisations or those working in particularly risky areas eg youth work or care work • Address impact of related legal and policy issues such as no win no fee • Provide resources, not just policy, for the full recovery of costs • Provide a Home Office Insurance Scheme for small organisations • Provide risk management information on the Home Office web site • Provide risk management information on the Charity Commission web site.

Insurance Industry • Engage in high level discussions with Government and representatives of the VCS • Provide more bulk purchasing schemes • Establish insurance mutual clubs • Provide risk assessment and management information • Provide an Emergency Funding Pool • Extend umbrella arrangements.

Local Authorities • Develop an insurance toolkit (on LGA and IDeA websites) to promote and deliver a variety of strategies to support the VCS in achieving appropriate and proportionate cover including blanket cover and umbrella arrangements, inclusive policies, waivers and reductions • Provide an introductory service to brokers and companies for VCS organisations • Create associations in geographical areas for small VCS organisations.

VCS organisations • Improve risk management and the communication of good practice • Establish ongoing dialogue with brokers and insurers • Develop negotiating power through collaboration within the sector • Promote accreditation to quality standards for business practices within own organisations and those associated with them.

In 2004, the Active Community Unit issued a report of the work being done in response to the findings outlined above. A copy is included in Appendix H. It says, in part,

“In the light of concern over increases in the cost of liability insurance premiums, and difficulty in negotiating renewal of cover by the voluntary and community

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sector, the Government, working with a range of stakeholders, is undertaking a programme of action to address the challenge.

The programme is the responsibility of the Home Office’s Active Communities Directorate, supported by other government departments and an insurance cover working group (ICWG). The ICWG is a forum for discussion with representatives of the insurance industry, local authorities and the voluntary and community sector. …

The action points comprise:

1. The Home Office Minister responsible for Communities championing the cause of insurance for the voluntary and community sector. 2. Taking forward ongoing work on employers' liability insurance, legal costs and full cost recovery, ensuring the interests of the voluntary and community sector are taken into account. 3. Drawing together sources of practical advice and expertise in order to increase the capacity of the sector to deal with insurance issues. 4. Making better practical arrangements for working with local government. 5. An ongoing dialogue between the voluntary and community sector, the insurance industry and government, facilitated by the Home Office.”

Of particular note in this list is that the Home Office Minister undertook to be a champion for the voluntary and community sector in the search for solutions.

As the foregoing indicates, the UK has put particular emphasis on risk management. An article published by the Charity Commission related to requirements for risk management is included in Appendix H. It says, in part,

“The Charity Commission issued the revised Statement of Recommended Practice, Accounting and Reporting by Charities, in October 2000. Probably the most headline grabbing new requirement introduced by the Charities SORP 2000 is the requirement for trustees to make a statement on risk management in their statutory annual Trustees Report that normally accompanies the accounts. …

Risk management is now seen as an important tool in ensuring the ordered and efficient operation of charities, regardless of their size or nature. It is the formalisation of this essentially common-sense approach to charity administration that should be the focus of trustees’ attention, not just the Charities SORP reporting requirements.”

Australia

The effects of the hard market were particularly acute in Australia, compounded by the collapse of the country’s largest carrier of liability coverage. A brief prepared for the Government of Australia in March 2002 is included in Appendix H. It described the problem as follows:

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“The Information and Research Service of the Department of the Parliamentary Library has received many requests from Parliamentarians for information and advice on the causes of recent increases in liability insurance premiums and possible courses of action for Government. Many constituents have contacted Parliamentarians about premium increases for liability insurance, and have reported that many non-profit and community groups have been faced with (in some cases) massive premium increases. These groups and organisations can not afford to pay higher premiums and have been forced to curtail their activities or cease them all together. Anecdotal evidence suggests that the cancellation of community events and cultural activities has been quite common in regional areas. …

The price of liability insurance has increased due to the collapse of the HIH Insurance Group. In March 2001, HIH Insurance Ltd and associated companies were placed into provisional liquidation. The HIH group comprised several authorised insurers that wrote many types of insurance including compulsory insurance. HIH was Australia's second largest insurance company with gross premium revenue of $2.8 billion. HIH held a large share of the market for certain classes of liability insurance, particularly public liability. This market share was won through aggressively building market share through offering lower premiums. With this practice no longer operating in the market, premiums have increased. The demise of HIH removed capital (and supply of insurance) from the industry. This contraction of supply combined with stable demand caused prices to rise. In addition, the few remaining companies that sell liability insurance in Australia have not adopted HIH's practice of selling at a discount, hence, policyholders that previously held policies with HIH will be faced with premium increases caused by more disciplined underwriting.”

In response to the crisis, the country’s Treasury Department commissioned Trowbridge Consulting to provide an analysis of the situation for a meeting of federal and state min isters on March 27, 2002. The executive summary of the firm’s report is included in Appendix H.

A significant factor underlying the problem in Australia was a long-term trend toward increasing frequency and cost of claims. Trowbridge said,

“Hence the problem that now exists is the consequence of –

§ Continuing increases in claims costs for personal injury claims (a 20 or 30 year phenomenon that currently shows no signs of abating) § An insurance market dominated by defensive pricing and underwriting by insurers (a recent phenomenon and part of a severe insurance market cycle).”

The firm went on to outline a broad range of possible responses. Subsequently, an extensive program of reform was developed and implemented at both the federal and state levels.

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In April 2003, Volunteering Queensland issued an update on efforts to improve the availability and affordability of insurance. It said, in part,

“As you have no doubt seen from the State Government’s press releases over recent months, their introduction of a number of initiatives such as the group insurance scheme, for community based organisations, the provision of stamp duty relief for those organisations, the Personal Injuries Proceedings Act 2002 and more recently the risk management support in the form of web based resource and the Civil Liability Act 2003, are all designed, as a primary objective, to have the effect of containing the insurance premium increases that have promised to cripple many community organisations. The State Government has also formally requested that the Federal Government give the ACCC greater investigative and enforcement powers in relation to insurance companies, rather than rely simply on the monitoring powers it currently has. Also, the State Government’s risk management resource will soon include seminars to be conducted in regional areas that, as far as we know, will assist local community organisations to upgrade their knowledge and skills in conducting risk management audits.

To date however, there appears to be no concre te evidence that any of these initiatives are succeeding to reduce costs.”

A discussion paper was prepared later in 2003 by Professor Myles McGregor-Lowndes, the Director of the Centre for Philanthropy and Nonprofit Studies at Queensland University of Technology. A copy of the paper is provided in Appendix H. It outlines a number of strategies he considered to offer a sustainable solution to the issues. They included

§ improvements in risk management, § nonprofit organizations acting collectively to meet their risk management needs, including use of group purchasing, risk pools, captives, and risk retention groups, § establishment of a body to assist nonprofit organizations in building their risk management and insurance capacity – modeled after The Nonprofit Risk Management Center in Washington and the Public Entity Risk Institute, § modifications to insurance industry data collection and reporting practices, § increasing control by nonprofit organizations over their insurance premium and loss data, § expedited methods to improve the claims resolution process, § tort liability reform to reduce the magnitude of damages while providing greater certainty that injured parties receive some compensation for loss, and § protection of volunteers from loss, provided the organizations they assist assume financial responsibility for the claims.

In other words, he suggested a wide-ranging program was needed.

In February 2004, the Treasury Department issued a report of the work done. An overview is included in Appendix H. The report said, in part,

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“Since early 2002, Governments across Australia have undertaken a program of unprecedented law reform and achieved a raft of changes unmatched in the common law world for their breadth and scope. These reforms were specifically designed to promote predictability to improve the cost and availability of liability classes of insurance and alleviate the crisis that had engulfed the Australian community. …

The insurance climate in Australia has vastly improved as a result of these reforms and commitments are in place to ensure that progress in restoring balance to the Australian system will continue.

Capacity is already returning to liability insurance in Australia and the price increases of recent years have stabilised. Recent industry surveys show underwriters and brokers generally expect capacity to increase further in 2004 and 2005 and that brokers are experiencing increasing interest from offshore underwriters enticed to the Australian market by attractively priced and profitable business.

Reforms undertaken to date have encouraged three insurers operating in Australia to form an alliance to provide public liability cover for small not-for- profit organisations. The activities of this alliance, the Community Care Underwriting Agency, have spread across jurisdictions as law reform was implemented, and at the end of 2003 the agency had already written policies for more than 1000 not-for-profit organisations.

Although some in the industry are taking a cautious approach to the early stages of reform, as the impact of tort reform on claims becomes clearer the return of capacity is likely to continue and strengthen.

Evidence indicates that conditions in the insurance market have begun to stabilise. Industry observers are reporting improving operating results, lower combined ratios and a favourable environment for insurers.

The comprehensive program of law reform has been a major contributor to this stabilisation and governments firmly believe that these reforms create a platform for a more stable and predictable insurance environment in the long term.”

Among the reforms implemented in Australia were volunteer protection acts in each jurisdiction. An article in the March 2005 issue of Torts Law Journal by Professor Myles McGregor-Lowndes and Ms. Linh Nguyen provided an assessment of the experience. It also compares the Australian experience with that in other jurisdictions. A copy of the article is included in Appendix H.

The article said, in part,

“The Volunteering Australia model code of practice for organizations involving volunteer staff requires that the organisation provide ‘appropriate and adequate

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insurance coverage for volunteer staff’. Their code of volunteer rights also states that a volunteer has the right ‘to be adequately covered by insurance’. During the International Year of the Volunteer (2001), representations were made to governments that volunteers would cease their activities for the general public good unless something was done about liability exposure of volunteers.

Similar concerns about volunteer litigation, insurance costs and possible withdrawal of volunteer services were evident in the United States during the 1980s. During much of that decade, there was a series of unsuccessful attempts at both state and federal levels to pass laws protecting volunteers from lawsuits. Volunteer protection laws were first passed in the United States in the early 1990s, culminating in the federal Volunteer Protection Act 1997 (VPA). The federal law provides minimum standards of le gal protection and immunity to volunteers. Where a volunteer is working for a non-profit organisation or a governmental entity, he or she is immune from liability for harm caused by his or her acts and omissions if:

• he or she was acting within the scope of his/her responsibility; • he or she was properly licensed, certified or authorised to engage in the activity or practice (if required by the state in which the damage occurred); • the harm was not caused by wilful or criminal misconduct, gross negligence, reckless misconduct or a ‘conscious, flagrant indifference’ to the rights or safety of the individual harmed by the volunteer; and • the harm was not caused by the operation of a motor vehicle, aircraft, or other vehicle for which an operator’s licence or insurance is required by the state. …

The sharp rise in insurance premiums and unavailability of insurance coverage occasioned by the emergence of a hard insurance market in 2001 gave rise to a State and Federal Government forum in 2002 to respond to community concerns. The Review of the Law of Negligence (Ipp Report) commissioned by the forum was to act as a blueprint to coordinate a national approach to reform the law with respect to public liability and professional and medical indemnity. In respect of volunteer liability, the Ipp Report stated:

‘The Panel is not aware of any significant volume of negligence claims against volunteers in relation to voluntary work, or that people are being discouraged from doing voluntary work by the fear of incurring negligence liability [and has decided] to make no recommendation to provide volunteers as such with protection against negligence liability.’

There was little evidence to support volunteers’ fears of litigation being the reality, as there are few reported cases on volunteer liability in Australia or the United Kingdom. Some reported Australian litigation involves liability arising from volunteers acting as officeholders of non-profit entities. It is common for Australian household insurance policies to provide between $10 million and $20 million cover against incidents that cause death or bodily injury or loss or damage to property outside the household. The usual cover is for Australia and New Zealand (with some around the world) and extends not only to the house

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owner, but their immediate family living with them such as partner, children, unmarried siblings, parents and parents-in-law. About three quarters of all Australian households are protected by household insurance against public liability. Few volunteers appear to appreciate this insurance coverage. Most insurance policies exclude incidents where the insured is an officeholder of a club or association, or a coach, referee or official at a game or organised sporting activity. If insurance companies do realistically assess actual risk, then their assessment of potential risk of volunteers’ liability points to officeholder risks. This is borne out by litigation involving volunteer officeholders such as Commonwealth Bank of Australia v Friedrich and Agar v Hyde. Before the federal legislation was passed in the United States, the situation was remarkably similar with the fear of volunteers being exposed to personal liability not being matched with actual litigation or withdrawal of services. In a report released in 2001, the American Non-Profit Risk Management Center (ANPRMC) believed that it was unlikely large numbers of volunteers withdrew their services because of the fear of liabilities or that potential volunteers did not volunteer because of the liability issue. It maintains that the evidence showed a steadily increasing volunteer rate even during the period before the enactment of the provisions. It does, however, acknowledge that there was considerable community concern about the issue of volunteers being caught in litigation. The ANPRMC’s research revealed that, three years after the legislation was introduced, the number of suits filed against volunteers had not declined. It explained this by reference to the limited nature of the protection and the fact that the provisions ‘may be helpful to plaintiffs seeking damages from volunteers, in that it makes it clear how a suit must be styled to require a review of the facts by a judge or jury’. Despite the Ipp Report’s recommendations, State Ministers agreed on the need for protection of volunteers and non-profit organisations. As such, the remaining States, Territories and the Commonwealth responded by enacting statutes containing volunteer protection provisions that formed part of general tort law reform in Australia. This article first summarises the provisions of volunteer protection legislation in Australia. It identifies the legislative structure of the volunteer provisions in each jurisdiction and compares and contrasts the approaches taken. The article then examines unanticipated consequences of particular provisions and elements adopted by some States and Territories that others might consider appropriate.”

The article proceeds to provide an extensive analysis of the provisions of the volunteer protection acts in different jurisdictions.

Specifically on the topic of directors and officers, it says,

“In New South Wales and Queensland, specific protection is given to volunteer officeholders, as well as ordinary volunteers of the organisation. As discussed earlier, volunteers serving as officeholders appear to be more likely to be involved in litigation; usually involving a breach of their duties as officeholders.”

On the topic of indemnification, it says,

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“In the United States, a common strategy for dealing with imposed statutory volunteer liabilities is the provision of an indemnity by the volunteer to the community organisation for any loss arising from the volunteer’s wrongful acts or omissions. These agreements shift the assumption of risk from the organisation to the volunteer, thus raising the following issues: • risk is shifted to the volunteer who is often not in the appropriate position reasonably to foresee the risk involved as he or she does not have the resources or control over activities that an organization has; • the requirement of an indemnity may put volunteers on guard, firstly that the activity should not be undertaken as it is fraught with peril, and secondly, creating an unwillingness to donate their time as they may be held lia ble for their tortious conduct.

In most Australian jurisdictions, the provisions explicitly state that community organisations cannot enforce contracts, agreements or understandings whereby a protected volunteer is obliged to indemnify a community organis ation for the cost of any liability caused by their acts or omissions.”

And it also contemplated the idea of state adoption of liability, as follows:

“Even though liability is passed on to the community organisation, it may be the case that they do not have any assets of substantial value or the ability to finance the satisfaction of potential liabilities. In times of a hard insurance market, it is also possible that a community organisation may not be able to source public liability insurance, let alone affordable insurance. Unless the community organisation is willing to expose itself to such risks without insurance, it may decide to withdraw its services. Even if it continues to operate without insurance, a volunteer’s liability passed on to the organiz ation may not be satisfied, leaving a defendant without any prospect of obtaining damages. Both situations may be unacceptable to communities who may rely on such vital services. The State may wish, given its assets and community responsibilities, to step in to redress the situation. Some jurisdictions have adopted various devices to address such a situation and others who have made no provision could consider such arrangements. …

There needs to be some consideration of whether liability passed on to the State should be restricted only to organisations representing the government, or whether community organisations carrying out activities ‘connected’ with government responsibilities should also have the benefit of having their liability assumed by the State. Allowing for this type of transfer of liability would ensure both that community organisations carrying out these types of activities would not face the fear of legal proceedings, and that people suffering injury, loss or damage could be compensated fully as the defendant would have the financial circumstances to pay any damages awarded.”

Finally, the article ends with the following conclusion:

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“The volunteer protection provisions at first glance appear to provide desirable immunity from litigation for volunteers but, on closer examination, there are significant restrictions on the immunity. To further complicate matters, each jurisdiction contains variations to volunteer protection law, adding to the confusion of both the community organisation and the volunteers themselves whose activities cross State or Territory borders. This article has set out a number of areas where legislative reform would be valuable to volunteers working for community organisations across Australia. The main aim was to highlight the variations between jurisdictions concerning volunteer protection laws in the hope of achieving uniformity, predictability and greater protection for volunteers whose work may spread interstate. The suggestion of uniform legislation may also have a practical effect on an insurance company’s willingness to provide insurance for local community organisations due to the added certainty that uniform legislation provides.”

In July 2005, the Australian Competition and Consumer Commission issued its Fifth Monitoring Report related to public liability and professional indemnity insurance. It said, in part

“There were 42 direct insurers active in the public liability insurance sector in Australia during 2004. Of these, the four largest earned 48 per cent of premium revenue, indicating that supply of this class of insurance is not highly concentrated.

Based on data provided by eight of these insurers (which accounted for 71 per cent of premium revenue for that class of insurance), the ACCC found the following:

• The average premium for public liability insurance fell by 4 per cent in 2004 and most insurers expect premiums to fall further in 2005—previously, the average premium had remained stable in real terms between 1997 and 1999 before rising significantly from 2000 onwards. • In respect of the terms and conditions of insurers’ standard public liability insurance policy, on average, the cover limit and level of excess have risen by around 10 per cent and 20 per cent respectively since 2002. • There was no substantial change in the average size of public liability claims settled in 2004, in contrast to increases in most years since 1997. • Both the number and frequency of claims incurred by insurers have remained relatively stable since 2002—there has been a small increase since 2002 in the frequency of property damage claims and a slight decrease in the frequency of personal injury claims. • The underwriting financial performance from public liability insurance written in 2004 is expected to be slightly lower than in 2003, with the gross combined ratio rising by 4 per cent to 88 per cent and the net combined ratio rising by 2 per cent to 77 per cent. • Most of the monitored insurers believed that the number and cost of public liability insurance claims in 2004 were lower than they would have been if tort

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reforms had not been implemented, with the estimated savings ranging from 1–5 per cent to 16–20 per cent. • Similarly, the majority of insurers believed that average premiums were lower in 2004 as a result of tort reforms, with the estimated savings ranging from 1–5 per cent to 6–10 per cent. …

The ACCC asked the eight insurers in the monitoring program if they collected separate data on public liability insurance claim costs and premiums for not-for- profit/community groups. Most insurers stated that they either did not write policies for such groups or did not differentiate between businesses and not-for- profit organisations that purchase public liability insurance, and were therefore not able to provide disaggregated data.

On the issue of availability of insurance for the not-for-profit sector, the ACCC is aware of several organisations that either provide, or help provide, insurance for not-for-profit organisations, including the Community Care Underwriting Agency (CCUA), Community Related Insurance and Superannuation Program (CRISP), the Council of Social Service of NSW (NCOSS) Community Cover, Catholic Church Insurances Limited (CCI) and EIG-Ansvar.

CCUA is a joint venture that only writes public liability nsurancei for the not-for- profit sector in Australia for organisations with a turnover of no more than $5 million per annum. The joint venture partners include the insurance companies QBE, IAG and Allianz.

CRISP is a program of the NSW Meals on Wheels Association and is managed by Austcover Pty Ltd Australian Financial Services. CRISP is available to any not-for- profit group within Australia.

Brokers Aon Risk Services and NCOSS have created NCOSS Community Cover, which is a bulk buying program that helps a range of not-for-profit organisations obtain public liability insurance policies through licensed insurance companies. The program is being expanded and aims to establish a not-for-profit insurance company.

CCI offers a full range of insurance products, including protection for property, motor vehicles, liability personal accident and workers’ compensation insurance. These products are available for parishes, schools and other education facilities, hospitals, nursing homes and other health care services, welfare organisations and other church or religious institutions in Australia.

The Ecclesiastical Insurance Group (EIG) acquired the Australian, New Zealand and UK subsidiaries of Ansvar Insurance to form EIG-Ansvar. EIG-Ansvar provides insurance primarily for church groups, but also provides insurance for care homes, retirement villages and independent schools in Australia.”

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In other words, the voluntary sector still depends on insurance provided through specialized programs and there is a lack of data specific to the sector – very much like the situation in Atlantic Canada.

With respect to the impact of reforms on premiums, the report said,

“The ACCC asked insurers to what extent tort reforms had affected premiums in the 12 months to 31 December 2004.

Two insurers thought that average premiums have been 6–10 per cent lower, and four insurers estimated that average premiums have been 1–5 per cent lower in 2004 as a result of tort reforms than they would have been without tort reforms. The remaining two insurers thought reforms had not changed average premiums in 2004.

Some insurers noted that it was difficult to isolate the effect of tort reforms from general competitive pressures, either because of the nature of the premiums written by the company or because some insurers’ premiums had previously made allowance for tort reform. One insurer had made specific allowance in its premiums of around 6 per cent savings due to tort reforms in 2004.

Insurers were asked if they anticipated expected savings in premiums as a result of tort reforms to be ‘higher’, ‘the same’ or ‘lower’ over the next two years compared with current savings. About half thought there would be no change in the level of savings, one expected savings to be higher, another thought savings would be lower, and one insurer was uncertain.”

New Zealand

About 30 years ago, New Zealand effectively abolished application of tort law to accidents, however they are caused. An article titled, “Privatization of Accident Compensation: Policy and Polit ics in New Zealand” was published in the Washburn Law Journal. It said, in part,

“On April 1, 1974, the New Zealand Parliament replaced the common law action for damages for personal injury with an accident compensation scheme. A system of awarding damages based upon proof of another person’s responsibility for causing injury was seen as incapable of dealing with the serious social problem of accident victims needing a secure source of financial support after having been deprived, permanently or temporarily, of their capacity to work. From the outset, the right to recover compensation under the new scheme was based not on any question of liability but simply on the claimant coming within one of the statutory conditions for cover, in which case he or she could make a claim to the public body administering the scheme. This right also was the claimant’s only option. Where coverage existed, the right to sue for damages was barred.

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The founders of the scheme had high hopes that it would provide fair compensation quickly and efficiently to deserving victims. It was introduced to general approbation and initially, indeed, it worked well enough. Unsurprisingly, however, the scheme has become increasingly controversial as problems concerning the level of coverage, incentives to rehabilitation, methods of funding, and, most critically, overall expense have come to the fore. The scheme originally had broad all party support. Nowadays it has become far more of a political football. Recent developments have dramatically widened the area of disagreement. A major change in the nature of the scheme occurred on July 1, 1999, when the part dealing with personal injuries suffered at work was hived off from public administration and control and opened up to private enterprise insurers. Then, at the end of 1999, after a general election, political opponents of this change came to power, and shortly afterwards they introduced a Bill aimed at restoring the public monopoly.

The purpose of this article is to report on these various developments. …

The quid pro quo of the right to statutory compensation was the barring of any right to sue for damages that might otherwise have been available. From the inception of the accident compensation scheme in 1974, it has not generally been possible to sue in New Zealand for compensation for personal injuries or death suffered after that date. …

In 1974 the accident compensation scheme in New Zealand represented a great experiment. Now, after twenty-five years of experience, a return to tort seems unthinkable. The manifest weaknesses of the tort system have not disappeared, and any corrective role, which might be regarded as its main asset, tends to disappear when put in the context of widespread liability insurance. Certainly, accident compensation has had its own problems, but by comparison with the tort system it has to be judged a clear success.”

The brief prepared in Australia referred to above described the scheme in New Zealand as follows:

“The accident compensation scheme provides accident insurance for all New Zealand citizens, residents and temporary visitors to New Zealand. In return people do not have the right to sue for personal injury, other than for exemplary damages. The scheme:

§ provides cover for injuries, no matter who is at fault § eliminates using the courts for each injury § reduces personal, physical and emotional suffering by providing timely care and rehabilitation that gets people back to work or independence as soon as possible § minimises personal financial loss by paying weekly earnings compensation to injured people who are off work § focuses on reducing the causes of these problems - the circumstances that lead to accidents at work, at home, on the road and elsewhere.

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The scheme is administered by the Accident Compensation Commission (ACC) which spends about $NZ1.4 billion each year on rehabilitation, treatment and weekly compensation. To fund these services, the ACC collect premiums. The ACC also earn income from investing premiums.

All New Zealanders pay premiums for ACC cover. Premiums are set to pay for the current and future costs of all claims made in that year.

The government funds the costs of injuries to people whom are not in the paid workforce. The government funds this on a 'pay-as-you-go' basis, meaning that ACC collects enough today to pay for all costs today. The government sets premiums. They result from recommendations from ACC's Board of Directors following a formal public consultation process. As a result of improved scheme performance, premiums have begun to fall and over the past two years have reduced by nearly $NZ500 million, a 25 per cent drop.

The premiums paid to ACC are assigned to one of seven accounts. When there is an ACC claim for this type of injury, the compensation is funded from this account.”

In 1996, New Zealand’s Hutt Valley Chamber of Commerce published an article titled, “New Zealand’s ACC Scheme: Time for a Decent Burial”. It is included in Appendix H and says, in part,

“From the consumer perspective, the issue is not only cost but choice and value - the relationship of benefits to costs. Henry Ford once said that his customers could have any car provided it was black. Who wants that kind of product today? Individuals have a large range of needs and preferences for cover, and differ in their capacity to cope with risks. The ACC is a one-size-fits-all scheme which is inherently inefficient and unjust - many women, for example, are penalised because they account for fewer accidents from sport, crime and motor vehicles than men, yet pay the same levies.

The raft of other endemic problems with the scheme is well known. Levy rates do not accurately reflect industry accident records, so that resources are misallocated across industries in the economy. Experience rating is rudimentary and safe employers within an industry cross-subsidise ones with poor safety records. The focus of the scheme is on a myriad of routine small claims rather than the low probability/high cost events that people generally choose to insure against. Lump sum cover is not available, whereas such cover is often a feature of insurance contracts favoured by insureds and insurers alike. The scheme discriminates on no logical grounds between sickness and accidents. Accident victims face ever-changing rules on benefits and eligibility - they have no policy contract on which they can rely. The ACC's performance has been criticised by the Auditor-General. Levy increases are making the Reserve Bank's job more difficult and weakening the economy's international competitiveness. Arbitrary inter-generational transfers are occurring because of the growing unfunded liability. Judicial activism continues to expand the scope of the scheme. There

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are regular news reports of abuse of the scheme by health professionals and claimants. It absorbs an inordinate amount of politicians' time. …

It is almost certainly the case that the current no-fault system is better than the tort liability regime in the United States today. But those are not the only options - the United Kingdom, for example, has a much more conservative tort regime than the United States. Again we should be careful about adopting one-size-fits- all solutions. Well-conceived liability rules might differ as between categories such as motor vehicle accidents, workplace accidents, medical malpractice and product liability. To the extent that the government must override voluntary contracting, and in accidents involving strangers where there may be no contractual possibilities, options such as subrogation rights to insurers, limits on the amounts recoverable and the use of administrative tribunals should be considered to avoid the excesses that have occurred under some tort regimes. …

The Woodhouse report noted that ‘the proposals we have made have no direct parallel elsewhere’ and asserted that ‘we do not doubt that before long they will begin to be acted upon’ by other countries. This was a revealing exercise in self - delusion - no country has followed the New Zealand path.”

However, the model has since undergone substantial changes and the ACC now seems to be performing much better. In its Annual Report for 2004, the Board Chair said,

“The past few years have seen a gradual return to the founding principles developed by Sir Owen Woodhouse and the Royal Commission 36 years ago, and I believe we now have an injury compensation scheme that is the closest we have come yet to the one they envisaged. …

The scheme remains a world leader in providing cost-effective rehabilitation and compensation, and stands as a testament to the Royal Commission. While other countries have experienced the financial fallout and massive premium hikes in the world insurance market, and the burgeoning costs of civil litigation and damages claims around the world, New Zealand has been largely protected. This is clearly demonstrated through comparison with our closest neighbours. While our rates for workers’ compensation were similar to Australia’s six years ago, New Zealand’s now are on average 65% less than those over the Tasman, giving us a clear competitive advantage in most industries. New Zealand’s rate of work injuries and diseases resulting in a week or more off work is 40% lower than Australia’s and ACC’s administration cost is about a third of the cost of Australian schemes. And we have far fewer disputes, due in part to ACC’s no- fault principle. …

New Zealanders rightly support the continued prohibition of tort liability (the right to sue). As a consequence, we avoid the 30% share of total costs that in Australian workers’ compensation schemes is absorbed in legal expenses. We also avoid the lottery involved in trying to demonstrate that someone else was at fault – assuming they were worth suing.”

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SOLUTIONS

Unmet Needs

Based on the foregoing discussion, it can be concluded that the insurance needs of voluntary organizations in Atlantic Canada are not presently being met very well. Specifically,

§ there are only a few potential suppliers of the products needed by voluntary organizations in Atlantic Canada, § both buyers and sellers depend on intermediaries – agents and brokers – to find the right match between needs and product availability, § buyers, sellers, and intermediaries all have limited knowledge of each other, and § agents and brokers serving the local markets where most voluntary organizations are based often do not have either the products or the knowledge to serve those organizations’ distinctive needs.

The overall result is that a substantial number of voluntary groups have no insurance, leaving people who may be injured through their activities with no clear path to compensation. Others have coverage but it may not be suited to their needs. And, if they have coverage, it is likely to be more expensive than it should be.

On the whole, problems in the Atlantic Region are not much different from those that have been experienced elsewhere. The principal factor distinguishing the situation here is the challenge of distributing specialty products to a small population spread over a large area divided into four political jurisdictions – which is very similar to the challenges in distributing other goods and services in the Region. Even then, other areas outside major population centres likely have much the same problem.

Solutions are potentially available. They can be categorized generally in terms of

§ improving the supply of insurance products, and § changing the way voluntary organizations buy insurance.

In creating the solutions, there are implications for both funding of voluntary organizations and public policy.

Availability – the Supply of Insurance Products

Insurance companies have little or no presence in the predominantly local markets served by voluntary organizations. Their offices are typically in major urban centres and their contact with insurance buyers is mainly through agents and brokers that serve local markets.

Because the voluntary sector is a relatively small segment of the overall market for property and casualty insurance but represents a diverse range of risks, most insurers

Wolfgang Uebel/BizNext Page 77 SOLUTIONS do not have products designed to meet the particular needs of organizations in the sector. For the most part, insurance for voluntary organizations is provided through programs offered to the commercial sector. And some of their needs can be met adequately through such programs. For example, voluntary organizations’ needs for automobile, property, and fidelity insurance can be met through conventional commercial coverage – but their needs for liability coverage cannot.

If the major insurers writing most of the business in Atlantic Canada had programs designed for the voluntary sector, availability would not be a problem. But they don’t have such programs – or at least they are not visible. That means the brokers who represent the major companies do not have ready access to programs that suit their voluntary sector clients and must look for specialty programs. Obtaining access to such programs is then often a challenge, because the number of potential clients for any one broker is likely too small and the administrative costs related to the program are likely too high.

Even when coverage specifically targeted at voluntary organizations is available, the supply can change, sometimes rapidly, as was found during the recent hard market. For example, Royal & Sun Alliance – a major player in all four of the Atlantic Provinces – stopped offering coverage to the sector, leaving many organizations scrambling to find replacement coverage on short notice. During 2003, Royal and Sun Alliance had an underwriting loss in Canada of $82,991,000 – the second worst of any insurer in the country – so that experience was undoubtedly behind its decision to change its positioning in the market.

During the same year, other major players in the Region – Economical, Co-operators, Aviva, Wawanesa, and Dominion of Canada – also had substantial underwriting losses, affecting their willingness to carry some risks. ING, the largest insurer in the country, did not have an overall underwriting loss but chose to withdraw from the market in Newfoundland and Labrador.

Changes such as those described above have very pronounced effects in the Atlantic Region, which has a small population spread over a very large geographical area and which represents a relatively small part of the Canadian market for insurance. When a major player, such as Royal & Sun Alliance stops offering coverage to the voluntary sector, it means many brokers probably no longer have products to offer the sector – or, at least, they have to go looking for new products.

The fact that insurance products suited to the needs of voluntary organizations are not readily available in the Atlantic Region does not mean they are not available elsewhere in Canada. In particular, there are programs specifically targeted at the sector that are underwritten by Aviva, Sovereign General, Ecclesiastical Insurance, and Lombard Canada, all of which do at least some business in all four Atlantic Provinces. Some information about these programs is included in Appendix D.

Although insurance programs are potentially available, even in Atlantic Canada, that does not mean they are readily available throughout the Region or voluntary organizations know about them. Because of the way the market for insurance operates,

Wolfgang Uebel/BizNext Page 78 SOLUTIONS availability depends largely on the brokerage firms that serve local markets. And, because brokers often have exclusive arrangements with insurers, there is no guarantee a particular product is available through any one broker serving a particular local market.

Enterprising brokers can put together programs to meet particular needs, sometimes obtaining coverage from different insurers for different elements of risk. Across Canada, a number of brokers have worked with insurers to develop broker-sponsored programs designed for the voluntary sector. Brokers that have done so include Aon Reed Stenhouse, Frank Cowan Company Limited, LMS Prolink, Naturelink, Allsport Insurance, McDougall Insurance, K&K Insurance, HKMB Insurance Brokers, J. D. Smith Insurance Brokers, Lloyd Sadd Insurance Brokers, Ranger Insurance Brokers, and Toole Peet Insurance.

However, brokers are likely to take such initiatives only where there is a substantial number of organizations in the markets they serve that have similar needs. And that usually means the brokers serve markets with fairly large populations. The fragmentation of both the market and the brokerage industry in Atlantic Canada makes it difficult for any one broker here to put together programs for particular groups that have sufficient numbers to be attractive to an insurer. But it has been done. For example, a consortium of brokers – including MacDonald Chisholm, Bell and Grant, and Fraser and Hoyt – put together a program to serve all the municipalities in Nova Scotia, which it accesses through Frank Cowan, a managing general agent but not an insurer.

When brokers do take the initiative and develop programs to meet special needs, they want exclusive rights to distribute the programs. Otherwise, they are not likely to obtain much of a reward for their work.

In some cases, local brokers obtain exclusive rights to sell programs developed by other brokers elsewhere. For example, MacDonald Chisholm has the exclusive right to sell the program developed by Allsport in Nova Scotia. Both Sport Nova Scotia and Recreation Nova Scotia take advantage of that program.

Prior to 2003, Recreation Nova Scotia offered its members an insurance program underwritten by Royal & Sun Alliance and offered locally through Bell and Grant Insurance Brokers. When Royal & Sun Alliance stopped offering coverage to the voluntary sector, Recreation Nova Scotia had to find an alternative. Although it requested proposals from brokers, only one was received – the Allsport program offered through MacDonald Chisholm. As it turned out, the Allsport program was a good replacement, providing coverage that was just as good and at a similar cost to the one that was lost.

Recreation Nova Scotia’s experience illustrates a key point. During the hard market, a voluntary group that was forced to find coverage from a new insurer may have been able to find the coverage if it changed brokers. However, an organization that continued to depend on the same broker that had been serving its needs likely had more difficulty arranging coverage – because the broker had lost its product line – and

Wolfgang Uebel/BizNext Page 79 SOLUTIONS had to pay a higher price if it found coverage – because the broker had to look outside its normal roster of insurers.

Another significant point is that the Allsport program is underwritten by Aviva, the second-largest insurer in Canada and one of the top three providers of coverage in each of the Atlantic Provinces. To access the program, however, voluntary groups cannot deal directly with Aviva or even brokers who represent Aviva for home and automobile coverage. They must deal with a local broker, who accesses the program under an exclusive arrangement with a wholesale broker that organized the program with Aviva. In other words, Aviva’s program can be accessed only through the back door. Despite the convoluted process, the program still offers coverage that is more economical than others available to voluntary groups.

If more local brokers had agency relationships for programs developed by brokers elsewhere, it might help solve the problem of availability. However, many do not have sufficient numbers of prospective clients with similar needs to make such arrangements worthwhile. And, because there is a lack of data related to voluntary groups’ premiums and claims, it can even be difficult for them to identify opportunities.

Sometimes, a broker-sponsored program is developed in conjunction with an umbrella organization that serves the needs of its individual members. For example, Aon Reed Stenhouse and ENCON developed a Directors and Officers Liability Insurance program in conjunction with Volunteer Canada. It is available to voluntary groups across the country. To access the program, an association is required to pay a fairly nominal fee to Volunteer Canada to cover administrative costs, in addition to the insurance premium.

As the foregoing discussion illustrates, size matters a lot when it comes to buying insurance, an industry that depends for its existence on the law of large numbers. Although the voluntary sector is large, its diversity and the relatively small size of individual voluntary organizations – which are its strengths in serving social needs – work against it in finding suitable insurance coverage. Organizations need to work together to find a solution.

Affordability – the Cost of Insurance

Affordability is a function of both:

1. cost; and 2. ability to pay.

If premiums increase sharply, as they did during the hard market, most voluntary groups do not have much flexibility in their funding arrangements to absorb the increases.

Over the past year-and-a-half, the insurance market has softened and premiums have been falling, as is illustrated in Figure 3. On the other hand, Figures 4 and 5 show that premiums for liability insurance – the principal need of voluntary organizations – have not softened as much as those for other categories of insurance.

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FIGURE 3 ADVISEN PREMIUM INDEX: COMPOSITE

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FIGURE 4 ADVISEN PREMIUM INDEX: GENERAL LIABILITY

ADVx % Change

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FIGURE 5 ADVISEN PREMIUM INDEX: DIRECTORS AND OFFICERS LIABILITY

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In many respects, the price paid for insurance is a function of its availability. The Nova Scotia Insurance Review Board observed in its report that,

“Affordability and availability are very closely associated. A factor that changes one aspect will often impact the other.”

One of the basic principles of economics is that the price of any particular good or service is determined through the interaction of demand and supply. When demand exceeds supply, the price goes up, reducing demand to bring it into balance with supply. When supply is greater than demand, the price goes down, stimulating demand and again bringing it into balance with supply. These principles apply to the cost – and affordability – of insurance for voluntary organizations in the Atlantic Region.

If there were more suppliers of insurance to the sector, there would be more competition and the price could be expected to go down. However, specialized needs always find limited supply.

Apart from competitive influences, premiums charged by insurers are based on their expectations related to the costs of providing coverage. Those costs are driven by a number of different factors, including:

§ claims – dependent on the occurrence of adverse events and influenced by lawyers, court judgments, and public policy; § reinsurance – influenced by industry cycles; § selling costs – commissions to agents/brokers; and § administrative costs – influenced by the volume of accounts.

And, of course, the overall cost to an insurance buyer is also influenced by taxes levied on premiums.

The major factor in setting premiums is the cost of claims. No hard data are available on voluntary organizations’ claims costs but anecdotal evidence suggests they are low.

On the other hand, costs of liability claims are potentially very high, trends in tort law indicate the probability of claims is likely to increase in the future, and claims can arise long after the events that give rise to them. Differences between possibilities and probabilities represent uncertainty – which is a factor in setting premiums.

For voluntary organizations, a significant aspect of affordability is stability in premiums, which are partly influenced by the costs insurers incur for reinsurance to spread their risks. When there is an industry-wide reduction in capital – as there was following 9/11 – it leads to reduced underwriting capacity, reduced competition, and higher premiums.

Selling costs are another significant factor. Sales commissions can take up to a quarter of the amount paid for premiums. But that is partly the price of getting coverage for special needs.

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Indeed, there is a trade-off between amounts paid for premiums and service levels. Voluntary organizations are typically relatively small and undoubtedly want to pay as little for insurance as possible. On the other hand, that translates into a low level of service from agents/brokers and insurers.

Administrative costs are another very real issue, because they can be high, especially for dealing with large numbers of small organizations that do not have much in -house knowledge of insurance. To cover those costs, come insurers set minimum premiums for handling accounts. The Lunenburg-Queens Regional Development Agency (LQRDA) found that organizations had been asked to pay minimum premiums for Directors and Officers liability coverage ranging from $500 to $2,000. The Nova Scotia Insurance Review Board reported that groups had been asked to pay minimum premiums ranging from $750 to $5,000. In contrast, the LQRDA observed that some organizations had coverage through Recreation Nova Scotia “for a nominal fee per year”.

Because umbrella voluntary organizations that offer insurance programs to their members typically take on part of the administrative load, they are able to obtain better premiums from their suppliers. Volunteer Canada charges its members a $25 fee to cover administrative costs related to the directors and officers liability insurance program it provides. Similarly, Recreation Nova Scotia charges its members a fee to cover admin istrative costs related to the Allsport insurance program. To keep such fees low, it helps to have a substantial number of members.

In addition to the premiums, another element of the cost of insurance coverage is the taxes levied on premiums. All provinces and territories charge some taxes. Those levied by the four Atlantic Provinces are higher than most – with Newfoundland and Labrador being the highest in the country, by far. When premiums rise during a hard market, the corresponding increase in taxes adds to the overall burden.

Recommendation 1 – Provincial governments in the Atlantic Region – especially the Government of Newfoundland and Labrador – should consider eliminating taxes on insurance premiums paid by the voluntary sector.

Apart from premiums and taxes, affordability is also a function of voluntary organizations’ ability to pay. According to Statistics Canada’s National Survey of Nonprofit and Voluntary Organizations, over 40% of the organizations surveyed had annual revenue totalling less than $30,000 and over 60% had annual revenue of less than $100,000. However, the survey included only organizations that were incorporated, a fraction of the overall total, so the proportions of voluntary groups operating with very little revenue are undoubtedly much higher. Because most voluntary groups have little ability to pay, what is “affordable”?

Surveys carried out by the Community Services Council Newfoundland and Labrador and the Lunenburg-Queens Regional Development Agency in Nova Scotia both indicated approximately 40% of the organizations surveyed did not carry any insurance, primarily because they could not afford it.

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When voluntary organizations do not buy insurance, it exacerbates the ov erall problem of availability. A relatively small segment of the overall market for property and casualty insurance effectively becomes even smaller. And that diminishes the voluntary sector’s attractiveness for both insurers and brokers.

An Unattractive Market Segment

Fundamentally, availability of products, premiums charged, and the level of service the voluntary sector receives reflect the fact that it is not an attractive market segment for the insurance industry – not just in Atlantic Canada but around the world. Although the voluntary sector is large, it is unattractive for the following reasons:

1. it is a relatively small segment of the overall market for property and casualty insurance compared to automobile owners, home owners, and the commercia l sector; 2. it owns relatively few automobiles and little property – the industry’s core coverage areas and main sources of revenue; 3. it is made up of many small, independent organizations serving local areas with diverse mandates, leading to high service costs for selling and administration; 4. some organizations have a very limited life span, being put together on an ad hoc basis just to put off special events; 5. the sector’s principal insurance needs are related to liabilities under tort law – which can be very diverse, arise long after the events that create them, lead to open- ended costs, and represent less than 10% of the market for property and casualty insurance; 6. in many cases, a voluntary organization’s activities depend on use of assets owned by others, who do not want to be exposed to the liabilities related to the activities; 7. liability risks are a specialized area of insurance, characterized by relatively low probability but high potential severity; 8. some of those risks are so large they may simply be uninsurable; 9. risk management practices in the sector vary a lot; 10. voluntary organizations often buy insurance with fairly low deductibles, because they do not necessarily understand the impact of deductibles on premiums and because of their limited means – but that transfers substantial costs to insurers, which ultimately must be reflected in premiums; 11. most insurers do not like providing liability coverage by itself; 12. voluntary organizations have little knowledge of insurance and very limited resources, so § they expect a high level of service, and § they cannot afford to retain much of the risk, but § they cannot afford to pay much for the coverage; and 13. there is a lack of reliable data to help with underwriting the risk.

In general, voluntary groups that own property, such as religious organizations, are more easily able to obtain the coverage they need than organizations that need liability coverage only. Similarly, when there are substantial numbers of organizations engaged in similar activities – as there are in sports and recreation – there is more likely to be an insurance program available to them.

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To improve availability and affordability of insurance, voluntary sector organizations have to make themselves more attractive to insurers. There are good examples of how that is already being done, both in Atlantic Canada and elsewhere.

There is little voluntary organizations can do to change the nature of their mandates, their scope of operations, or the kinds of coverage they need. But they can reduce the likelihood and magnitude of liability claims. And they can improve the ways in which they buy insurance, to benefit from economies of scale by reducing selling and administrative costs.

Reducing the Likelihood and Magnitude of Claims

The principal means availa ble for reducing the likelihood and magnitude of claims is a good comprehensive program of risk management – not simply transferring the risk to an insurer. In other jurisdictions that have sought to improve availability and affordability of insurance, risk management has been a key component.

Recommendation 2 – Voluntary organizations should ensure they have good programs for managing their risks, to reduce the likelihood and magnitude of claims.

Liabilities flow from tort law. And there has been a long-term trend in the evolution of tort law contributing to increases in the frequency and cost of claims. Reform of the tort law system could help to reduce the likelihood and magnitude of claims.

Tort law exists to compensate victims who have had wrongs inflicted on them, either deliberately or accidentally. In our society, a basic principle is that victims deserve to be compensated. That is not likely to change through reform. Rather, the argument for tort reform is to reduce costs related to frivolous claims and avoid paying compensation that is excessive relative to either the injury suffered or the contribution to that injury.

There is little evidence that frivolous claims and excessive compensation are currently problems related to the activities of voluntary sector organizations in Atlantic Canada – or elsewhere for that matter. Because of the trend, however, it is an area of uncertainty that is priced into premiums.

Where extensive tort reform has been undertaken – most notably in Australia – the impact on insurance premiums is very difficult to distinguish from that due to softening of the market for insurance. According to a “News Backgrounder” published by the Center for Justice & Democracy based in New York on March 25, 2002,

“Sometime in March 2002, the American Insurance Association (AIA) published a “critique” of the Center for Justice & Democracy’s 1999 study Premium Deceit: The Failure of ‘Tort Reform’ to Cut Insurance Prices, co-authored by J. Robert Hunter and Joanne Doroshow. The study was conducted to test the effectiveness of ‘tort reform,’ which a majority of states enacted to bring down insurance rates in response to a severe liability insurance crisis in the mid-1980s. Premium

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Deceit examined rate activity in every state since that time. It found there to be no correlation between the enactment of tort restrictions and insurance rates. States with little or no tort law restrictions experienced the same level of insurance rate increases as those states that enacted severe restrictions on victims’ rights. …

These prior studies consistently found that the severe liability insurance crisis of the mid-1980s, which led many states to enact ‘tort reform,’ was caused not by legal system excesses but by the economic cycle of the insurance industry. Large rate increases and cut backs in coverage characterized insurance rates in all states in the mid-1980s. By the late 1980s, the insurance cycle turned again and prices began to fall everywhere. The nation enjoyed a relatively ‘soft’ insurance market for over a decade, with rates of liability insurance not only stable but also down in some years. That is until now, as the market once again is turning ‘hard.’ …

AIA’s lead point is not a criticism at all, but rather, validates Premium Deceit’s findings. AIA boldly states, “The insurance industry never promised that tort reform would achieve specific premium savings, but rather focused consistently on the benefits of fairness and predictability. …

In addition, if tort costs were the cause of rate increases, we should see a steady increase in rates rather than gyrations evident in AIA’s own Table 1 (p.3) This table of A.M Best data clearly shows the national cycle at work, with premiums stabilizing for 15 years following the mid-1980s crisis. It also clearly shows that there was no tort ‘crisis’ in this country from 1986 to 2000. It makes absolutely no sense to assert that the underlying tort system and the behavior of the trial bar has suddenly changed in 2001/2002 to create a ‘crisis’.”

Considering the long-term trends in development of tort law, there certainly is merit in reform to eliminate abuse and the costs it imposes on insurance buyers and society as a whole. Over time, those trends will inevitably affect insurance premiums. But tort reform is not likely be achieved in time to improve availability and affordability of insurance for voluntary organizations in Atlantic Canada when the insurance industry cycle swings toward another hard market.

Recommendation 3 – Voluntary organization should support initiatives to reform tort law as a means for maintaining stability of premiums over time.

In some jurisdictions and for some types of insurance, introduction of no-fault coverage has been found to eliminate most of the legal costs attributable to the tort law system, thereby reducing overall costs. It may be possible, for example, to introduce a program of no-fault insurance coverage based on the model currently in use in New Zealand that would reduce the effects of the insurance industry cycle.

Recommendation 4 – The potential for implementing a no-fault insurance program for voluntary organizations should be investigated.

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Changing the Way Insurance is Bought

In buying any product or service, there is no substitute for being a knowledgeable, informed buyer. And insurance is a particularly complex purchase. Organizations in the voluntary sector need help to find coverage suited to their needs – but the way the market presently operates means they are not getting the help they need from the insurance industry.

It is difficult to be a knowledgeable, informed buyer without data related to the risks borne by voluntary organizations. Data provide better knowledge of risks and provide the foundation for better risk management. Because no organized effort to collect such data currently exists, the lack of data is a very significant impediment to buying the right coverage at the right price. The uncertainty undoubtedly leads to premiums for insurance that are higher than they should be.

Lack of data related to voluntary sector risks is not limited to Atlantic Canada. It has been an issue throughout the insurance industry for a long time. And that is not likely to change in the foreseeable future. Ultimately, the best solution is for the voluntary sector to collect its own data, so it can be used for risk management, assessing needs for insurance coverage, and negotiating both coverage and premiums.

Insurance to cover liabilities related to the activities of voluntary organizations and the volunteers who work for them can be purchased in different ways, including

1. the organizations can purchase coverage on behalf of both the volunteers and the organizational entities; 2. individual volunteers can purchase some coverage for themselves; 3. owners of property used by voluntary organizations for their activities can purchase incremental coverage for those activities; 4. voluntary organizations can participate in group buying programs already in existence; and/or 5. they can organize new groups to retain some of the risk and/or attract competition among suppliers for the coverage they need.

Currently, the first approach is the most common – but it is not the most economical.

Neither volunteers nor owners of property used by voluntary organizations in carrying out their activities want to be exposed to the liability risks associated with those activities. Even insurers – who are in the business of accepting the risks of others – find it an unappealing prospect. It is much like a game of pass-the-broom. Each participant wants to pass the risk on to someone else and doesn’t want to be holding it when the music stops.

In many respects, it is only fair that voluntary organizations be responsible for managing their risks and buying insurance as part of that process. Such logic certainly applies in the commercial sector. And it makes perfect sense from the perspective of the volunteers and the property owners. On the other hand, voluntary groups create a lot

Wolfgang Uebel/BizNext Page 89 SOLUTIONS of social value with very limited resources and need all the help they can get. Many such organizations do not buy insurance, because they simply cannot afford it, potentially leaving victims with no clear route to compensation – and contributing to the need for tort lawyers to expand the range of parties that can be found liable. And organizations that do buy insurance pay more for it than they should.

As is the case in Australia – which was discussed earlier – most volunteers ni Canada likely already have some coverage for liabilities related to their volunteer activities. For example, one homeowner’s policy states,

“You are insured for claims made against you arising from:

Personal Liability – legal liability arising out of your personal actions anywhere in the world.”

Another policy states,

“You are insured for claims made against you arising from:

Personal Liability – legal liability for unintentional bodily injury or property damage arising out of your personal actions anywhere in the world.”

As might be expected, there are some exclusions to this coverage. For example, the first policy cited excludes claims arising from “the rendering of or failure to render any professional service”.

Similarly, most volunteers’ use of personal vehicles is covered through their standard automobile policies. Should that coverage not be sufficiently comprehensive, an endorsement is available that covers use of vehicles to carry passengers for compensation. Optional endorsement SEF#6A – Permission to Carry Passengers for Compensation – says

“In consideration of the premium charged, permission is hereby given for the automobile to be used to carry passengers for compensation or hire in the business of or the use described as follows:

If more than one automobile is insured under this policy, this endorsement shall apply to the automobile(s) described under Item(s) number of the schedule of automobiles attached to and forming part of this policy.

Except as otherwise provided in this endorsement, all limits, terms, conditions, provisions, definitions and exclusions of the policy shall have full force and effect.”

For this endorsement, one of the larger insurers in Atlantic Canada charges an additional 10% of the third party liability premium. Another charges an additional 10% of the third party liability and accident benefits premiums. And a third does not charge for the endorsement unless it is applied to a bus.

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Considering that a reasonably typical policy providing $1,000,000 of liability coverage costs about $350 and accident benefits cost an additional $70, the incremental premiums are fairly nominal. For about $40 per year, a volunteer would not have to worry about liabilities related to use of his/her personal vehicle in carrying out voluntary activities – on behalf of any volunteer organization. In the absence of such coverage, each voluntary organization for which the volunteer works would have to buy liability coverage related to non-owned and hired vehicles.

If volunteers were able to arrange for coverage of their liabilities as directors and officers through similar riders on their property insurance, it would make that coverage more widely available and likely at a relatively nominal cost. The coverage would then apply, regardless of the number of voluntary organizations that make use of their services. And it would relieve those organizations of the cost of providing coverage. Such coverage for directors and officers does not currently seem to exist in Canada. But it could be made available, if an effort were undertaken to develop a suitable package.

Similarly, if municipalities, school boards, churches, and commercial organizations were willing to extend their coverage to voluntary groups using their premises, the incremental cost to them would likely be relatively small but the benefits to the groups would be substantial. Property owners can purchase such coverage but typically do not want exposure to the additional liability, because of concerns about their own insurance costs. Consequently, they require voluntary groups to have coverage as a condition of use. A significant factor in their choosing not to offer such coverage is difficulty in incorporating independently operated volunteer groups into their risk management programs and/or ensuring that such groups follow proper risk management procedures.

Another option available to voluntary organizations is to participate in group buying programs. Some programs already exist but they are not necessarily well known throughout the voluntary sector. In some cases, the programs are sponsored by brokers, as was discussed earlier. In other cases, they are operated outside the insurance industry.

For example, GAIN is a buying group sponsored by a consulting firm based in Toronto that offers memberships to registered nonprofit organizations. Members are able to use GAIN’s services to buy a variety of goods and services, including insurance.

OASSIS is another Ontario-based not-for-profit organization that focuses on the needs of member community-based organizations across Canada for employee benefit plans. It works in conjunction with Marsh, a large broker, and offers some general insurance packages in addition to its core employee benefit plans. Those packages include directors and officers liability, professional and general liability/contents insurance, and group home and auto coverage.

One of the benefits of group buying is the avoidance of minimum premiums charged by insurers simply to cover administration costs. Many small voluntary organizations are charged such minimum premiums, which are much higher than premiums they would be charged as part of a group.

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Because insurance depends heavily on the law of large numbers, the voluntary sector becomes much more attractive to insurers when organizations come together in groups – the larger, the better. As a group, they represent a much bigger premium base and can attract more insurers to offer quotes. And they can take advantage of economies of scale in selling and administration costs. Typically, programs are organized through an umbrella group that takes care of relationships with brokers and insurers, as well as publicizing the programs to its members and doing much of the administration, relieving brokers and insurers of these burdens.

In organizing buying groups, the principal challenge is the diversity of voluntary sector risks. Insurers prefer to deal with groups that have fairly homogeneous risks.

In the United States market, approximately 25% of property and casualty insurance is provided through alternative risk transfer mechanisms – i.e. outside the normal market for such coverage. For example, some organizations with similar insurance needs have organized themselves into risk retention groups. Members of such a group pay premiums to the group administrator. The administrator then uses the funds to settle smaller claims, buy insurance for larger catastrophic risks, and cover administrative costs. Simply by self -insuring part of the risk – in effect, establishing a fairly high deductible – the group makes itself much more attractive to insurers, can buy protection against catastrophic risks at reasonable prices, and saves money on premiums. Typically, the administrator of such a risk retention group als o works with its members to improve risk management practices.

Risk retention groups are usually formed to deal with risks that are fairly homogeneous. However, risks in the voluntary sector are quite diverse, reflecting fragmentation of the sector and the diversity of mandates and characteristics of individual organizations. A risk retention group may be a viable option for some relatively large clusters of organizations in the sector with similar mandates. But it is not likely to be a solution for the many small organizations that account for much of the sector’s diversity, leaving gaps in availability. Because Canada is an even smaller market, the gaps in this country may be even larger than in the US. And it is reasonable to think the gaps could be even bigger in the Atlantic Region.

Governments are often insurers of last resort. But they should only finance risks that cannot be transferred to the private market at acceptable costs.

Some provincial governments have taken initiatives to fill gaps in coverage. For example, the Government of British Columbia has developed a Master Insurance Program to provide coverage to organizations from which it buys services. The Jubilee Reciprocal Insurance Exchange operates in Alberta. Régroupement Loisir Québec provides coverage to recreation groups in Quebec. And in Nova Scotia, the provincial government has sponsored a program for the Nova Scotia Trails Association that also includes coverage provided by Lombard Insurance Canada.

As the foregoing indicates, solutions to the problem of insurance availability are potentially available. And they have been found right here in Atlantic Canada. But a

Wolfgang Uebel/BizNext Page 92 SOLUTIONS broader range of solutions may have to be found to meet the diverse needs of the Region’s voluntary sector.

Funding

Regardless of the level of insurance premiums, affordability depends partly on ability to pay. Adequacy of funding is a very substantial issue for the voluntary sector. In considering affordability of insurance, two critical considerations must be taken into account:

1. a substantial number of voluntary organizations – especially the smaller ones – do not have insurance, because they cannot afford to buy it; and 2. organizations that do have insurance are likely paying much more for it than they should be.

Whether or not voluntary organizations should be allowed to operate without insurance is a matter of public policy, which will be discussed later. On the other hand, if organizations are spending too much on premiums, the first order of business should be to spend existing funds wisely, by maximizing the value obtained for money spent, through means such as those discussed in the previous section – essentially forming groups to buy proper coverage, with appropriate exclusions and deductibles. However, it must still be recognized that many voluntary organizations operate without much funding and do not currently buy insurance. If they do not have insurance, anyone injured through their activities is likely to have trouble obtaining compensation.

To expand the pool of funds available to pay for insurance, there are really only two options:

1. obtain more funds from existing payers; or 2. expand the number of payers.

Neither option is likely to be an easy proposition. And voluntary groups nearly always have more uses for funds than the limited amounts they have available, so spending decisions are guided by their priorities – which may not always include buying insurance.

Obtaining More Funds From Existing Payers

Individual voluntary organizations depend on different combinations of three primary sources of funds to pay for insurance – earned revenue, donations, and operating grants. Each source has different implications for affordability.

Organizations that earn revenue through membership fees or sale of goods or services have at least some possibility to increase their prices – but customers’ willingness and ability to pay can be an issue. If government is the payer, it may have the ability but not the willingness. If the organization charges fees to individual clients with special needs, they may not have the ability to pay.

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Donor-dependent organizations can also raise additional funds. But the market for donations is very competitive, so it places extra burdens on the fundraisers, who are often in short supply themselves. And raising more money simply to pay for insurance costs is not likely to provide them with a high level of motivation.

Grant recipients must depend on grantors’ willingness to increase their grant payments. There has been a trend for granting agencies to provide funds mainly for programs and services and not for administration costs. Because of accounting conventions, it is likely that most organizations record insurance premiums as part of their administration costs. However, most voluntary organizations’ liabilities flow primarily from program activities, so insurance should more properly be categorized as a program cost, rather than as administrative overhead.

Regardless of the accounting, however, applying for grants is competitive. Granting agencies have limited funds, and nearly always have more requests than funds available, so they tend to stretch those funds as far as possible. Increasing a grant to one recipient means another does not get funding or receives less. Furthermore, they usually have funding cycles. If costs increase unexpectedly in mid-cycle, organizations have to wait till the next cycle to reflect that in their requests.

Expanding the Number of Payers

Potential exists to expand the number of payers, to reduce the burden on both the voluntary organizations and the people and organizations providing them with funds. Some possibilities were discussed in the previous section. For example, encouraging owners of properties used by voluntary groups to extend their coverage to include volunteer activities would relieve the burden from the groups themselves. It is easier and cheaper to obtain liability coverage along with property coverage than to obtain it as a standalone product. Savings to voluntary organizations would likely be much larger than the incremental costs to volunteers and property owners.

Another option could be a program similar to the one whereby telephone subscribers currently pay a fee to support the 911 emergency service. If all insurance buyers – personal and commercial – were given an opportunity to make a donation to a fund that would pay the insurance premiums for voluntary groups, it could raise a substantial amount of money. In 2003, the premiums paid for property and casualty insurance in Atlantic Canada totalled a little over $2.275 billion. If just 1% of that could be raised through a donation program, it would amount to $22.75 million – and go a long way to providing insurance for the voluntary sector, relieving funding pressure from the recipients. Such an amount would represent less than $1 per month per capita.

Some incentives would help to encourage donations. If the donations were made to a registered charity, individuals could be provided with tax deduction receipts, as well. Businesses would be able to deduct their donations for tax purposes anyway. Consequently, the donations could be divided into two pools – the donations from individuals could be used to pay insurance premiums for charitable organizations and those from businesses could be used to pay premiums for voluntary organizations that are not charities.

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If brokers and insurers were willing to contribute, it would expand the pot even further. And, of course, they would also benefit from it, as well.

Recommendation 5 - The sector should work with government and the insurance industry to provide an option to buyers of insurance so they can pay a little extra – possibly a percentage of their premiums – when they renew their policies, to raise a significant pool of funds to help voluntary organizations pay their premiums.

Public Policy

Several aspects of public policy must be taken into account in considering availability and affordability of insurance for voluntary sector organizations in Atlantic Canada. They include:

1. protection of volunteers and voluntary organizations from liability; 2. operation of some voluntary sector organizations with no insurance; 3. reform of tort law; 4. support for initiatives related to risk management and buying insurance; and 5. coordination of effort among different jurisdictions.

Protection of Volunteers and Voluntary Organizations

Although the frequency of claims may be low, volunteers have exposure to liability risks related to their activities and the consequences are potentially catastrophic. In providing coverage to individual volunteers and the organizations they work for, insurers must take these facts into account.

Collectively, the voluntary sector contributes a lot to society at relatively little cost. To encourage development of the sector, volunteers working in good faith, within their assigned mandates, and using due diligence should reasonably be protected from liability for accidental injuries they may cause in the course of their activities.

Governments in different jurisdictions have tried to provide such protection to volunteers and voluntary organizations. The protection is invariably limited but it does help remove a disincentive for people to contribute to their communities by engaging in volunteer activity. One of the lessons from the experience to date is that, when different political jurisdictions provide protection but do it in different ways, it causes confusion – as has been the case in the United States and Australia. In Atlantic Canada, Nova Scotia is the only jurisdiction to have passed a volunteer protection act for such a purpose so far.

Volunteer protection acts passed in different political jurisdictions vary a lot in their provisions. However, they are not necessarily helpful in improving either availability or affordability of insurance. Such acts do not eliminate liability; they merely transfer it under specified circumstances. Most acts transfer the liability of volunteers to the organizations for which they work. Some also give protection to volunteer officeholders.

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And charitable immunity laws, such as the one in New Jersey, provide immunity to the organizations, as well.

Despite the transfer of liability, a victim continues to be entitled to compensation, so there must be some means of recovery. In the United States, it is common for voluntary organizations to require volunteers to provide them with an indemnity in the event harm is caused by the volunteer’s wrongful acts or omissions, essentially shifting the risk back to the volunteer. Such indemnification is specifically prohibited in some jurisdictions.

The US federal volunteer protection act allows states to pass their own laws that supersede or modify the provisions of the federal act. Specifically, there is a provision that allows a state to require a charitable organization to provide a financially secure source of recovery for people who suffer harm, as a condition of volunteers’ obtaining protection. In the vast majority of cases, the means of recovery is an insurance policy. Without such a means, liability continues to rest with the volunteers.

The Nova Scotia Volunteer Protection Act contains no such provision. A volunteer’s liability is transferred to the organization but, if the organization does not have insurance or other means to compensate a victim, the victim is forced to either absorb the loss or seek redress from other parties with sufficient means.

In short, volunteer protection acts do not eliminate the need for insurance and may even require it. If – as was found in the Lunenburg-Queens Regional Development Agency survey – volunteers and organizations think they do not need insurance because of them, such acts may even lead to undesirable outcomes.

Recommendation 6 – The four provinces in Atlantic Canada should pass legislation to protect volunteers from liability, subject to conditions, and provide a clear path to compensation for victims. To minimize confusion, the legislation should be the same in all four provinces – and even coordinated with other jurisdictions across Canada.

On the other hand, volunteers may be able to obtain insurance coverage for their voluntary activities at nominal personal cost, so that should be taken into account in determining the level of protection provided.

Operation of Voluntary Sector Organizations Without Insurance

It is a well-established principle of tort law that anyone suffering from an injury inflicted upon them – either physical or economic – is entitled to compensation from the wrongdoer. Insurance provides people and organizations with the means to compensate victims for wrongs they commit, limiting damage to their lifestyles and operational capacity. Allowing voluntary organizations to operate without liability insurance is somewhat akin to allowing people to drive cars without coverage. There is potential for injury but no clear path to compensation. Consequently, governments should consider whether or not that is an acceptable public policy position.

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If a voluntary organization is not insured, there is a reasonable chance it also is not incorporated, so its members are potentially liable for any harm it may cause. However, if volunteers and voluntary organizations feel immune from consequences for their actions and see little value in managing their risks, protecting volunteers may actually be counter-productive. Insurers feel more comfortable underwriting risks when the people and organizations they cover retain a share of the risk.

Despite efforts to reduce liability and transfer it, volunteers and voluntary organizations must still be accountable for their actions, as are other sectors of society. What is happening now in the voluntary sector is not that different from what has been happening in other sectors. Because of increased concerns about food-borne illnesses, businesses in the food industry have increasingly been using quality management programs based on HACCP (Hazard Analysis Critical Control Point) methodologies over the past 15 years. And businesses generally have been using better practices to ensure the health and safety of their employees, to avoid paying excessive premiums for workers’ compensation.

Recommendation 7 – Protection from liability provided to volunteers and voluntary organizations should be contingent on availability of insurance or other means to compensate victims.

Tort Reform

Reform of the tort law system is likely to be a long-term initiative, requiring much public debate. It is not likely be achieved in time to improve availability and affordability of insurance for voluntary organizations in Atlantic Canada when the insurance industry cycle swings toward another hard market. Where extensive tort reform has been undertaken – most notably in the United States and Australia – the impact on premiums has been difficult to distinguish from that due to softening of the market for insurance.

Nevertheless, considering the long-term trends in development of tort law, there is merit in reform to reduce uncertainty and eliminate abuse and the costs it imposes on insurance buyers and society as a whole.

Support for Initiatives Related to Risk Management and Buying Insurance

In the Atlantic Region, the best way to improve availability and affordability of insurance for voluntary organizations is to undertake initiatives to improve data collection, risk management, and the ways in which they buy insurance, as outlined earlier. Such initiatives can be taken and lead to substantial benefits in the relatively short term.

Unfortunately, however, most voluntary organizations do not have sufficient knowledge and many do not presently have the means to buy appropriate coverage. They do not necessarily know the full range of options available to them or have a well-qualified source of independent advice to help them find what they need. Furthermore, the sector is too fragmented, organizations are too small, and they lack the resources to

Wolfgang Uebel/BizNext Page 97 SOLUTIONS deal with the problem themselves. If the initiatives are to be undertaken, the process needs a champion.

And the most likely champion is government – ideally, the four provincial governments in the region acting together, to maximize economies of scale in a relatively small market. These governments have the mandate, the expertise, and the financial resources to make it happen.

So far, governments have largely chosen to ignore the problem and do nothing. Because of voluntary organizations’ contributions to the quality of life, however, they should have a strong incentive to help.

Recommendation 8 – The four provincial governments in the Atlantic Region, possibly with assistance from the federal government, should create a voluntary sector risk management centre to provide appropriate independent advice to voluntary organizations to help them obtain insurance suited to their needs at the best possible price. As part of its mandate, the centre should collect data related to voluntary sector risks, claim s, and associated costs. It should maintain a database of programs available through insurers and brokers that are suited to the sector’s needs. And it should offer training to volunteers and voluntary organizations in risk management and insurance and to brokers and insurers about the distinctive needs of the sector.

The cost of such a centre should not be high but the benefits should be substantial. For example, a group of five people looks after the insurance program for the Province of Nova Scotia. A centre could be modeled on similar centres in other places and even take advantage of work those centres have done already.

The key to improving the situation is that claims frequencies seem to be very lo w for most voluntary activities. And, although claims may be settled occasionally at very high cost, most are likely to be for small amounts, so it helps to distinguish between the two categories.

Many voluntary organizations already buy insurance – but they may not have the right coverage and very likely pay too much for it, because they are unable to take advantage of economies of scale and have difficulty handling even small claims themselves. By taking advantage of economies of scale, the overall cost of a properly designed insurance program may not be much different from that being incurred now, while the coverage could be much better. And much of the money voluntary groups use to pay insurance premiums likely comes directly or indirectly from government.

Each provincial government has people with knowledge of risk and insurance, who can facilitate the process of obtaining suitable insurance coverage for voluntary organizations at a reasonable price. By leading the effort to obtain coverage for voluntary groups, they can make an extremely valuable contribution to society and the quality of community life. They are able to assess the sector’s insurance needs, develop a comprehensive approach, including specifications for insurance coverage, and deal with brokers and insurers to obtain the coverage at reasonable cost.

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And there is a precedent where they have found a creative solution. Earlier this year, the Nova Scotia government facilitated development of an insurance program to cover the Nova Scotia Trails Association. The principles used in the program can be used more broadly, to help other voluntary organizations gain access to insurance at an affordable price.

Under the program, trails associations are provided with $5 million in general liability insurance protection for any claim or loss. The provincial government covers the risk up to $1 million – essentially providing a high deductible – while Lombard Insurance Canada covers the additional cost when an individual claim or the annual cost exceeds $1 million. Participating trails associations pay premiums, contributing an estimated $39,000 to operate the program. However, the overall cost of managing small claims and buying insurance for claims above $1 million is expected to be about $126,000 annually.

The Department of Transportation and Public Works is responsible for risk management on behalf of the province. Most claims fall into the range of $2,000 to $3,000. The provincial government handles the small claims itself, so Lombard does not have to move funds into its reserves when the claims are made and diminish its underwriting capacity. The province has a fee-for-service agreement with a broker but handles much of the relationship with the insurer on its own.

Government is committed to the program for five years. During that period, data will be accumulated to modify it for subsequent years. Premiums may be adjusted based on the cost of buying insurance above the $1 million guarantee and claims experience. If Lombard’s loss ratio is less than 35%, it will pay a rebate on the premiums charged.

The Trails Association model is now being expanded into a national program, through participation of the other provinces and territories. In effect, it is based on the reciprocal risk retention group model, except the provincial government is facilitating getting it set up. A similar model can be applied to improve availability and affordability of insurance for other voluntary organizations. It does not have to include government funding but some injection of funds may help in getting the scheme started.

A key element in creating such a model is obtaining participation from the volunteer groups themselves. Program viability depends on a high level of participation – which cannot be taken for granted. To ensure a high level of participation – and prevent voluntary organizations from operating without adequate insurance – government may want to make it mandatory.

As long as the voluntary sector continues to purchase insurance, it will be tied to the industry cycle of hard and soft markets. Experience elsewhere has shown that the only means available to insulate voluntary organizations from that cycle and stabilize premiums is to form sector-specific insurance pools. Because the protection provided by such a pool depends heavily on its overall size, the larger the pool that can be created the better. A regional – or even national – initiative would be better than one taken on a provincial basis.

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Recommendation 9 – Risk managers who work with the different provincial governments in the Atlantic Region should be asked to collaborate to develop a comprehensive insurance program suited to the sector’s needs, following the model already being used to provide coverage for the Nova Scotia Trails Association. In developing such a program, the risk managers should look at providing coverage in different layers, for example by

§ taking into account coverage already available to volunteers through their personal home and autom obile insurance, § considering how coverage through those personal lines might be extended to include volunteers’ roles as directors and officers, § looking at the possibilities for obtaining coverage at little incremental cost through policies carried by owners of properties used by voluntary organizations – e.g. municipalities, school boards, and churches, § taking greater advantage of sector-specific programs that are already available, § providing a mechanism for handling small claims, to allow larger deductibles, and § purchasing insurance for larger losses that are potentially devastating.

Recommendation 10 – As part of the comprehensive insurance program, voluntary organizations with compatible needs should form buying groups to attract greater interest from insurers and gain economies of scale.

Recommendation 11 – Buying groups with sufficient scale should establish risk retention groups, to make better use of the premiums they pay, by dividing claims between those with high frequency and low payouts and others with low frequency but high potential severity. Paying small claims internally allows buying insurance with higher deductibles, helping to lower premiums.

Coordination of Effort Among Different Jurisdictions

In the same way that program viability depends on participation by voluntary organizations, its viability can be enhanced through participation of all four Atlantic Provinces. The Atlantic Region is a relatively small and fragmented market for insurance products. Protection provided by the law of large numbers and economies of scale in program administration will be much better, if the program operates on a regional basis, rather than provincially. Again, there is a precedent – the Atlantic Lottery Corporation is owned and operated jointly by the four provinces.

Recommendation 12 – To gain maximum advantage from economies of scale, the four Atlantic Provinces should coordinate their efforts in developing a comprehensive insurance program for the voluntary sector.

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