Risk and Reward: D&O Insurance Can Help Museums Focus on Core Objectives

Michael Hunziker

Wanuskewin Heritage Centre in the Winter.

Photo — Zoonar GmbH / Alamy Stock Photo.

Canadian museums are changing the way they share stories, educate, and preserve cultural heritage. Besides ever-present financial and governance challenges, museums and their leaders are grappling with questions of equity and justice involving all stakeholders, and pursuing reconciliation with Indigenous communities.

Success in any of these dimensions depends on recognizing and managing risk, both institutional and personal. Even the most progressive institutions are not immune from employment disputes, harassment and discrimination lawsuits, or risks associated with deaccessioning and repatriation. Litigation in Canada is increasingly expensive and can threaten the financial viability of a museum, and even the personal assets of its leaders.

Fortunately, leaders can take steps to reduce risks to themselves and their boards while enhancing the financial stability of their institutions. One of the most helpful ways to mitigate risk is through directors and officers liability (“D&O”) insurance. D&O insurance typically provides two kinds of protection: It can reduce the personal risk assumed by leaders of an organization, while also protecting a museum’s balance sheet. In so doing, it can enhance an organization’s ability to attract and retain talented leaders and board members while minimizing the potential financial impact of litigation on the museum itself. Protecting human and financial resources with insurance can improve the confidence of funders and other stakeholders, and can help leaders better position their organizations to advance their core social and cultural goals.

Attracting and Protecting Leaders

The first way that D&O insurance reduces risk is by providing personal protection for the individuals who take on positions of senior responsibility—paid or unpaid—within the organization. Officers and board members have legal duties to institutions and their stakeholders, which, if breached, could attract personal liability. These include a duty of loyalty and care, which require leaders to make prudent decisions in the best interests of the institution. The law also imposes certain duties on leaders with respect to the interests of donors, employees and other stakeholders, all of which can imperil personal finances in the event of litigation about their decisions or actions. Board members can even be held personally responsible for the unpaid wages of employees in the event of an organization’s bankruptcy.

Consider the risks associated with deaccessioning and repatriation, for example. The removal of an object from a collection is a normal part of museum operations, for a variety of reasons. This may come with a risk of a lawsuit from a disappointed stakeholder, and individual officers or board members can be named as defendants.

Even if the litigation is ultimately without merit, defending a lawsuit is increasingly expensive and defence costs alone are often in the hundreds of thousands of dollars. At law, with a few narrow exceptions, organizations are typically permitted to pay for the defence of their employees, officers, and board members in the event of litigation. That indemnification obligation is typically found in an organization’s bylaws. And, in order to attract and retain a diverse and talented group of leaders, museums may also consider a promise to do so in the form of a written indemnity agreement, in addition to the bylaws. It is important to understand that in spite of that commitment, there is never a guarantee that an organization can or will be able to honour its indemnity. Where particularly egregious conduct is alleged, for example, an institution might balk at paying defence costs. Or, an organization may be financially unable to assist. Museum funding sources are not always stable. In some cases, the loss of a single grant may make it impossible for a museum to pay for the defence of a lawsuit or imperil its overall financial viability.

It is in these circumstances where D&O insurance plays a crucial role. D&O insurance is designed to step in to pay for the defence of individual officers or board members in cases where an organization is unwilling or unable to pay. Knowing that there is an insurance policy available to pay for legal defence even if the museum becomes bankrupt can be an added source of comfort for people considering whether to take on a position of responsibility. Museums that are able to offer that level of protection to prospective leaders are in a better position to attract the kinds of candidates they need to best further their strategic goals.

Protecting the Bottom Line

The second way that D&O insurance reduces risk is by cushioning the impact of litigation on a museum’s financial position. One way that it does this is by allowing an organization to recover sums spent defending individual officers and board members from their D&O insurer. Another way is by indemnifying the organization itself for losses resulting from a variety of legal risks. That is, if the museum itself is named in a lawsuit and either settles or loses at trial and is ordered to pay damages, insurance can step in.

A particularly notable type of risk often covered by not-for-profit D&O policies involves allegations of wrongful dismissal, discrimination, or harassment of employees or others. Most covered loss in the not-for-profit sector is employment related. According to some in the industry, not-for-profit organizations generate a higher rate of employment-related claims than for-profit firms. Given the level of attention that many organizations pay to social justice issues, this is perhaps surprising. Nevertheless, even the best of intentions will not always protect an organization from a lawsuit. Media have reported several lawsuits in the United States in which employees have alleged that diversity, equity, and inclusion initiatives are themselves discriminatory. Regardless of the merits of these kinds of claims, defending any lawsuit will inevitably involve significant sums of money.

D&O insurance that includes employment liability coverage can cushion the financial impact of these kinds of lawsuits by providing coverage for both defence costs and, in many cases, judgments or settlements of harassment or discrimination cases. Having this kind of protection enhances an organization’s financial stability and resilience. It can also assure patrons, donors, and granting institutions that their contributions will further a museum’s core mission, and are less likely to be diverted to the defence of a lawsuit.

Navigating the Choices

Although D&O coverage provides considerable advantages, dealing with risk and insurance can be daunting. D&O insurance policies differ widely in terms of their coverage, availability, and affordability. Policies available to not-for-profit organizations typically provide broader coverage for lawsuits against individuals than for claims against the organization itself, and all policies include terms that exclude or limit coverage of certain kinds of claims. It is best to approach risk and insurance matters with the help of a licensed insurance broker. They can help assess an organization’s risk profile, provide risk management advice, and help to obtain appropriate insurance coverage.

Risk management may not be the most attractive part of museum leadership, but leaders who take proactive steps to reduce their organization’s risk profile will be better equipped to help their organizations and their people succeed.

Wanuskewin Heritage Centre in the Winter.

Michael Hunziker is a Senior Vice President at Marsh Canada, an insurance brokerage, and leads its national professional and financial liability claims advocacy practice. Michael is a non-practicing lawyer who formerly practiced civil litigation at a leading Toronto law firm and was later employed by a large multinational insurer.

Marsh Canada is proud to be the exclusive insurance broker to the Canadian Museums Association. This insurance program (includes Property and Liability Coverage, Collections/Fine Arts Coverage and Directors and Officers Liability Coverage) was designed by the insurers brokers at Marsh Canada who have tremendous experience designing and placing insurance solutions for the museums and heritage sector. In addition, CMA members also have access to preferred group Home and Auto Insurance rates only available to members and their families.