Dateline: December 21, 2006, Chicago
Dave Umhoefer of the Milwaukee Journal-Sentinel reported in a December 7, 2006 article that Terry Gaouette is using a $5 million directors’ and officers’ liability insurance policy to finance his defense against criminal charges that are rooted in the 2005 collapse of the Milwaukee Public Museum. See Dave Umhoefer, Museum Insurer Covering Ex-CFO: Gaouette's Already Been Repaid $77,760 For Legal Bills in Criminal Case, Milwaukee Journal-Sentinel, December 7, 2006. Every director and officer of a nonprofit should take a close look at Umhoefer’s story. The lesson is clear...
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You do not want to serve on a board or work for a nonprofit that doesn’t provide you with D & O insurance coverage. As faithful readers of this column know, we believe the charges against Gaouette are highly questionable, inappropriate, and are largely politically motivated. However, that does not make the $77,760 in defense costs reimbursed to date any less real. How would you like to be paying those expenses if you were innocent and you had a family to support?
Some nonprofits will argue that this sort of coverage is too expensive. They should take a look at the facts the Umhoefer has uncovered. The policy in question provides $5 million of coverage for a $5,000 annual premium. That coverage isn’t provided by a second rate insurance carrier, but by Chubb Group of Insurance Companies, one of the premier insurance companies in the world. The $1,000 per million dollars of coverage is consistent with what we have previously heard about the cost of these policies.
Some will argue that there is no need for insurance coverage because the institution can or is required by state law to indemnify officers and directors. There are two problems with indemnification. First, if the institution is bankrupt, there are no funds available to fund the indemnification. Second, indemnification provisions often require determinations that the officer or director acted in good faith or meets some other standard of conduct. That determination may be in the hands of the board, the state attorney general or the courts. Everybody is a great person if there are no problems. But as Gaouette has sadly found out, when there is a disaster, the officer or director may have acted in good faith, but nevertheless be covered in mud or be the easy scapegoat. Consequently, D & O insurance is preferential to indemnification—although in practice, the nonprofit may use the policy to fund any legal obligation it has to indemnify the officer or director. Even if that is the case, the officer and director wants the right to draw on the policy directly. In fact, in recent years, some insurers have begun to issue secondary policies directly to directors and officers that cover gaps in the primary coverage provided by the corporation's D & O coverage. This is probably more prevalent in the case of officers and directors of publicly-traded companies.
The $77,760 in covered costs to date will sound like a large amount to most people. But Paul Polaski, an attorney and insurance broker with Republic Associates of Wisconsin told Umhoefer that Gaouette’s defense costs could come in at $600,000 to $1 million. That $5 million of coverage is very comforting given those numbers.
We have not seen the policy, but several comments in the article suggest that, in theory, if Gaouette is convicted, Chubb could seek to recoup the defense costs from Gaouette. Polaski and a second insurance broker, Doug Henderson, apparently told Umhoefer that it is unlikely that Chubb would seek repayment in the event of conviction. The terms of insurance policies differ, making it important for those relying on D & O policies to carefully read them to ascertain their rights. In any event, Umhoefer’s article points out that if convicted, Gaouette would have to look to his own resources to cover any restitution or other damages. That is not surprising.
Umhoefer’s article also discloses some interesting new facts. Apparently, the County has not foreclosed some sort of civil action against Gaouette and possibly other Museum officials. However, Milwaukee County’s corporation counsel told Umhoefer that no decision had been made. Umhoefer also notes that the Museum has not foreclosed legal action Gaouette. The potential plaintiffs appear to be awaiting the outcome of the criminal case. Umhoefer does note that the same D & O policy that Gaouette is relying on might be a source for funding any recover from Gaouette. We have our doubts about that for two reasons. First, if Gaouette is convicted, we would be surprised if the terms of the policy would provide any further coverage for him—although as already noted, we have not read the specific terms of the policy. Second, the policy may contain an insured vs. insured clause. Those clauses differ widely, but as a general proposition, an insured vs. insured clause protects the insurance company when two parties covered under the same policy find themselves on opposites sides of a lawsuit. Such a provision would seem to pose more of an issue for the Museum than the County.
Finally, Umhoefer reports that Museum’s net assets fell by $1.14 million for the fiscal year ending August 31, 2006. According to Umhoefer, the Museum “is showing a negative $9.3 million net worth." We have not seen any reports of late on the Museum's capital campaign.
As a side note, we have been highly critical of the Museum’s board of directors and its role in the financial debacle. We are not the only ones. Following an article in the Chronicle of Philanthropy, where our very own Jack Siegel was quoted, two members of the Syracuse University Gift-Planning Department wrote a highly critical letter to the editor entitled In a Major Scandal, Where Was the Board? December 7, 2006 of the Chronicle of Philanthropy. The original article, Former Financial Officer Faces Charges in Museum Debt Crisis, was written by Ben Gose and appears in the October 26, 2006 edition of the Chronicle of Philanthropy.
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