To err is human. Some mistakes, unfortunately, are more costly than others. Take, for example, the University of Arizona’s recently discovered $240 million accounting error, which has led to talk of severe budget cuts, including in the student aid it provides, hiring, and in other operations.
How a university could have allowed this to happen is the question on everyone’s lips. UA’s decision to give its athletics department $53.3 million in 2021 – a figure nearly five times more than the school provided the department the year before – may have played a role. UA’s guaranteed tuition program also may have contributed to the problem.
Whatever the case, the challenges now facing UA underscore the critical need for robust insurance coverage and financial safeguards.
Let’s start with Professional Liability Insurance, often known as Errors & Omissions (E&O) insurance.
E&O coverage provides protection against losses caused by errors, omissions, or negligence in professional services.
For educational institutions like UA, this policy could cover the financial losses due to miscalculations or mismanagement, assuming they were unintentional and that they impacted UA’s ability to provide the education for which its students had paid.
More specifically, an E&O policy could cover the legal defense costs, settlements, and court judgments related to lawsuits that arise from the professional services rendered.
A perhaps more relevant coverage applicable in UA’s case is Directors & Officers (D&O) insurance. This type of insurance protects the university’s balance sheet and the personal assets of corporate directors and officers (or, in this case, its Board of Regents), and their spouses, in the event they are sued for actual or alleged wrongful acts in managing the university.
Given the scrutiny faced by UA President Robert C. Robbins, such insurance could be crucial in safeguarding personal and organizational assets against legal challenges.
D&O coverage would cover a range of claims including:
- Mismanagement allegations, including poor decisions leading to financial losses or bankruptcy.
- Breach of fiduciary duty, meaning a failure to act in the best interest of students or the university.
- Lawsuits alleging misrepresentation or failure to act in the university's best interests.
- Regulatory claims related to government funding or student loans.
Finally, crisis management coverage can be a lifesaver in situations where an organization's reputation is at stake.
This coverage – often found in E&O and D&O policies with separate sublimits – typically provides support for public relations efforts and other measures to mitigate the impact of a financial crisis on the organization’s public image.
Implementing a Robust Risk Management Strategy
Beyond insurance, organizations will want to develop a comprehensive risk management strategy. This includes regular financial audits, implementing checks and balances in financial reporting, investing in employee training, and establishing a culture of transparency and accountability.
The financial turmoil at UA serves as a cautionary tale for all, highlighting the need for adequate insurance coverage and a proactive approach to risk management.
After all, insurance is not just a safety net but a vital component of a holistic strategy to protect against unforeseen financial crises.
The Mahoney Group, based in Mesa, Ariz., is one of the largest independent insurance and employee benefits brokerages in the U.S. For more information, visit our website or call 877-440-3304.
This article is not intended to be exhaustive, nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel or an insurance professional for appropriate advice.