Members behaving badly - the importance of D&O insurance for Clubs and Not-for-Profit organisations

Published 13 March 2020

Directors’ & Officers’ insurance cover is a core aspect of risk management not just for large multinationals, but also small and medium-sized enterprises (“SMEs”). Part of the SME Directors’ & Officers’ market includes bespoke policies for private member clubs, sports clubs, associations and not-for-profit organisations. Over the last 18 months we have seen a sharp rise in disputes concerning such organisations including against sports clubs, associations and leagues (“Clubs”).

Membership disputes

The relationship between Clubs and their members is typically governed by the Club’s own rules (“the Rules”). The Rules act as a contract between its members and sometimes operate in conjunction with rules and procedures required by any governing body that regulate the Club (for example, sports clubs are often required to comply with the rules of their relevant governing body). Clubs are often managed by a committee (“the Managing Committee”), who run the Club for the benefit of their members.

It is common for smaller Clubs to be unincorporated associations, rather than limited companies. Unincorporated associations have no separate legal personality and the members have duties and liabilities to each other that stem from the Rules. This means that individual members can be held personally liable for any debts or contractual obligations even where these are incurred by the Club.

When there are disputes that result in litigation, a claimant is able to name some or all members as defendants. In practice, however, it is normally some (or all) of the individuals who sit on the Managing Committee who are named personally as defendants in any proceedings. Such Managing Committee members are often volunteers who do not appreciate that they could be held personally liable for the decisions made by the Club.

Disputes frequently arise following a breach of the Rules by a member, which can range from altercations at Club events, to a breach of playing regulations. When a breach occurs, a disciplinary investigation will follow and a decision and/or sanction is imposed by the Managing Committee, which can result in an individual’s Club membership being terminated.

We have seen an increase in such claims, where a member has faced investigation and/or sanction and alleges that the investigation/sanction was unfair. The legal basis of those claims against the Managing Committee members is often for breach of contract, negligence, discrimination and/or victimisation. If proven, this can render any disciplinary decision void.

We commonly see claims where either:

(i) the Rules do not sufficiently set out a proper process for dealing with a breach of the Rules;

(ii) a process does exist, but is not followed;

(iii) an investigation takes place, but the panel is not independent; or

(iv) the sanctions imposed for any breach of the Rules is more severe than permitted by the Rules, or is alleged to be excessive.

A few examples of the range of scenarios that we have handled are set out below:

• Defending a Club where a member was expelled as a result of sending obscene text messages to the Club captain;
• Defending a claim against a sports league by a member club and player in which it was alleged that the league had incorrectly applied a points deduction following breach of player registration rules; and
• Defending a claim against a governing body by a coach following a safeguarding investigation which led to the coach being suspended and his coaching licence subsequently expiring.

Complicating factors

Claimants often fail to appreciate that membership of private member/sports clubs is typically at the discretion of the Managing Committee as governed by the Rules and are surprised when sanctions, suspensions or expulsions are imposed, following a breach.

Where the Club is a primary interest or hobby for the member and/or the Managing Committee are volunteers, claims are emotionally charged and the parties can be resistant to settlement negotiations or forms of Alternative Dispute Resolution, such as mediation.

In addition, claims of this nature often have limited value as the remedy sought is non-monetary; such as a declaration that the decision of a disciplinary committee is void. It is also difficult to keep disputes confidential given the number of people involved and the close-knit nature of Clubs.

Disclosure duties (in accordance with Civil Procedure Rule 31) are owed to the court as soon as a person knows that he or she is (or may become) a party to proceedings that have been (or may be) commenced. These duties include a duty to take reasonable steps to preserve documents (including electronic documents such as emails) in their control which may be relevant to any issue in the proceedings.

From a practical perspective, and as Clubs are often run by part-time volunteers, relevant documents are often not centralised in one office or business email account. Correspondence can also be less formal (such as via WhatsApp, text message and/or telephone) and there are usually a number of people involved in the dispute. All factors which can cause disproportionate costs.

Reducing risk

There are a number of practical steps Clubs can take to reduce the risk of claims being made:

• Focus on the importance of the Rules - Rules should be drafted as comprehensively as possible and include a clear process and list of sanctions in the event of a breach. Where possible, independent legal advice should be taken and input should be sought from any relevant governing body on draft Rules and changes before they are published;
• Be professional – Keep relevant documents, records and minutes of meetings and set up a separate email accounts for correspondence relating to Club activities/business;
• Follow the Rules – In the event of a membership dispute, follow the procedure and sanctions set out in the Rules. It may be appropriate to seek legal advice and/or input from any relevant governing body at an early stage;

Conclusion

Disputes involving how Clubs are run, or how any breaches of Rules are dealt with, are common. It is of paramount importance that members, and particularly those who sit on any Managing Committee, are aware of their personal exposure if the Club is an unincorporated association.

Claims can often be emotive and difficult to resolve, but Clubs can reduce their exposure by ensuring that the Rules that govern the conduct of members are clear and that any process for dealing with membership issues are followed.

Insurers should be mindful that, in our experience, early engagement of legal representation in these type of disputes is key to capturing the relevant documents that are required to be maintained, narrowing the issues and exploring settlement, before the position of the respective parties harden.