By HELEN R. SAVAIANO
Risk managers and executives today don’t have to look far to see that executive and management liability exposures are increasing.
Almost every day, headlines report troubling news: cyberattacks and data breaches, lawsuits against corporate directors and officers, litigation over employee benefit plan issues, and criminal activity committed by company insiders. In addition, businesses are under greater scrutiny than ever, from regulators, legislators, customers, employees, investors and others. Risk managers have a lot to monitor and guard against, and this is an important area to focus attention upon.
Research has determined that many business owners or managers are not doing enough to protect their companies. A 2013 survey by the Risk and Insurance Management Society found that only two out of three companies purchased directors and officers (D&O) liability coverage. Worse is that only four in 10 companies purchased employment practice liability (EPL) coverage. In this complex and litigious business environment, owners and managers need expert advice and guidance, which creates considerable opportunities for risk managers.
Too many small- or midsize-business owners and managers think only larger public companies have significant management liability exposures. What many don’t realize is that cyber privacy and security risks, crime and employee litigation represent real threats to midsize, privately held businesses.
A review of recent claims revealed losses that were near or exceeded six figures for midsize companies and nonprofits across the country. All of the organizations had fewer than 200 employees. In one of the cases, resolved for $150,000, the employee had worked for the company for more than 20 years as a manager. Sadly, each organization thought they were making the right business decisions that ended up exposing them to costly liability. Without the proper management liability coverage in place, any one of those organizations could have ceased to exist.
A common misconception is that “all management liability policies are alike,” but the truth is there are important differences. While management liability products have been around for a while, some carriers continually have invested in and updated their products, and others have not. In this dynamic environment, it is important to stay abreast of the new and enhanced products available for management liability.
It’s also very important to understand exclusionary endorsements. These endorsements can fundamentally change the coverage that an organization buys. For example, an exclusion for major shareholders or family members could remove coverage that an organization needs to operate.
As a risk manager, there are some important policy features to evaluate with an independent insurance agent or broker to ensure a business has appropriate protection, including, but not limited to:
• Multiple coverage parts. Management liability insurance products should make available robust coverages for D&O liability, employment practices liability, fiduciary liability, fidelity and crime, cyber privacy/security and more
• Duty to defend. For many smaller and mid-sized organizations, defense costs can be a significant financial burden. Even frivolous claims can exceed $50,000. The duty to defend is one of the most valuable elements of a management liability policy. Look for a strong and experienced claims team to provide peace of mind that the business is being protected
• Broad definition of claim. This includes claims arising from monetary and non-monetary relief, judicial, civil, administrative, regulatory, alternative dispute or arbitration proceedings
• Broad definition of insured. This includes past, present or future directors, officers, trustees or in-house general counsel, members of committees and employees. Rule of thumb, broader is generally better
The most successful risk managers in the marketplace today proactively assess their risks and consult with a trusted independent insurance agent or broker about how to best address those risks. Even “business as usual” is important to discuss with an agent or broker, to ensure that the right risk management strategies are in place.
Among the questions that risk managers should be asking business owners and executives are:
• What would you do if your business had a data breach?
• Can you afford the cost of defense and indemnity if you were served with a lawsuit from an angry employee or group of former employees?
• How might bad publicity over a company decision hurt your reputation and would it damage your ability to serve customers?
The foundation for managing risk effectively is a trusted and highly consultative relationship between risk advisers, business owners or managers, and carriers. Risk managers, in addition to being more proactive about assessing exposures, coverages and limits, should work with an insurance carrier that can offer valuable advice and deliver on its commitments. As mentioned, a critical area to consider is claims management. Do you trust that your claim will be treated as important to your carrier and that your business’s interests will be rigorously protected? Will you be working with an experienced attorney who helps you understand the claim strategy and options for resolution?
Critical for success is having a carrier that invests in its products, hones its underwriting expertise, and offers responsive claims handling. Risk advisers should look for insurers that value the needs of their business and offer the right level of expertise and consultation to help them achieve their goals and protect their business.
Small and medium size businesses in all industries often have complex risk profiles, and they may lack adequate coverage for their exposures or resources to manage those risks effectively. Management liability risks are becoming more complex. Risk managers need good advice and strong partners to help manage these risks. By adopting a big-picture approach, with attention to coverage and claim details, risk managers can help grow and sustain long-term business success.
Helen Ryan Savaiano (shown) is president of management liability at The Hanover Insurance Group, Inc., based in its Itasca, Ill., office. She holds a law degree from University of Notre Dame Law school. The Hanover (www.hanover.com) is a national insurance carrier.