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Small Business, Big Management Liability Risk

Management liability lawsuits pose a threat to companies both large and small.
By: | November 2, 2016 • 6 min read

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A small business and a large, public corporation may be two different animals, but many of their litigation risks are the same.

Executives of large companies can be sued for breach of fiduciary duty for mishandling retirement investments, or for violating fair employment practices — and so can small business owners.

The difference, however, is that public company executives can often rely on the resources of their organization to mount a defense, while such a suit may put a small business owner’ s personal assets at risk.

When faced with a management liability lawsuit, the cost of defense can easily exceed the net worth of the individual defendants.

Simply put, management liability lawsuits can quickly deplete a business owner’s finances.

“In small, private companies organized as sole proprietorships or partnerships, owners are individually liable for the decisions they make on behalf of their organizations. They could lose their house, their car; all of their personal assets may be on the line,” said Edward McNally, Vice President and Underwriting Officer, Management Liability and Financial Institutions, CNA.

To protect themselves from financial ruin due to a lawsuit, small business owners should consider these five crucial insurance coverages.

1. Employment Practices Liability (EPL)

Discrimination and wrongful termination lawsuits filed by former employers are increasingly common, and companies of every size are vulnerable.

“If smaller companies with fewer than 50 employees are going to purchase just one management liability product, it should be EPL,” McNally said.

EPL claims top the list of management liability lawsuits in both frequency and severity. At the federal level, according to the U.S Equal Employment Opportunity Commission (EEOC) Charge Statistics, during the last five years, the EEOC has registered approximately 90,000 employment discrimination charges per year, which breaks down to approximately 250 employment-related charges per day. The same report showed a surge of disability and retaliation claims in 2008, due to a series of new employment laws, including the Lilly Ledbetter Act and amendments that expanded the Family Medical Leave Act and the Americans with Disabilities Act.

Some of this frequency may also been driven by increased enforcement of EEOC regulations under the Obama administration.

“The EEOC has embarked on an attorney hiring spree and pursued claims more aggressively, effectively driving up the average severity of these cases as well,” McNally said. “We’re in a challenging economic environment but also a challenging regulatory environment with increased state and federal regulatory enforcement by multiple different bodies.”

Rising severity of EPL suits becomes a greater concern in times of economic uncertainty, when many companies face the unhappy task of laying off employees, which could in turn could incite suits for discrimination or wrongful termination.

“Even when layoffs are justified by a good business reason and done in fairness, that doesn’t mean people can’t or won’t sue you. There is still exposure there and you will have to defend yourself against it,” McNally said.

2. Directors & Officers (D&O) Coverage

Business owners may be personally responsible for the effects of their managerial decisions on their fellow proprietors and the business as a whole, and, therefore, face D&O exposure. According to the “Directors and Officers Liability Survey,” published by Towers Watson, 36 percent of executives experienced a D&O lawsuit in the last 10 years.

The Towers & Watson survey indicated that D&O lawsuits are also increasing in frequency — a trend that may be overlooked by small businesses that don’t necessarily see their risk. D&O claims commonly stem from disputes over intellectual property, anti-trust allegations, or breach of fiduciary duty allegations brought by co-owners.

“For instance, a local construction company owned by three brothers inadvertently chose a name for their business that resembled the name of a large corporate conglomerate. That large company sued the brothers in their capacity as directors and officers for trademark infringement,” McNally said, describing an intellectual property suit that the officers of a small business could face.

“For privately held companies, D&O coverage may serve as the last line of defense between an executive’s personal assets and the outside world as it relates to litigation. It’s about protecting those people,” McNally said.

CNA_SponsoredContent“In small, private companies organized as sole proprietorships or partnerships , owners are individually liable for the decisions they make on behalf of their organizations. They could lose their house, their car; all of their personal assets may on be the line.”

— Edward McNally, Vice President and Underwriting Officer, Management Liability and Financial Institutions, CNA

3. Crime

No business owner wants to believe that their workers could steal from them, but employee theft has been a steady risk over the years. Smaller businesses may be more likely to fall prey by believing their small workforce is like a “family” that would never betray the company or its owner.

“In reality, you could have Jane in accounting, who has been at the company for 20 years, using dummy accounts to pay herself instead of a vendor that doesn’t really exist. Over those 20 years, she could have stolen $1 million,” McNally said.

Owners and officers of any size business need to be aware of their exposure and prepared for this unfortunate reality. Fidelity coverage, also called crime coverage, can help defray some of those losses if employee theft is discovered.

4. Fiduciary

Companies that offer retirement benefits and assume fiduciary oversight over investment options are exposed to fee and fund performance lawsuits.

An employee might file a fee and fund performance suit if they feel that their employer made ill-informed investment decisions that left the employee with above-market fees on their investments, and less cash in their retirement account.

“Frequency for fiduciary claims has been historically low, but plaintiffs’ attorneys are starting to drive it up,” McNally said. “New regulations regarding the maintenance of municipal pension funds have also increased exposure. Many mid-sized companies carry fiduciary coverage in addition to their D&O, but smaller organizations may be unaware of the risk.”

5. Kidnap, Ransom and Extortion

Employers that send workers overseas may be aware of their kidnap and ransom exposure, but many may not realize the risk that exists on their own soil.

“In the banking industry, for example, there have been home invasions of bank employees by perpetrators looking to gain access to the bank’s system or to extort large sums of cash,” McNally said.

Because each small business will have varying levels of exposure to these risks, CNA offers management liability coverages in a modular format, allowing insureds to pick and choose the products that best fit their needs.

The right insurance can mean the difference between a business owner’s bankruptcy and continued prosperity. In addition to its suite of insurance products, CNA invests in experienced attorney claims handlers who understand the laws and regulations their clients grapple with.

“An effective way for small businesses with limited resources to manage their management liability risk is to partner with a financially stable carrier like CNA that is invested in quality in-house legal claims handlers,” McNally said. “We’ve differentiated ourselves in the market with our claims team.”

For more information about CNA’s business insurance products, visit www.cna.com.

Only the relevant insurance policy can provide the actual terms, coverages, amounts and conditions for an Insured. All products and services may not be available in all states and may be subject to change without notice. CNA is a service mark registered with the United States Patent and Trademark Office.

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This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with CNA. The editorial staff of Risk & Insurance had no role in its preparation.




Serving business and professionals since 1897, CNA is the commercial insurance carrier of choice for more than 1 million businesses and professionals worldwide.

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Emerging Risks

Stadium Safety

Soft targets, such as sports stadiums, must increase measures to protect lives and their business.
By: | January 10, 2018 • 8 min read

Acts of violence and terror can break out in even the unlikeliest of places.

Look at the 2013 Boston Marathon, where two bombs went off, killing three and injuring dozens of others in a terrorist attack. Or consider the Orlando Pulse nightclub, where 49 people were killed and 58 wounded. Most recently in Las Vegas, a gunman killed 58 and injured hundreds of others.

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The world is not inherently evil, but these evil acts still find a way into places like churches, schools, concerts and stadiums.

“We didn’t see these kinds of attacks 20 years ago,” said Glenn Chavious, managing director, global sports & recreation practice leader, Industria Risk & Insurance Services.

As a society, we have advanced through technology, he said. Technology’s platform has enabled the message of terror to spread further faster.

“But it’s not just with technology. Our cultures, our personal grievances, have brought people out of their comfort zones.”

Chavious said that people still had these grievances 20 years ago but were less likely to act out. Tech has linked people around the globe to other like-minded individuals, allowing for others to join in on messages of terror.

“The progression of terrorist acts over the last 10 years has very much been central to the emergence of ‘lone wolf’ actors. As was the case in both Manchester and Las Vegas, the ‘lone wolf’ dynamic presents an altogether unique set of challenges for law enforcement and event service professionals,” said John

Glenn Chavious, managing director, global sports & recreation practice leader, Industria Risk & Insurance Services

Tomlinson, senior vice president, head of entertainment, Lockton.

As more violent outbreaks take place in public spaces, risk managers learn from and better understand what attackers want. Each new event enables risk managers to see what works and what can be improved upon to better protect people and places.

But the fact remains that the nature and pattern of attacks are changing.

“Many of these actions are devised in complete obscurity and on impulse, and are carried out by individuals with little to no prior visibility, in terms of behavioral patterns or threat recognition, thus making it virtually impossible to maintain any elements of anticipation by security officials,” said Tomlinson.

With vehicles driving into crowds, active shooters and the random nature of attacks, it’s hard to gauge what might come next, said Warren Harper, global sports & events practice leader, Marsh.

Public spaces like sporting arenas are particularly vulnerable because they are considered ‘soft targets.’ They are areas where people gather in large numbers for recreation. They are welcoming to their patrons and visitors, much like a hospital, and the crowds that attend come in droves.

NFL football stadiums, for example, can hold anywhere from 25,000 to 93,000 people at maximum capacity — and that number doesn’t include workers, players or other behind-the-scenes personnel.

“Attacks are a big risk management issue,” said Chavious. “Insurance is the last resort we want to rely upon. We’d rather be preventing it to avoid such events.”

Preparing for Danger

The second half of 2017 proved a trying few months for the insurance industry, facing hurricanes, earthquakes, wildfires and — unfortunately — multiple mass shootings.

The industry was estimated to take a more than $1 billion hit from the Las Vegas massacre in October 2017. A few years back, the Boston Marathon bombings cost businesses around $333 million each day the city was shut down following the attack. Officials were on a manhunt for the suspects in question, and Boston was on lockdown.

“Many of these actions are devised in complete obscurity and on impulse, and are carried out by individuals with little to no prior visibility.” — John Tomlinson, senior vice president, head of entertainment, Lockton

“Fortunately, we have not had a complete stadium go down,” said Harper. But a mass casualty event at a stadium can lead to the death or injury of athletes, spectators and guests; psychological trauma; potential workers’ comp claims from injured employees; lawsuits; significant reputational damage; property damage and prolonged business interruption losses.

The physical damage, said Harper, might be something risk managers can gauge beforehand, but loss of life is immeasurable.

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The best practice then, said Chavious, is awareness and education.

“A lot of preparedness comes from education. [Stadiums] need a risk management plan.”

First and foremost, Chavious said, stadiums need to perform a security risk assessment. Find out where vulnerable spots are, decide where education can be improved upon and develop other safety measures over time.

Areas outside the stadium are soft targets, said Harper. The parking lot, the ticketing and access areas and even the metro transit areas where guests mingle before and after a game are targeted more often than inside.

Last year, for example, a stadium in Manchester was the target of a bomb, which detonated outside the venue as concert-goers left. In 2015, the Stade de France in Paris was the target of suicide bombers and active shooters, who struck the outside of the stadium while a soccer match was held inside.

Security, therefore, needs to be ready to react both inside and outside the vicinity. Reviewing past events and seeing what works has helped risk mangers improve safety strategies.

“A lot of places are getting into table-top exercises” to make sure their people are really trained, added Harper.

In these exercises, employees from various departments come together to brainstorm and work through a hypothetical terrorist situation.

A facilitator will propose the scenario — an active shooter has been spotted right before the game begins, someone has called in a bomb threat, a driver has fled on foot after driving into a crowd — and the stadium’s staff is asked how they should respond.

“People tend to act on assumptions, which may be wrong, but this is a great setting for them to brainstorm and learn,” said Harper.

Technology and Safety

In addition to education, stadiums are ahead of the game, implementing high-tech security cameras and closed-circuit TV monitoring, requiring game-day audiences to use clear/see-through bags when entering the arena, upping employee training on safety protocols and utilizing vapor wake dogs.

Drones are also adding a protective layer.

John Tomlinson, senior vice president, head of entertainment, Lockton

“Drones are helpful in surveying an area and can alert security to any potential threat,” said Chavious.

“Many stadiums have an area between a city’s metro and the stadium itself. If there’s a disturbance there, and you don’t have a camera in that area, you could use the drone instead of moving physical assets.”

Chavious added that “the overhead view will pick up potential crowd concentration, see if there are too many people in one crowd, or drones can fly overhead and be used to assess situations like a vehicle that’s in a place it shouldn’t be.”

But like with all new technology, drones too have their downsides. There’s the expense of owning, maintaining and operating the drone. Weather conditions can affect how and when a drone is used, so it isn’t a reliable source. And what if that drone gets hacked?

“The evolution of venue security protocols most certainly includes the increased usage of unmanned aerial systems (UAS), including drones, as the scope and territorial vastness provided by UAS, from a monitoring perspective, is much more expansive than ground-based apparatus,” said Tomlinson.

“That said,” he continued, “there have been many documented instances in which the intrusion of unauthorized drones at live events have posed major security concerns and have actually heightened the risk of injury to participants and attendees.”

Still, many experts, including Tomlinson, see drones playing a significant role in safety at stadiums moving forward.

“I believe the utilization of drones will continue to be on the forefront of risk mitigation innovation in the live event space, albeit with some very tight operating controls,” he said.

The SAFETY Act

In response to the terrorist attacks on Sept. 11, 2001, U.S. Homeland Security enacted the Support Anti-Terrorism by Fostering Effective

Warren Harper, global sports & events practice leader, Marsh

Technologies Act (SAFETY Act).

The primary purpose of the SAFETY Act was to encourage potential manufacturers or sellers of anti-terrorism technologies to continue to develop and commercialize these technologies (like video monitoring or drones).

There was a worry that the threat of liability in such an event would deter and prevent sellers from pursing these technologies, which are aimed at saving lives. Instead, the SAFETY Act provides incentive by adding a system of risk and litigation management.

“[The SAFETY Act] is geared toward claims arising out of acts of terrorism,” said Harper.

Bottom line: It’s added financial protection. Businesses both large and small can apply for the SAFETY designation — in fact, many NFL teams push for the designation. So far, four have reached SAFETY certification: Lambeau Field, MetLife Stadium, University of Phoenix Stadium and Gillette Stadium.

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To become certified, reviewers with the SAFETY Act assess stadiums for their compliance with the most up-to-date terrorism products. They look at their built-in emergency response plans, cyber security measures, hiring and training of employees, among other criteria.

The process can take over a year, but once certified, stadiums benefit because liability for an event is lessened. One thing to remember, however, is that the added SAFETY Act protection only holds weight when a catastrophic event is classified as an act of terrorism.

“Generally speaking, I think the SAFETY Act has been instrumental in paving the way for an accelerated development of anti-terrorism products and services,” said Tomlinson.

“The benefit of gaining elements of impunity from third-party liability related matters has served as a catalyst for developers to continue to push the envelope, so to speak, in terms of ideas and innovation.”

So while attackers are changing their methods and trying to stay ahead of safety protocols at stadiums, the SAFETY Act, as well as risk managers and stadium owners, keep stadiums investing in newer, more secure safety measures. &

Autumn Heisler is a staff writer at Risk & Insurance. She can be reached at [email protected]