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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


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.



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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By: | June 1, 2017 • 4 min read

R&I: What was your first job?

Working at Dominick’s Finer Foods bagging groceries. Shortly after I was hired, I was promoted to [cashier] and then to a management position. It taught me great responsibility and it helped me develop the leadership skills I still carry today.

R&I: How did you come to work in risk management?

While working for Hyatt Regency McCormick Place Hotel, one of my responsibilities was to oversee the administration of claims. This led to a business relationship with the director of risk management of the organization who actually owned the property. Ultimately, a position became available in her department and the rest is history.

R&I: What is the risk management community doing right?


The risk management community is doing a phenomenal job in professional development and creating great opportunities for risk managers to network. The development of relationships in this industry is vitally important and by providing opportunities for risk managers to come together and speak about their experiences and challenges is what enables many of us to be able to do our jobs even more effectively.

R&I: What could the risk management community be doing a better job of?

Attracting, educating and retaining young talent. There is this preconceived notion that the insurance industry and risk management are boring and there could be nothing further from the truth.

R&I: What’s been the biggest change in the risk management and insurance industry since you’ve been in it?

In my 20 years in the industry, the biggest change in risk management and the insurance industry are the various types of risk we look to insure against. Many risks that exist today were not even on our radar 20 years ago.

Gina Kirchner, director of risk management, Navy Pier Inc.

R&I: What insurance carrier do you have the highest opinion of?

FM Global. They have been our property carrier for a great number of years and in my opinion are the best in the business.

R&I: Are you optimistic about the US economy or pessimistic and why?

I am optimistic that policies will be put in place with the new administration that will be good for the economy and business.

R&I: What emerging commercial risk most concerns you?


The commercial risks that are of most concern to me are cyber risks, business interruption, and any form of a health epidemic on a global scale. We are dealing with new exposures and new risks that we are truly not ready for.

R&I: Who is your mentor and why?

My mother has played a significant role in shaping my ideals and values. She truly instilled a very strong work ethic in me. However, there are many men and women in business who have mentored me and have had a significant impact on me and my career as well.

R&I: What have you accomplished that you are proudest of?

I am most proud of making the decision a couple of years ago to return to school and obtain my [MBA]. It took a lot of prayer, dedication and determination to accomplish this while still working a full time job, being involved in my church, studying abroad and maintaining a household.

R&I: What is your favorite book or movie?

“Heaven Is For Real” by Todd Burpo and Lynn Vincent. I loved the book and the movie.

R&I: What’s the best restaurant you’ve ever eaten at?


A French restaurant in Paris, France named Les Noces de Jeannette Restaurant à Paris. It was the most amazing food and brings back such great memories.

R&I: What is the most unusual/interesting place you have ever visited?

Israel. My husband and I just returned a few days ago and spent time in Jerusalem, Nazareth, Jericho and Jordan. It was an absolutely amazing experience. We did everything from riding camels to taking boat rides on the Sea of Galilee to attending concerts sitting on the Temple steps. The trip was absolutely life changing.

R&I: What is the riskiest activity you ever engaged in?

Many, many years ago … I went parasailing in the Caribbean. I had a great experience and didn’t think about the risk at the time because I was young, single and free. Looking back, I don’t know that I would make the same decision today.

R&I: What about this work do you find the most fulfilling or rewarding?

I would have to say the relationships and partnerships I have developed with insurance carriers, brokers and other professionals in the industry. To have wonderful working relationships with such a vast array of talented individuals who are so knowledgeable and to have some of those relationships develop into true friendships is very rewarding.

R&I: What do your friends and family think you do?

My friends and family have a general idea that my position involves claims and insurance. However, I don’t think they fully understand the magnitude of my responsibilities and the direct impact it has on my organization, which experiences more than 9 million visitors a year.

Katie Siegel is an associate editor at Risk & Insurance®. She can be reached at [email protected]