Small Business, Big Management Liability Risk
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.
“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
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.
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.