Research has shown one in four companies will at some time face allegations related to wrongful employment practices or other leadership decisions and actions taken within the scope of managing their operations. Heather Schaaf, Underwriting Director, Burns & Wilcox, Chicago, Illinois, shares insight on management liability insurance and what today’s senior executives should know.
What are the biggest risks related to management liability today?
H.S.: Unemployment remains high, and there is a direct correlation between high unemployment and an increase in the number of lawsuits filed against employers alleging discrimination, harassment or other types of wrongdoing. Many companies are struggling financially and facing other challenges, which may mean that oversight of day-to-day operations or timely 401K disbursements are falling to the wayside. These types of circumstances can increase the likelihood that missteps will occur as well as the number of disgruntled employees. Senior officers within a company also need to be aware that they can be named individually as defendants in a lawsuit, and their own personal assets can be targeted.
What kinds of insurance policies can help management respond to these threats?
H.S.: The top three policy types are Directors & Officers Insurance (D&O), Employment Practices Liability Insurance (EPLI) and Fiduciary Liability Insurance.
D&O Insurance can offer coverage for costs related to allegations made against a company itself and claims of personal liability for wrongdoing or bad judgment against a company’s directors or officers, as well as for those individual officers who are not indemnified. Supplemental coverage for additional side A, derivative demand investigations and shareholder dilution claims are also available.
EPLI covers costs related to harassment or discrimination lawsuits, or allegations of retaliation against an employee for reporting wrongdoing. Optional coverage add-ons could be for wage & hour claims, Immigration Reform Control Act violations, workplace violence or including independent contractors in the employee definition.
Fiduciary Liability Insurance coverage is available to protect companies in administering and managing their employee benefit plans. Popular enhancements include a voluntary settlement program, claims for violations under HIPAA, COBRA or PPACA, disclosure provisions penalties, and settler capacity.
Cost of defense outside of limits (DoL), Excess D&O Insurance, Excess Side A and Excess EPLI are also available, which can help ensure that when a claim comes, there is enough coverage to mitigate the costs.
How has COVID-19 affected the management liability insurance market?
H.S.: The market has been hardening since mid-2019; nevertheless, within a month of when COVID-19 hit the U.S. and Canada in March this year, we began seeing sharp increases in premiums and retentions being quoted. The increases were dramatic because these coverage forms rely so heavily on a company’s financial performance and management.
Reduced limits are also being quoted, and optional add-ons may not be available for certain classes. Companies that have not previously carried management liability coverage in some instances have become more difficult to place. Companies’ policies and procedures are being scrutinized much more closely, especially those having to do with layoffs, and we are seeing new exclusions added related to COVID-19, bankruptcy, downsizing and past acts.
What steps can management take to complement insurance coverage from a prevention standpoint?
H.S.: Leaders should have an accurate, complete and current picture of what is going on in their industry and in the marketplace, including recent trends. Join industry trade organizations and engage in continuing education. Make sure your company follows all federal, state and local directives and that your human resources department is keeping policies and procedures updated based on compliance guidance from the U.S. Equal Employment Opportunity Commission and Occupational Safety and Health Administration. Companies should also maintain a relationship with a law firm.
Payroll processing companies that track hours and benefits can be a worthwhile investment and help avoid wage & hour claims from employees asserting they are owed overtime or miscalculated pay. Diversifying your supply chain is a good idea to help keep your business running smoothly in the event of delays or closures.
Anything else managers should know?
H.S.: It is critically important to have adequate D&O Insurance and/or EPLI coverage in place and make sure the limits are sufficient. What we see in these types of lawsuits is that legal defense costs can equal or even exceed the amount of a settlement.
What advice would you give brokers to increase their success in this market?
H.S.: Educating themselves on the coverage lines, networking, and increased communication between carriers and underwriters are imperative. We often hear that small companies or family-run companies do not believe they need these types of insurance coverages, but 10 percent of management liability claims originate from competitors and suppliers, 28 percent from government agencies, and 32 percent from employees. Explain to your clients that EPLI and D&O Insurance coverages are exceptionally cost-effective ways to transfer liability risks.
MANAGEMENT LIABILITY INSURANCE
WHY YOUR CLIENTS MIGHT NEED IT: To protect the assets of their company and its directors and officers. Also, when unemployment goes up, the number of lawsuits against employers goes up as well.
PROTECTS AGAINST: D&O Insurance helps with costs of defending against allegations of wrongdoing or poor judgment against company leaders. EPLI covers costs related to harassment or discrimination lawsuits.
EXPERT OPINION: “It is critically important to have adequate D&O Insurance and/or EPLI coverage in place and make sure the limits are sufficient. What we see in these types of lawsuits is that legal defense costs can equal or even exceed the amount of a settlement,” said Heather Schaaf, Underwriting Director, Burns & Wilcox, Chicago, Illinois.
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