Supply chain shortages linked to seaport backlogs, a lack of truck drivers and other constraints could mean toy stores are unable to keep up with holiday shopping demands this year, setting up business owners and consumers for a season that some say will be “unlike any other.” Although President Joe Biden told retailers Nov. 29 that the White House would partner with them to ensure shelves are fully stocked for holiday shopping, concerns remain that the shortages could persist through 2022, the New York Times reported.
Some business owners are hoping their early efforts to avoid a toy shortage will pay off. The owners of Kip’s Toyland, the oldest toy shop in Los Angeles, recently told the Los Angeles Times that they noticed supply chain issues looming months ago and began stocking more product than usual. In Pepper Pike, Ohio, one toy store owner told WJW Cleveland that he started stocking holiday inventory in the spring, and toy store owners from Missouri to Michigan have shared similar strategies.
“This is a very difficult time; I do not think many business owners can say they have been through this storm before,” said Ryan Ascenzo, Senior Broker, Professional Liability, Burns & Wilcox Brokerage, New York, New York. “Some store owners loaded up on product before the supply chain became a real problem, and the risk with that is they could be stuck with a full inventory that is not moving very well. They could have to drop the price on those products or sell it for less than what they paid, and their business could sink or thrive based on that kind of a decision.”
Business is no longer ‘as usual.’ … Whether it is supply and demand or labor shortages, business owners have to think outside of the box.
Additionally, the unprecedented strain could put retailers at risk for other types of losses, including litigation over mismanagement or employment issues, or reduced revenue due to consulting work gone wrong. It is a good time for businesses to evaluate their Directors & Officers (D&O) Insurance, Employment Practices Liability (EPL) Insurance, and Errors & Omissions (E&O) Insurance, said Rahmad Bauldrick, Associate Vice President, Regional Practice Leader, Professional Liability, Burns & Wilcox, Chicago, Illinois.
“Business is no longer ‘as usual,’” Bauldrick said. “These challenges are serious and bring a different mechanism to how we do business around the world. Whether it is supply and demand or labor shortages, business owners have to think outside of the box. Many are hiring consultants to help their business thrive, but if they do not have the right expertise, that could backfire.”
Retailers could be sued for mismanagement over supply chain crisis response
On Nov. 30, Walmart CEO John Furman said on Good Morning America that the Biden administration’s efforts to help with supply chain concerns have been helpful and that inventory is up, though he said it is still a good idea to shop early for especially sought-after holiday gifts, ABC News reported. Canadian shoppers have also been advised to shop early and some toys have been difficult for retailers to obtain, CTV News reported on Oct. 31.
Trucking is a “weak link” in the supply chain, MarketWatch recently reported, with shortages of truck drivers, trucks, and warehouse workers all contributing to delays.
It is a tough time to be in business and there are a lot of difficult decisions to make. This might be an unprecedented event for any business owner.
“Shortages are a real concern, and I think everyone is experiencing it in some form,” Ascenzo said. “From what I am hearing, it is not so much the products getting to the ports. The products are in the ports, but the issue is getting products from the ports to store shelves, distribution facilities, or consumers’ doorsteps.”
Retailers that did not load up on extra stock could have trouble keeping their doors open this season as costs rise in other areas, including wages and utility expenses. “If you run out of products to sell and now you are cash-strapped for the remainder of the holiday season, then you are faced with other difficult business decisions,” Ascenzo pointed out. “Do you start to close hours, do you lay workers off? It is a tough time to be in business and there are a lot of difficult decisions to make. This might be an unprecedented event for any business owner.”
Companies that lose revenue, shut down or fall behind on debts could face lawsuits from creditors, investors or others alleging mismanagement. This is the type of lawsuit D&O Insurance is designed to respond to, providing coverage for a company’s directors and officers or the entity itself in the event of litigation.
“D&O Insurance is a financial protection product that is meant to protect directors and officers for decisions they make on behalf of the business,” Ascenzo said, noting that this is also a necessity for small businesses. “Small business owners are still at risk from the financial consequences of making business decisions. Whether it was due to supply chain issues or the rising cost of operating a business, if they ultimately have to close their doors, they may have creditors trying to recoup whatever they can from the business. They may even go after the business owner personally.”
Antitrust litigation is also possible if allegations are made that toy stores colluded to overcharge consumers, for example, he noted. “If it is negotiated and structured correctly, D&O Insurance could pick up the defense costs and damages for those types of lawsuits as well,” Ascenzo said.
Holiday hiring rush may bring increased employment liability for toy stores
The ongoing labor shortage may also have an impact on stores struggling to navigate an already-challenging holiday shopping season, Ascenzo said. According to a Nov. 25 USA Today report, some retailers have turned to employing more teenagers in advance of the holiday shopping season because they cannot find enough adults to fill the positions. Other retailers are increasing wages; Macy’s, for example, announced in November that all of its workers would make at least $15 per hour by May, Reuters reported. In Canada, many small retail store owners are struggling to hire enough workers for the holiday season while competing with larger retailers offering more incentives, according to a Nov. 29 CBC News article.
Anytime a business makes changes to hiring practices, the risk of an employment-related lawsuit may increase. EPL Insurance can respond to these lawsuits, which could make allegations of discrimination based on gender or nationality.
From a business financial protection perspective, there is no better time than now to look into a D&O Insurance policy to protect you in the event that your business is named in a lawsuit, whether it be rightfully so or not, and the same goes for EPL Insurance.
“If you have an existing workforce and now you are soliciting new workers at higher wages or offering incentives that were not available to your existing workforce, the existing workforce might bring a lawsuit against their employer,” Ascenzo explained. “That is a real concern for companies that are aggressively hiring, whether it is trucking companies or retailers. When you have disgruntled workers who feel wronged or jilted, lawsuits can happen.”
From hiring practices to purchasing decisions, business owners should exercise additional caution during this time, Ascenzo emphasized.
“The business climate is unpredictable right now with all of these different factors, and your business could potentially falter in these unprecedented times,” he said. “From a business financial protection perspective, there is no better time than now to look into a D&O Insurance policy to protect you in the event that your business is named in a lawsuit, whether it be rightfully so or not, and the same goes for EPL Insurance.”
Consultants advising retailers should be experienced, insured
Companies that provide a professional service, such as consulting for a retail store or other business, should always carry E&O Insurance, Bauldrick said. This policy can cover financial damage caused by a professional’s mistake. For toy shops, this could include an advisor consulting on how to navigate supply chain issues or a professional working on the retailer’s online store.
“If a consultant does not have the expertise in that area, they could be misleading their client,” Bauldrick said. “You want to make sure that whoever you are hiring to assist your business has the experience and is insured. That is critical.”
This is especially relevant today, as more retailers are seeking out consulting help. “There is more of a demand for consultants out there to consult on businesses because of the crisis that has gone on in the last two years,” he said. Some of that consulting work may include implementing more automated processes to help adapt to the labor shortage and the rising cost of doing business, Bauldrick noted.
“If they are seeking outside advice, they need to make sure the individuals responsible are carrying adequate amounts of E&O Insurance,” he explained. “That can cover any damage the business suffers due to that consultant’s negligence. If the retailer’s reputation is harmed, the policy can also provide services from that standpoint.”
You want to make sure that whoever you are hiring to assist your business has the experience and is insured. That is critical.
Legal defense is another key coverage provided by E&O Insurance, Bauldrick said. For retailers and consultants alike, the legal costs alone of responding to a lawsuit often make insurance well worth the expense, Ascenzo added. “Legal costs can easily outweigh a settlement in many cases,” he said. “The cost to bring or defend litigation is rising and has been for a number of years, and there are no telltale signs that this is going to subside.”
Other essential insurance policies for retailers include Commercial General Liability (CGL) Insurance, which can cover third-party bodily injuries or property damage, and Commercial Crime Insurance, which can cover cash in registers and stock in the event a store is burglarized. Cyber and Privacy Liability Insurance can respond in the event of a cyberattack and help with ransom payments, notification costs, lost revenue, and other expenses.
“Many of these policies are designed to dovetail with each other,” Ascenzo said. “It is important to partner with a good insurance broker that has expertise in multiple lines of coverage, like Burns & Wilcox does, so we can put together comprehensive programs that minimize any potential gaps in coverage.”
Join our experts for a discussion on E&O as it relates to the risks associated with remote operations, labor shortages, and staffing companies on our Labor & Staffing: Management Liability and E&O webinar here.