Wrongful termination allegations and shareholder lawsuits are among the numerous management liability risks companies may encounter. To learn more about these challenges and the corresponding insurance solutions, Crain’s Content Studio spoke with Marvin Cigarroa, Broker, Professional Liability, Burns & Wilcox, San Diego, California.
What are some of the greatest management liability risks companies face today?
M.C.: The management liability risks that companies face today come from numerous sources: employees, shareholders, creditors, competitors, vendors, customers, and regulators. The greatest exposure from employees is an employment practices wrongful act lawsuit — whether it is wrongful termination, discrimination, harassment, etc. These lawsuits are costly to settle, and defense costs can quickly add up even for a claim with no merit. Employment Practices Liability (EPL) Insurance policies are designed to respond to these types of claims and cover both settlement and legal defense costs. The greatest Directors & Officers Insurance risks for a privately-held company depends on the shareholder structure and industry class. The shareholder risk will be higher for a company with numerous shareholders, including those that have minority shareholders that feel their interests are not being protected by the majority shareholder. Regulation risk will be higher for the insured in more regulated industries like health care and finance. Complaints from competitors and vendors can result in antitrust/price-fixing claims across all industry classes.
Which insurance policies can help them respond to these threats?
M.C.: The two primary policies that help respond to these risks are Directors & Officers Liability (D&O) Insurance and EPL Insurance. They can be purchased together as a package policy with or without shared limits, or they can purchase only one or the other. Fiduciary Liability is a related policy coverage that can usually be purchased together with D&O and EPL Insurance, for those companies that sponsor a pension plan and/or defined contribution plan like a 401(k). The limits purchased by an insured will depend on its revenue and asset size, risk tolerance, and specific exposures. It is important to keep in mind that these policies provide coverage for both settlement and defense costs, with defense costs typically included within the limit of liability. For this reason, the insured should factor in limits erosion from defense costs when determining the appropriate limit to purchase, or the amount they would like to have available for settlements.
Are there additional coverages available for certain scenarios?
M.C.: On EPL Insurance specifically, an insured should look to confirm the coverage available for Wage & Hour claims. These claims can impact most businesses but are more prevalent in industry classes with a higher percentage of hourly employees, like hospitality and retail. These claims allege that the insured has violated Wage & Hour laws regarding issues like meal breaks and overtime pay. They also deal with the misclassification of employees as exempt hourly employees and vice versa. Wage & Hour Claim endorsements will provide the insured coverage for defense costs for these types of claims, usually at a lower sublimit amount.
What steps should businesses take to complement their insurance coverage from a prevention standpoint?
M.C.: One of the key steps that a company should take from a risk mitigation standpoint is to create, implement, and regularly update employment practices policies and procedures. These are usually found in the form of an employee handbook. However, it is not enough to simply have an employee handbook if the policies and procedures are not followed by the company’s management team. Properly adhering to the handbook and documenting all employment-related matters will go a long way toward helping to mitigate the exposure from an employment practices claim. Many EPL Insurance carriers offer complimentary or reduced-fee services to insureds that would like to improve their policies and procedures.
How has COVID-19 affected the Management Liability Insurance market?
M.C.: Covid significantly impacted the Management Liability market, especially with respect to EPL Insurance. Underwriters have seen increased claims frequency due to the employment issues that arose out of Covid, including companies of all sizes conducting layoffs, the “Great Resignation,” and vaccination policies. Termination activity, whether voluntary or involuntary, tends to be a trigger for employment claims. D&O Insurance has also been impacted primarily from a bankruptcy perspective, as many companies were unable to stay in business during the shutdowns.
What are the greatest opportunities for brokers to get into Management Liability Insurance?
M.C.: I believe that many brokers hesitate to get into Management Liability Insurance products because they simply are not as familiar or comfortable with the coverages. In those cases, I would first recommend that they look to partner with a Burns & Wilcox professional broker that can help them better understand and guide them in this area. I believe the greatest opportunity for brokers is to look to cross-sell Management Liability to their existing book of business. EPL Insurance tends to be a product to lead with, as most of their insureds will have employees and with it, employment practices liability risk to mitigate.
What features of Management Liability Insurance are specific to Burns & Wilcox?
M.C.: Burns & Wilcox has dedicated professional brokers that specialize in Management Liability, Professional Liability/E&O, and Cyber. It is advantageous to have brokers that specialize in Management Liability, given the various coverage issues that arise in these product lines. Burns & Wilcox brokers also have access to exclusive in-house programs, including Management Liability. Finally, our professional group works on a brokerage basis, meaning that we have access to a wide variety of markets depending on the insured’s risk profile. Our strong relationships with our underwriting partners help us find solutions for our retail brokers.
Management Liability Insurance
WHY YOUR CLIENTS MIGHT NEED IT: Companies face numerous management liability risks from employees, shareholders, creditors, competitors, vendors, customers, and regulators.
PROTECTS AGAINST: Lawsuits related to employment practices, such as wrongful termination, discrimination and harassment, wage and hour lawsuits and lawsuits regarding Covid vaccination policies.
EXPERT OPINION: “One of the key steps that a company should take from a risk mitigation standpoint is to create, implement, and regularly update employment practices policies and procedures.”