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CNA Blog — From the Experts

Published Tuesday, September 5, 2017

5 Management Liability Insurance Coverages all Small Businesses Need

Your business may be small, but your risks are not. The liability insurance needed to run your business profitably doesn't greatly differ from the coverages that large, public corporations require.

Similar to large companies, small-business owners are not immune to lawsuits alleging fair employment practices violations, tortious interference or employee theft or extortion. But unlike large corporations, your business may not have the organizational resources to defend these claims.

In fact, Management Liability losses can paralyze a small business and impair the owner's finances, whether through high defense costs that exceed your net worth or settlements paid with personal assets.

For these reasons, consider purchasing the following insurance coverages:

  1. Employment Practices Liability Insurance (EPLI)

    If your business has fewer than 50 employees, EPLI is the No. 1 Management Liability insurance you need. Discrimination and wrongful termination lawsuits are increasingly common.

    In 2016, the Equal Employment Opportunity Commission (EEOC) received more than 91,000 charges of discrimination, harassment and retaliation, which amounts to approximately 250 employment-related charges a day. From a defensive cost perspective, the average EEOC charge is more than $25,000, which represents a significant expense for most small businesses.

    It doesn't matter how good your company's human resources and risk management practices are, an EPL exposure arises simply because you have employees.

    The changing regulatory environment raises uncertainties regarding both EEOC regulatory enforcement and future economic conditions. If you are forced to make layoffs — even when implemented in a fair manner and for sound business reasons — disgruntled employees may file lawsuits against you for discrimination or wrongful termination.
  2. Directors & Officers Insurance (D&O)

    According to the 2016 Willis Towers Watson report "Directors' Liability: D&O The changing face of personal exposure," more than one in four respondents (27 percent) experienced a claim or investigation involving a director of their companies in the last five years. Business owners may be personally responsible for the impact of their managerial decisions on their fellow proprietors — and the business as a whole — and consequently face D&O liability exposure.

    The leaders of any organization may face personal liability for the decisions they make. They can be sued based upon their actions while managing the organization, or they can be named as defendants in a lawsuit simply because they serve as directors and officers. In the absence of D&O liability insurance, the directors and officers may be required to pay for their defense out of their own personal assets. Tillinghast-Towers Perrin (now Willis Towers Watson) has reported that the average cost of defending D&O litigation can range from $100,000 to $2 million.

    D&O lawsuits also are increasing in severity, perhaps due to small businesses overlooking their risk exposures. Imagine if you hire a competitor's employee, who brought to your firm some of her previous clients as well as some customer information. This employee had a non-compete agreement with your competitor. The competitor sues your new employee and your company for breach of contract, fraud and tortious inference. Does this make you uneasy? With a D&O policy, you can rest easier knowing it helps you pay the substantial costs required to defend against the matter.
  3. Fidelity and Crime Insurance

    No business owner wishes to believe that one's employees would steal from the business, but according to a 2015 report of Statistic Brain, based upon data compiled by the Association of Certified Fraud Examiners, 37.5 percent of employees have stolen at least twice from their employers. Moreover, this data reveals that 33 percent of business bankruptcies are caused by employee theft. More than a quarter of respondents (25.3 percent) report stolen funds greater than $1 million, with the median amount of $175,000.

    Owners and officers of companies of any size should be aware of this exposure and prepared for this unfortunate reality. However, as a small-business owner, you likely view your employees as family and thus may overlook adequate risk measures. Perhaps an employee from accounting, who has served your company for more than 20 years, created a dummy account to pay themselves under the guise of a vendor account. Over the years, the amount could escalate exponentially. Fidelity coverage, also called Crime coverage, may help you to defray losses due to employee dishonesty, forgery, robbery or other theft.
  4. Fiduciary Liability Insurance

    When you manage the investment and retirement plans of your employees, you assume fiduciary oversight. Careless management — and innocent errors — can result in fee and fund performance lawsuits if one of your employees converts retirement funds for personal use. If an employee has less cash in his or her retirement plan, a lawsuit may follow.

    According to a Tillinghast-Towers Perrin (now Willis Towers Watson) survey, the average Employee Retirement Income Security Act of 1974 (ERISA) matter settles for nearly $1 million, with nearly 70 percent of plaintiffs prevailing in substantive district court cases. If you offer employees a retirement plan, consider coverage that insures against the administration and management of 401(k), pension, and health and welfare.
  5. Kidnap, Ransom and Extortion Insurance

    Conducting business in 2017 and beyond means you may embrace global opportunities and travel to countries encountering economic or political instability. Ransom demands yield kidnappers nearly $500 million dollars per year. If an employee is kidnapped or faces other security incidents, this coverage will help insure your corporate assets. In most circumstances, your insurer also provides you with access to a crisis response firm, which is experienced in evacuating personnel from high risk environments.

The appropriate insurance can mean the difference between bankruptcy and prosperity for your small business. Whether you own a private company or non-profit, you are responsible for a diverse workforce and address Management Liability risks. Small businesses with limited resources can effectively manage their Management Liability risks by partnering with an insurance company that invest its resources in experienced claim professionals, and by working with independent agents and brokers to ensure that they have the right coverages for their exposures.

One or more of the CNA companies provide the products and/or services described. The information is intended to present a general overview for illustrative purposes only. Read CNA’s General Disclaimer.
One or more of the CNA companies provide the products and/or services described. The information is intended to present a general overview for illustrative purposes only. Read CNA’s General Disclaimer.
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