A third of private companies do not purchase any type of management liability insurance even as they increasingly enter business areas once considered the domain of large public companies, according to the 2005 Chubb Private Company Risk Survey.
The new survey was revealed at the recent Inc. 500 Conference, held by Inc. magazine to highlight achievements of creators of the 500 fastest-growing private companies in America. Marketing Leverage Inc., a market research firm in Connecticut, conducted the survey. The firm interviewed the chief executive, financial and other top officers at 451 privately held U.S. companies in 46 states, according to Chubb.
"As privately held companies continue to escalate their activity in areas that were once considered the domain of large, publicly owned companies, they have increased their exposure to potentially costly liability-related lawsuits, as well as to crime events such as workplace fraud and extortion," said Lisa McGee, vice president, Chubb & Son. "In an area such as directors and officers liability, the stakes can be especially high and financially devastating."
Specifically, survey participants in those 112 private companies that were named in a directors and officers liability lawsuit reported average total defense, settlement and/or judgment costs of $308,465.
According to the survey, 67 percent of private companies are likely to broaden their product offerings, 20 percent plan to reduce or eliminate some employee benefits, 21 percent plan to reduce their workforce, 18 percent plan to add an outside board member, 27 percent plan a major acquisition, and 31 percent plan to outsource functions or operations.
The top two reasons cited for not purchasing management liability insurance products were "no need" or "low risk."
Ironically, almost two-thirds of private companies surveyed had experienced some management liability event in the past five years, most often an employment practices liability, directors and officers liability, or crime event, Ms. McGee said. Of those 161 companies that reported an employment practices liability lawsuit or Equal Employment Opportunity Commission charge, the average cost was $1.1 million, the survey showed. Respondents also reported an average loss of $348,000 resulting from the theft of stolen company funds, equipment, inventory or merchandise.
"Private companies have many of the same exposures as publicly traded companies," said Ms. McGee. "For instance, outsourcing jobs can lead to an employment practices liability lawsuit alleging discrimination and/or wrongful termination, and an expansion of products or services can increase a company's risk of an errors and omissions lawsuit.
"These and other activities are often triggers to lawsuits, potentially placing the firm in greater financial peril," she said.
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