Small business executives faced big litigation in past 24 months
The average D&O lawsuit costs over $120,000, Coalition, Inc. reports.
The need for directors & officers (D&O) and employment practice liability (EPL) coverage is skyrocketing. After two years of the pandemic, a huge increase in cybercrime and the fast pace of digital transformation, today’s business leaders face a much greater risk from legal action than ever before. This is true for large and small organizations alike.
In Coalition’s 2022 Executive Risks Report, a survey of 1,000 small business leaders about executive risks coverage and claims, revealed that the average D&O lawsuit costs over $120,000 and 28% of executives surveyed experienced some form of litigation in the past 24 months.
Furthermore, the report, which contains the study’s findings, discussed the current risk of D&O and EPL claims, as well as the demand that executives have for this liability coverage. Key findings in the report include:
1. The digital economy has amplified corporate risks
Digital threats strike faster and with more severity than traditional hazards. Threat actors can gain control of company social media accounts, causing extensive reputational damage in seconds. Even something as simple as harassment of employees on email is a growing problem.
2. The pandemic has created new legal exposures
Nearly 60% of the businesses surveyed were negatively impacted by the pandemic. Quick decisions regarding remote work, reductions in headcount, and enacting health and safety precautions have made executives vulnerable to a wide variety of lawsuits. Thousands of federal fraud investigations into the Paycheck Protection Program (PPP) and other loans have been triggered simply by discrepancies in corporate information entered on forms.
The report also noted that 62% of all businesses bought additional insurance coverage as a direct result of COVID. Pandemic-related legal exposures include executives’ actions and decisions regarding employer-mandated vaccinations and other COVID-19 precautions, alleged price gouging, denial of refunds, inconsistencies in employee sick leave or termination policies, and many others.
3. Financing activities put executives at risk
There are a number of financing-related activities in which corporate officers can be held directly liable, leaving uninsured companies exposed to potentially disastrous losses. One of the most common scenarios is merger and acquisition litigation (such as conflict of interest objections). Currently, there is one lawsuit filed for almost every public company merger transaction and, according to the report, 55% of small businesses completed at least one merger/acquisition in the past 24 months.
This past year also heralded the onset of a huge increase in class actions filed by shareholders against numerous organizations trying to fast-track their IPOs by forming a special purpose acquisition company (SPAC) to merge with.
4. Employment practices liabilities are rising
Besides employment and COVID-related practices, organizations of all sizes are increasingly facing EPL issues where 26% of companies with 100 or more employees experienced an EPL claim in the last two years, according to the survey’s findings. These EPL issues stem from companies’ diversity & inclusion and equity issues, discrimination or harassment or wrongful termination.
5. Small businesses are not immune to liability
Data and real world examples in the report illustrate that no business is too small to face costly D&O or EPL cases as 36% of small businesses with D&O coverage have experienced a claim in the last two years. Executives at smaller companies may even be found more personally liable than those at larger corporations because they are typically more directly involved in key decisions.
According to the U.S. Small Business Administration’s Office of Advocacy, every year, 36%-53% of small businesses are sued — and 43% of small businesses said that they had at least been threatened with a lawsuit.
The need for executive risks coverage
Nearly one-third of small business executives surveyed didn’t purchase management liability coverage because they didn’t realize coverage existed. This highlights the need for agents to work with their small business clients to address executive risks as an important part of their insurance and risk management programs.
Patrick Mitchell is executive risks lead at Coalition, Inc.
Opinions expressed here are the author’s own.
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