How to guide small business clients on D&O liability risks
Many small business owners erroneously think they are ‘too small’ for these risks.
Even in our increasingly litigious society, many small business owners think they’re too small to fall victim to directors and officers (D&O) liability claims.
As a result, they fail to protect their companies and don’t realize the error of their ways until it’s too late. According to Coalition’s 2022 Executive Risks Report, 36% of small businesses that had D&O liability coverage experienced a claim within the last two years, with the average cost eclipsing $120,000 and the highest claim extending into the millions. Making matters worse, 18% of businesses that had employment practices liability (EPL) had a claim, too, with an average cost coming in just south of $69,000.
Small business owners often don’t know what kind of protection they need — they often have to assume many roles as part of daily operations and rely on trusted risk advisors. On top of this, other small businesses that are not aware of the risk posed by modern D&O liability claims can have a hard time prioritizing coverage that protects leadership and business decision-makers.
As a risk advisor, it’s a broker’s job to convey these risks to your small business clients. As D&O and EPL litigation becomes more common, brokers have the opportunity to protect their clients from litigation arising out of mismanagement.
Why exactly should small businesses opt to add D&O and EPL coverage to their policies? Let’s take a look.
The case for D&O and EPL coverage
While businesses have always faced risks, those risks have compounded significantly over the last two years. Since COVID-19 shut down the world, employees have filed more than 1,000 lawsuits against their employers, claiming unsafe work conditions, low pay, and suboptimal family and medical leave. Similarly, workers — like a group at Cedars-Sinai Medical Center — have taken their employers to court over vaccine mandates.
In many ways, small businesses face more risks than ever before, which is why D&O and EPL coverage is becoming a necessity for many organizations navigating today’s digital economy. Before we dive deeper, let’s take a step to lay the foundation of what D&O and EPL insurance covers:
• D&O coverage protects the personal assets of business executives and often their spouses in the event they’re sued based on their actions made on behalf of their company. These policies — which protect against breach of duties, negligence, errors, and misleading statements — often include coverage for legal fees, settlements and other associated expenses.
Since directors and officers can face personal liability for their role with the company, and since a company may not have assets to defend and/or indemnify them, D&O coverage is often seen as a mandatory purchase for many directors or officers.
• EPL coverage protects businesses against lawsuits that stem from job-related injuries, discrimination, sexual harassment and wrongful termination.
Many small businesses face litigation
According to the Small Business Administration (SBA), between 36% and 53% of small businesses are sued every year. Beyond that, 43% of small businesses say that they’ve at least been threatened with litigation. Despite what small business owners might hope, it turns out that these companies are quite susceptible to liability claims.
Third-party dependencies are growing
These days, more and more businesses are outsourcing selected services (such as payroll or IT). As third-party dependencies expand operational risk, this translates to small business liability increasing.
Litigation costs a lot of money
For every $1 million a business earns, they can expect to spend $20,000 on litigation, according to the SBA Office of Advocacy. In this light, a strategic investment in additional insurance coverage can help small businesses transfer this risk through insurance in the event they find themselves on the wrong side of a lawsuit.
M&A activity is on the rise
Coalition’s 2022 Executive Risks Report also found that 55% of small businesses finalized at least one merger or acquisition over the last two years. While M&A activity benefits and creates opportunities for many organizations, lawsuits are commonplace when transactions finalize. In order to ensure executives won’t face potentially disastrous consequences in the aftermath of a failed transaction, businesses can protect themselves with D&O coverage.
Real-world lawsuits against small businesses
Now that we all have a better idea of some of the key reasons why small businesses need insurance for executive risks, let’s examine some real-world examples of liability claims.
A California law firm filed suit against more than 250 businesses in San Francisco, claiming that they violated the Americans with Disabilities Act (ADA).
The Equal Employment Opportunity Commission sued Presidente Supermarket, alleging the company fired an employee because she was pregnant.
Read more: Real-world EPL, D&O lawsuits: Did you know they’re insurable?
More and more investors are suing special purpose acquisition companies (SPACs), alleging that they have been misleading shareholders.
Objection handling for executive risks coverage
The benefits and necessity of D&O and EPL coverage speak for themselves. Even so, many small business owners are still hesitant to add executive risks coverage to their policies. In this section, we’ll examine three main reasons why that is — and how brokers can help to address them.
1. “We’re too small to need this kind of coverage.”
To be sure, large corporations are more likely to make headlines when they face litigation than small businesses most people haven’t heard of. Just because a company might be a small one doesn’t mean it’s immune from potential liability claims. As the SBA stated, more than half of small businesses face lawsuits. By adding D&O and EPL protection to their policies, small business owners can protect themselves against these increasingly common executive risks.
2. “We don’t have enough resources to pay for additional coverage.”
The D&O and EPL premiums for coverage may seem daunting to small business owners. However, small businesses will find it even more difficult to retain the average claim cost of $120,000 and $69,000 for D&O and EPL, respectively.
3. “We have general liability insurance, and that’s enough.”
While general liability is a good start, it doesn’t always cover legal costs and other awards. Depending on the specifics of the case and coverage, companies can save millions of dollars by adding an executive risks policy to their insurance portfolio.
Patrick Mitchell is the head of executive risk for Coalition, Inc. Mitchell’s expertise lies in management liability insurance, employment practices liability, product development, strategy, organizational change and process improvement. He is a business transformation leader with nearly 20 years of product underwriting experience having previously served in leading roles at Hiscox and AIG.
This article originally appeared on the Coalition website. It is reprinted with permission.
Opinions expressed here are the author’s own.
Related: