Private companies at increased risk of liability lawsuits, Chubb & Son survey reports

Today, many private companies are planning activities that may increase their exposure to management liability risks, Lisa McGee, vice president, Chubb & Son, said at a recent Inc. 500 Conference. Sixty-seven 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, according to Chubb’s 2005 Private Company Risk Survey.

“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,” McGee said. “In an area such as directors and officers liability, the stakes can be especially high and financially devastating.”

Survey participants in those 112 companies that were named in a D&O liability lawsuit reported average total defense, settlement and/or judgment costs of $308,465.

“Private companies have many of the same exposures as publicly traded companies,” McGee said. “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.”

Survey results showed that 33 percent of private companies do not purchase D&O liability, employment practices liability, fiduciary liability, E&O, crime, kidnap/ransom and extortion, or workplace violence expense. The top two reasons cited for not purchasing 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 EPL, D&O liability or crime event.

“More than half of private companies with more then 250 employees purchase some type of management liability coverage, but they may not be purchasing the full amount of protection needed,” McGee said.

McGee says that smaller companies, often more financially vulnerable to a liability lawsuit or crime-related event, are simply less likely to purchase any type of management liability coverage.