Today’s service firms must look beyond their father’s E&O
Owners of mid-size companies used to make relatively easy, straightforward decisions on what types of insurance to buy from their local agent. The owners would purchase property insurance for the buildings; liability for the autos, premises and products; and workers’ compensation for employees who could be injured on the job.
Beyond those “standard” property and casualty insurance coverages, a firm that provided professional services to others for a fee, was probably advised by its agent to also purchase errors and omissions or professional liability coverage.
But now the sons and daughters own the company their parents founded many years ago, and agents have been talking to them about directors and officers liability, employment practices liability and fiduciary liability insurance. Why do medium-sized professional firms need to consider those insurance coverages when their parents did not? Simply put — this is not their father’s litigation climate anymore.
A business owner today need only look at the events of the past decade to see the changing landscape of laws, litigation and regulations surrounding securities, employment discrimination or the management of pension plans. Beyond existing laws, new bills are pending that may create additional liabilities for mid-size companies in the area of management liability. Let’s look at the risks employers face for each of the three management liability insurance coverages mentioned.
Negligent management
D&O liability insurance, introduced nearly 30 years ago, has become a mainstream and necessary coverage for mid-size companies only in the past decade. While the E&O policy is intended to cover financial damages resulting from negligence in providing professional service to others, D&O is intended to cover claims of financial loss for negligence in managing the business affairs of the company.
A simple example is that an architect may be sued for errors and omissions for faulty design of a building. However, that same architectural firm’s directors and officers, and the firm itself, could be sued for “tortious interference” if it backs out of a proposed acquisition of a competitor during final negotiations. D&O coverage, not E&O would be needed to address the second case.
Lawsuits against public and private companies can come from competitors, government entities, customers, suppliers or vendors and — if the company has privately issued shares of stock — from investors or shareholders. Even family members are turning to the courts in increasing numbers when they feel that their interests are not being met. Each of these parties can bring a lawsuit alleging financial loss due to negligence that is not covered by a “standard” or an E&O policy but requires D&O coverage.
As the variety of litigation has evolved, so has the cost to defend against such litigation. Attorney’s fees may run well into the hundreds of thousands of dollars, and that’s just for lawsuits that are settled or dismissed early. It’s not doing something wrong that can get a firm sued, it’s simply an allegation that it did it that will cause the lawyer’s billing clock to start ticking.
Protected classes
Employment practices liability (EPL) insurance has become more mainstream during the past decade, driven by the increase in employment discrimination and harassment litigation, and extensive media coverage of the cases. Yet there are many companies that become indignant at the suggestion they purchase employment practices liability insurance, unwilling to believe that what hasn’t yet happened could happen in the future.
Theoe firms gamble with their company assets. In fact, the U.S. Equal Employment Opportunities Commission reports that more than 75,000 individuals filed charges with the agency in 2005 alleging discrimination by an employer or perspective employer. Couple that statistic with employers who do not have full-time human resource personnel or up-to-date practices for managing workplace conduct, and the result for a mid-size company can be catastrophic.
Beyond existing federal and state employment laws surrounding discrimination on the basis of race, sex, creed, national origin or religion, authorities continue to create additional protected classes. Pending federal legislation would make it illegal for an employer to discriminate on the basis of an employee or prospective employee’s genetic makeup, or to treat an employee differently for refusing to submit to genetic testing. Imagine telling your parents when they owned the local manufacturing plant that they needed to buy insurance to cover them if they were sued for subjecting employees to DNA testing!
Benefit plan breach
Fiduciary liability insurance, better known as ERISA or pension and benefit plan liability, protects a firm for errors or omissions in administering a pension or welfare benefit plan, and for breach of the responsibilities imposed on fiduciaries by ERISA. Thus if a company failed to sign up an applicant for a plan as the applicant had requested and the applicant alleges that negligence resulted in lower pension benefits, the insured had better have fiduciary liability protection.
Unfortunately, those claims often arise after employees are terminated, making the claim a double whammy. In addition to the issues under employment practices liability, terminating a poor performer months or even a few years before he or she is due to receive a higher level of pension benefits can mean the employer is ripe for both an EPL and fiduciary liability lawsuit.
Times have changed and companies are managed differently then they were decades ago. Businesses also need to change how they protect themselves from financial loss. Professional firms must think beyond the protection offered by property and casualty, or errors and omissions insurance of their fathers.
Paul Sullivan is vice president, Hartford Financial Products, an underwriting unit of The Hartford companies, based in Hartford, Conn.