A potential rise in insolvencies among Canadian small- to medium-sized enterprises (SMEs), driven by the cost-of-living crisis and the looming deadline to repay federal government-backed pandemic loans, could have huge management liability consequences for business leaders.
At least one expert has told Insurance Business that the double-whammy of high inflation and loan repayment pressures on SMEs could trigger a wave of company insolvencies.
“If a company goes insolvent or bankrupt, it could lead to claims made against the directors themselves,” said Rob Page (pictured), North American management liability team leader at CFC.
“During COVID, there was a lot of concern that we would see a spike in companies go into insolvency. However, the low-interest rate environment and the fact that governments were providing funding to small businesses delayed that impact.
“Since government funding has stopped and the interest rate environment and inflation have increased, we are now starting to see a spike, both globally and in Canada, of companies going insolvent, and that will have a knock-on impact on the liability of directors.”
Canadian businesses have received an extension to repay federal government-backed loans given during the COVID-19 pandemic. The deadline for the Canadian Emergency Business Account (CEBA) loan repayment was moved from December 31, 2023, to January 18, 2024.
According to CTV News, more than 900,000 SMEs took advantage of the interest-free loan program, which was launched in April 2020. Up to one-third of the loans can be forgiven if businesses pay back the outstanding amount by January 18.
But with the higher cost of wages, materials, and energy, many SMEs could fail to repay those loans or continue to operate. Organizations and advocates are urging the government for a further extension to the CEBA loan repayment deadline.
“It's going to put a lot of pressure on a large number of businesses,” Page said. “Companies could continue when funding was readily available, or debt was fairly cheap. But that's not the case anymore. It’s a tremendous risk for companies in Canada and globally, especially with the general cost-of-living crisis.”
Similarly, SMEs face the risk of legal action from layoffs as they grapple with a financial crunch.
Page explained: “When inflation increases, wage inflation also increases. If an employer wants to lay off an employee, and that employee decides to bring a wrongful termination claim against the company, the size of the demands may also increase due to inflation.”
The tougher economic environment may make individuals more inclined to bring these types of claims against their employers, heightening the risk.
“We often find that in periods of economic uncertainty, there's an increase in the frequency of employment practices liability claims, so that’s a trend area that we're watching out for,” said Page.
“If you get laid off from your job, and you don't have the prospect of walking straight to another job, you're much more likely to try and bring a claim against your former employer to recover some costs.”
Management liability insurance can cover the professional and legal costs of preparing and defending directors against regulatory actions after insolvency.
To address the growing risks in the segment, CFC has unveiled a new management liability product with Canadian SMEs in mind.
The offering focuses on smaller organizations' day-to-day exposures and includes several new, non-standard coverages in the Canadian market.
Page acknowledged that many traditional management liability insurance policies aren’t tailored to SMEs. In creating its new offering, CFC sought to address the biggest objection small businesses make to brokers selling the product.
“The feedback that we got overwhelmingly was the directors and officers of SMEs, specifically, didn't feel like the product was relevant to them,” said Page.
“I think that's because so much of the marketing material, the claims examples, and even the policy language itself have been drafted with large public companies or multinational private companies in mind.”
Management liability exposures for SMEs are also unique because of the “blurred line” between directors, officers and their companies.
“If you're a director of a small company, the lines are very much blurred between being a director and yourself in a personal capacity. That’s quite unique at the small business,” Page continued.
“In this day and age, with the emergence of social media, it can take just one incident that gets posted on a local-area Facebook group to have huge ramifications on not just the personal reputation of a director, but also the reputation of the company.”
What are your thoughts of the management liability exposures of Canadian SMEs? Sound off in the comments.
