SMEs must pay attention to rising D&O and EPL risks

SMEs must pay attention to rising D&O and EPL risks | Insurance Business Canada

SMEs must pay attention to rising D&O and EPL risks

Today’s volatile economic, political, and social climates have resulted in heightened risks for businesses, with small and medium-sized enterprises (SMEs) not exempted. These risks have the potential to be even more devastating to SMEs, as they typically do not have the resources and insurance coverage possessed by larger firms.

According to Coalition’s 2022 Executive Risks Report, risks such as directors and officers (D&O) and employment practices liability (EPL) are not to be ignored. The report showed that the average D&O lawsuit costs over US$120,000 and the average EPL loss is US$68,867 – amounts catastrophic to smaller businesses. However, many smaller businesses neglect coverage for these risks.

Patrick Mitchell (pictured above), head of executive risks at Coalition, cited a survey by the company which found that many executives don’t purchase D&O (48%), EPL (46%), fiduciary liability (45%), and crime (40%) coverage because they thought their organization was too small to need it.

“This line of thinking can be damaging to small businesses as it leaves them exposed to all sorts of executive risks, including discrimination, harassment, or wrongful termination claims, or breach of fiduciary duty claims related to financing, pandemic-related legal exposures, or a transaction like a merger or acquisition,” Mitchell told Corporate Risk and Insurance.

While exposures are similar regardless of business size, dealing with executive risks is different for large businesses compared to SMEs, Mitchell said. In smaller organizations, executives are often “closer to the action”, such as financing operations, hiring practices, and other day-to-day aspects of the business. This leaves them more vulnerable to being held liable for anything that may happen. 

He added that SMEs do not have the same breadth or depth in terms of the resources – such as HR, financial, legal and regulatory – available to larger companies. This makes executive risk coverage even more important to help bridge those gaps and protect businesses. 

“With small and medium businesses, there is an assumption that they don’t need executive risk coverage because they don’t think they are at risk, but as we see in the survey and its report, that’s not true at all,” Mitchell said. “Businesses of all sizes are vulnerable to executive risks and recognizing that no one is immune to them is the first vital step small/medium businesses can take to protect themselves. No company size or revenue figure can keep executives safe from being targeted.”

In a worst-case scenario, an SME that fails to properly manage executive risks, faces total failure or bankruptcy.

“Many small businesses may think that they’re immune to liability claims but, in reality, they’re extremely vulnerable to them,” Mitchell said. “Our survey found that 36% of small businesses with D&O coverage have experienced a claim in the last two years and nearly 18% with EPL coverage experienced a claim in the same time period.”

According to Mitchell, Coalition’s survey echoes the Small Business Administration (SBA) Office of Advocacy finding that 36% to 53% of small businesses are sued and 43% of small businesses said they were threatened with a lawsuit. The SBA also calculated that, for every US$1 million a business earns, they may spend US$20,000 on lawsuits.

“Dedicated executive risk coverage helps small businesses stay resilient to these risks, even if they lack internal expertise that could help prevent such liabilities,” he said.

Aside from purchasing cover, Mitchell advised SMEs to take advantage of risk management services, many of which are offered by insurers.

“Insurers often provide free risk management tools like a pre-claim hotline, anti-harassment training or access to pertinent risk management materials today, such as best practices when implementing a company-wide COVID-19 vaccination policy,” he said. “In addition, small businesses should ask their broker about executive risk coverage and see what kind of protection is available to them. By learning about the different types of coverage and recognizing that general liability or umbrella insurance won’t take care of every possible lawsuit, small and medium businesses put themselves in a good position to mitigate potential risks.”