All businesses have management liability exposures. Whether you’re a Fortune 500 public company, a small and family-owned private firm, or a non-profit organization, management liability is a very real and growing concern. Issues like allegations of wrongful termination, sexual harassment claims, breach of fiduciary duties or unintended errors by directors and officers can all result in costly and business-threatening situations.
Public companies often have a contractual obligation to purchase a wide range of management liability insurance coverages, including: directors & officers liability (D&O), employment practices liability (EPL), fiduciary liability, fidelity and crime, kidnap, ransom and extortion, and more often these days, cyber liability insurance. On the other side of the spectrum, private and non-profit companies face fewer contractual insurance obligations. In fact, many small private firms and non-profits are not required to purchase any management liability insurance.
While it may not be a contractual requirement, purchasing management liability insurance is “a good trade” for small businesses, both private and non-profit, according to Dominic Senese, vice president of private & non-profit management liability at CNA. The way the US legal environment is trending today, with settlement costs skyrocketing, a $3,500 premium policy can be the difference between a small business surviving or sinking after a management liability claim.
“There’s a huge uninsured population of private companies and non-profit organizations in the US,” Senese told Insurance Business. “We believe there are about 5.5 million private companies and not-for-profit organizations in the US, but only a small percentage of that population buys management liability insurance today. Even if 10% buys insurance, that’s still a huge number (550,000), but the uninsured population dwarfs the number of companies that actually buy insurance.
“Part of that is down to the fact that it’s not a contractual obligation; it’s a selective purchase. Furthermore, if they’re really small companies (which a lot of private companies are) they can often get a little bit of management liability coverage in their business owners’ policy. They’re able to get a little bit of EPL coverage and a little bit of crime coverage, but it’s not really a sufficient limit and the coverage isn’t broad enough.”
One reason why small private companies and non-profit organizations don’t buy management liability insurance is because they think they’re immune to the risks. They think they’re too small, too familiar, or too philanthropic to be accused of a management liability blunder. But, claims data would suggest otherwise, Senese pointed out. Even family-owned and family-run companies can find themselves embroiled in nasty management liability lawsuits. That’s why educating private and non-profit firms about the huge variety of potential claims, and the sources they can come from, should be a primary exercise for brokers or agents selling management liability insurance.
“Claims could come from shareholders, or regulators, or customers, or competitors, or even family members. Sometimes, I think there’s lack of understanding among smaller firms as to what their ultimate exposures are,” said Senese. “Another thing to note is that private and non-profit firms don’t generally see a lot of D&O claims. They’re severity-driven exposures rather than high-frequency events. That often makes smaller companies question the odds that they will be sued. But the thing is, if a private company or a non-profit organization faces a D&O claim, it can be totally devastating.”
Once small businesses have come to terms with their management liability exposures and have given the green light to insurance, then comes the cumbersome task of trying to understand their insurance policies. This is another barrier to management liability insurance uptake, according to Senese, who described the policies as “overly complicated” and surrounded by “mystery”.
To address that challenge, CNA recently launched Epack 3, its next generation modular management liability policy that combines clear, concise and easy-to-read language with a flexible policy structure. The policy includes six optional coverage parts: D&O liability, EPL, fiduciary liability, crime, kidnap ransom and extortion, and non-profit D&O liability.
“There’s sometimes a bit of mystery around management liability – not just around the intangible nature of what it covers, but because we haven’t made it easy for insureds to pick up a management liability policy or a D&O policy and understand what they’re reading,” Senese commented. “It’s a good trend that CNA is championing with Epack 3. We’re simplifying our product offerings and making our policies easier to read and understand. We want to be the easiest carrier to do business with.”