Every day, corporate executives are expected to make the perfect business decisions on all issues. Obviously, this does not happen all the time. The best one can truly expect is for the executives to make the best decision based on the known facts using their current experience and training. This will still lead to an element of risk exposure related to bad decisions, since no one is perfect.
The true insurance professional will understand that there exists a complex world of executive risk losses that can range from shareholder litigation against the board of directors, human resource related claims, lawsuits against a board for decisions made, or the threat of an extortion attempt against a key decision-maker.
Producers are not expected to be well versed in the law that governs corporate activities. However, they should be aware of potential exposures that can arise from it.
Business clients need to be educated of the possible necessity of executive risk coverages for their firm. It is not too difficult to get ammunition by simply clipping articles today from the newspapers describing the claims that are being won on behalf of claimants.
Often businesses are ending up paying out of pocket, because their current insurance policies are not covering these types of risks. Typically, they are not covered by the standard CGL policies.
Here are some of the highlights on the subject.
Directors and officers liability
This coverage is like “managerial malpractice” insurance. D&O insurance protects directors and officers from liability arising from actions connected to their corporate positions.
Even if a company wants to cover the personal liability costs resulting from activities performed on behalf of the company, this ability, called indemnification, may not apply to every situation. A corporation might not indemnify its directors or officers because law prohibits it from doing so or the company’s bylaws prohibit it from doing so, or even it might be financially incapable of doing so due to bankruptcy or lack of funds. The laws regarding indemnification differ from jurisdiction to jurisdiction.
Another big issue is the Sarbanes Oxley Act passed by the U.S. Congress in 2002. This law has had a major impact on the liability of directors and officers. The intent is to protect shareholders and improve corporate governance.
However, it also bears the risk of increasing the amount of litigation. New fines and penalties have been established for the corporate board for securities fraud violation involving accounting irregularities and financial fraud.
It is also important to pay attention to possibilities of fraudulent behavior by corporate officers, run-off exposures from firms being acquired and hidden or unknown factors when a privately held firm becomes public via an IPO.
The primary purpose of D&O insurance is to fill in these gaps, protecting the personal assets of the individual director or officer.
Employment practices liability
This is “human resources malpractice” insurance. There is no better teacher than personal experience. Some of our clients that have had their own EPL claims are ardent supporters of this policy as standard coverage for every one of their clients!
Clients that decline this coverage should sign a rejection letter that the coverage was offered by the agent and declined.
The policies provide defense coverage to protect the firm, even if claims are unfounded. This coverage protects those who manage people and also protects hiring, firing and promotion exposures.
EPL claims are becoming more and more common. Exposures for employment practices liability include:
- Defamation, libel, slander;
- Interference with contractual relations;
- Retaliatory discharge;
- Invasion of privacy;
- Interference with prospective economic advantage;
- Negligent hiring, retention or supervision and;
- Infliction of emotional distress.
Keep in mind that for a business to manage EPL exposures they should have the following in place:
- A uniform employment application;
- Specific and complete job descriptions;
- A good personnel manual;
- Uniform and complete personnel files and;
- Training and policy reinforcement materials meetings.
- In many cases, an EPL stand-alone policy or add-on coverage can be provided for your clients. A stand-alone policy provides broader coverage and there is not a shared limit.
For some carriers, EPL coverage can be added on to a D&O policy, a commercial general liability or umbrella policy.
Think of this policy to be like “employee benefits malpractice” insurance. This covers alleging breach of duties required of fiduciaries by ERISA (Employee Retirement Income Security Act of 1974) and common or statutory law.
The passage of the ERISA substantially increased the liabilities of fiduciaries in the United States.
Those having anything to do with pensions, savings, profit-sharing, employee benefit, and health/welfare plans are liable to the beneficiaries for any breach of their fiduciary duties.
Even with insurance, the fiduciaries are responsible for any wrongful acts and are subject to recourse from the insurer through subrogation.
Also, it protects benefits administration exposures and discretionary judgment of managers.
Employee benefits liability
Employee benefits liability coverage responds to claims for damages due to any negligent act, error or omission by an employer or any person for whose acts the employer is legally responsible in the “management” of public and private employee benefits.
For example, this policy will cover a clerical error that resulted in the failure to add an employee to the company health insurance program that resulted in an unpaid claim.
Keep in mind that a fiduciary liability policy covers these same exposures and provides broader coverage.
If an employer has EBL exposure, it has a fiduciary liability exposure.
The CGL policy endorsement is CG 04 35 and is on a claims-made basis. Premiums for this endorsement can be only $50 to $100 or even free!
EBL covered claims would include:
- Incorrectly interpreting benefits calculation;
- Failure to enroll in benefit plan;
- Late enrollment in benefit plan;
- Improper termination of enrollment;
- Improper counseling on savings plan; and
- Record keeping errors.
We truly believe that all commercial lines producers should become educated in what is executive risk exposure and what coverages are available. Many of these “executive risks” are discussed in detail with practical solutions for insurance agents and brokers in a new Ruble Seminar offered by the Society of CIC that is conveniently titled “Executive Risk.”
Bill Schoeffler and Catherine Oak are partners at Oak & Associates. The firm specializes in financial and management consulting for independent insurance agents and brokers. They can be reached at 707-935-6565, by e-mail at email@example.com, or visit www.oakandassociates.com.