Risk Managers’ Forum

By Richard (Dick) G. Clarke, CIC, CPCU, RPLU

EXECUTIVE LIABILITY RISKS

Tracking the exposures and insurance options

Executive liability insurance encompasses directors and officers liability, employment practices liability, and fiduciary liability. Each area has specific exposures; common claims allegations; focused legislation at the national, state and local levels, and available coverages.

Ample coverage is available for private companies, including family businesses, and nonprofit organizations. The market is less competitive for publicly traded firms. Let’s look at the exposures, current events that affect exposures, and some of the policy nuances that make executive liability insurance a challenge and a specialty for underwriters, agents and wholesalers.

Directors and officers liability

Lloyd’s of London underwriters generally are given credit for writing the first D&O liability policy in the United States shortly after the country began to rebound from the devastating Great Depression. The first D&O policy covered executives of a Chicago department store in 1943. Domestic insurers began to write D&O in the 1960s.

The early policies specifically protected only company decision makers; entity coverage did not make an appearance until the 1990s. Today some 50 to 60 carriers write some form of this “management malpractice” insurance.

Many clients, both small and large, are unaware of their D&O exposures, and this gives agents an opportunity to offer the coverage and build their book.

A major exposure is data security breach. Responsibility for any proven security or IT protection lapse could trigger D&O coverage, as executives have a duty to protect and secure business operations. The enactment of the General Data Projection Regulation (GDPR) in the European Union in May 2018 and the January 2020 California Consumer Privacy Act (CCPA) puts additional compliance pressure on executives and boards of directors worldwide.

Small businesses and nonprofit organizations aren’t immune to litigation that alleges “managerial malpractice.” Most executive responsibilities are the same as for large for-profit entities.

A recent example of a small business D&O exposure is the dive boat that was lost off the California coast in 2019. A fire trapped and killed 30 sleeping passengers. If the vessel owners are found negligent for not following appropriate safety procedures, they could face allegations of “managerial malpractice,” which could be covered by D&O insurance if coverage is in place.

Many clients, both small and large, are unaware of their D&O exposures, and this gives agents an opportunity to offer the coverage and build their book.

Employment practices liability

Other than workers compensation insurance, no line is more likely to develop claims experience than employment practices liability (EPL). The coverage was first written at the end of the 1980s—again, by underwriters at Lloyd’s. Although both agents and underwriters struggled with exposures, litigation and legislation throughout the 1990s, the coverage is now a mainstay in commercial insurance portfolios. Employees no longer are hesitant to allege discrimination, harassment or wrongful termination against current or previous employers. Even prospective employers have an exposure if they fail to follow appropriate hiring procedures.

Current events that affect EPL exposures are the #MeToo movement and questions about past criminal convictions on employment applications. The EPL policy also can cover allegations of discrimination and harassment brought by a business’s customers (third-party extension).

The Equal Employment Opportunity Commission (EEOC) enforces federal laws on employment-related discrimination and harassment. Each year the EEOC reports incidents and the amounts of settlements. These trends should concern employers, especially those with 1,000 or more employees.

Additional employment-related issues are medical and/or recreational marijuana, the rise in opioid addiction (now taking more lives in the United States annually than auto-related deaths), and even a business’s website accessibility by persons with disabilities. In fact, failure to comply with the Web Content Accessibility Guidelines version 2.0 ultimately may prove to present a greater third-party EPL exposure than cyber.

Employees increasingly are alleging employers’ violation of the Fair Labor Standards Act (FLSA), more commonly known as wage and hour lawsuits. This exposure is usually excluded from EPL insurance, but some carriers will carve out coverage for limited defense expenses. But once an organization’s employee count rises above 750, or the organization has publicly traded stock or is located in a litigation-prone area, the coverage may no longer be available.

The good news? There is a vibrant market for EPL insurance, with many interested underwriters. Most carriers, however, carefully underwrite these exposures. Claims experience is always a factor in pricing and availability.

Fiduciary liability

With the 1974 passage of the Employee Retirement Income Security Act (ERISA), new responsibilities were placed on employers, at least one new insurance product was developed, and an older product was redesigned.

ERISA applies to almost all benefit plans, not just pension, profit-sharing, and stock ownership plans. ERISA mandates the purchase of employee dishonesty insurance, and it provides a formula for calculating the amount of insurance an organization must carry. Failure to comply can result in Department of Labor fines.

Fiduciary liability insurance also covers:

• Health Insurance Portability and Accountability Act (HIPAA) civil money penalties. Most carriers provide a sub-limit for such penalties, usually $100,000 or more.
• Fines and penalties that arise from violations of the employer mandate in the Affordable Care Act. Most insurers provide a sub-limit for this coverage.

Carriers are eager to write fiduciary liability insurance, and most risks are considered for underwriting. No coverage exists in the alternative market. Fiduciary liability is essential for executives who are charged with decision making for employee benefit plans. Note that for organizations whose boards are required to ratify management decisions about employee benefit plans, D&O policies almost always exclude liability under ERISA.

Executive liability insurance is important for any organization, especially those whose executives are risking their personal assets by making difficult and sometimes legally challenged decisions. The governance exposure is protected by D&O liability insurance, the human resources function is covered by employment practices liability insurance, and employee benefit plan decisions should be protected with fiduciary liability insurance. All three coverages work in concert to protect the organization and its decision-making executives.

The author

Dick Clarke, a 48-year veteran of the property/casualty industry, retired as senior vice president of J. Smith Lanier & Company in 2016. Dick is the proprietor of Dick Clarke Insurance Answers, a consulting firm, and is an educational consultant and National Alliance faculty member who teaches advanced Ruble Graduate Seminar subjects and other courses. Dick is the author of all six editions of Executive Liability Insurance, the most recent of which is available at NationalAllianceBooks.com.