Survey: Private Firms More Exposed to Liability Risks, But Less Protected

More than one-third of U.S. businesses do not purchase any type of management or professional liability insurance. Yet, two out of three U.S. private companies have experienced some type of event related to management or professional liability in the past five years.

“Despite a down economy and an increase in risks, private companies may not be purchasing sufficient management liability insurance to help protect their bottom line from a costly liability lawsuit,” said Lisa Jones, vice president, Chubb & Son, and private commercial product manager for Chubb Specialty Insurance.

“In addition, companies that are uninsured and experience workplace crimes or an employment practices liability lawsuit, for example, may find that a tight credit market makes it difficult to obtain credit to pay for such a loss or to continue their business operations,” Jones said.

According to the latest Chubb Private Company Risk Survey, 37 percent of U.S. companies do not purchase any type of management liability/professional liability insurance.

The majority of survey participants do not purchase employment practices liability (63 percent), crime (66 percent), directors and officers liability (63 percent) and cyber liability (91 percent) insurance.

One in three of the companies that do not purchase employment practices liability, crime and directors and officers liability insurance cite “low risk/no exposure” as the reason. One in two companies do not purchase cyber liability insurance for the same reason.

Participants also were less concerned in 2007 than in 2005 about the potential financial damage caused by lawsuits filed for wrongful termination, discrimination or sexual harassment (23 percent vs. 43 percent), employee/retiree benefit issues (11 percent vs. 18 percent) and directors and officers liability issues (5 percent vs. 9 percent).

Even so, the survey found that two out of three, or 62 percent, of U.S. private companies have experienced some type of event related to management/professional liability in the past five years, including workplace crime (32 percent), employment practices liability (24 percent) and directors and officers liability (22 percent).

In 2008, one in three (31 percent) companies expect to experience a crime-related event, 26 percent a directors and officers liability incident and 19 percent an employment practices liability incident.

“Today’s global economy has created new opportunities and new risks for companies of all sizes,” Jones said.

Private company executives indicated their firms are likely to broaden product offerings (47 percent), reduce workforce size (28 percent), outsource functions or operations (25 percent), reduce or eliminate some employee benefits (20 percent) and/or make a major acquisition (19 percent) this year.

“These types of activities could expose the company to a costly liability lawsuit and potentially create cash flow problems for those firms that are uninsured,” Jones added. In 2008, one-third of the survey participants anticipated tighter access to credit.

Employment Practices Liability Risks Surge
“Economic conditions exert a significant impact on employment-related claims and lawsuits,” Jones said.

Equal Employment Opportunity Commission claims today are at their highest level since 2002, and each charge category — discrimination, harassment, retaliation, etc. — has increased by double digits since 2006.

“This makes employment practices liability one of the bigger — and more costly — potential risks faced by private companies,” Jones stated. “Companies are also involved in activities that could trigger an employment practices liability lawsuit.”

According to Chubb’s survey, the average total cost, including judgments, settlements, fines and legal fees, of an employment practices liability-related event is $63,114.

“Smaller companies with their more limited resources are particularly vulnerable to the costs associated with an employment practices liability lawsuit,” said Jones. “However, smaller companies may not realize this, as suggested by the fact that they are less likely to purchase insurance protection for this risk.”

Only 37 percent of companies with 50 to 249 employees purchase employment practices liability insurance, compared to 51 percent of companies with 250 or more employees.

Economic Conditions Spur Employee Crime
“During tough economic times such as these,” said Jones, “employees may be more tempted to steal from the company coffers, making it critical for private companies to take steps to prevent employee theft.”

According to the 2006 report by the Association of Certified Fraud Examiners, U.S. organizations lose an estimated 5 percent of annual revenues to fraud, and businesses with fewer than 100 employees suffered a median fraud loss of $190,000. Employee crime cost companies in Chubb’s survey as much as $250,000

D&O Liability Litigation Costs Increase
“Although the percentage of U.S. companies experiencing a D&O-related incident in the past five years has stayed relatively flat since Chubb fielded this survey in 2005, the costs associated with that incident have increased by nearly 22 percent,” said Jones. “This may be threatening to small to medium-size private companies that aren’t financially prepared to shoulder the burden of a costly liability lawsuit.”

In 2008, one in four respondents believed it is likely that their company will experience a D&O-related event. According to the recent Chubb survey, the average cost to defend and indemnify a directors and officers liability lawsuit is $393,017, up from $308,475 in 2005.

“We’re also concerned about the drop in focus on corporate governance,” said Jones. The survey reported that only 24 percent of respondents had a published corporate governance program or planned to have one this year, down from 44 percent in 2005. Only 24 percent of respondents have or plan to implement Sarbanes Oxley compliance in 2008.

Cyber Liability Remains a Threat
“Cyber security threats continue to multiply and morph, and practically every business is at risk,” said Jones.

The 2007 CSI Computer Crime and Security Survey notes that 46 percent of companies had experienced one or more security incidents in the past 12 months; the average reported loss increased to $350,424 from $168,000 the previous year. In the United States, where 35 states currently require notification of a security breach, the Ponemon Institute, a privacy and information management research firm, reports that costs run as high as $197 per record, an increase of 43 percent from 2005.

“Despite all the warning signs, we are surprised to see so many private company executives believe that executive liability protection is not necessary in today’s global market,” said Jones. “As private companies continue to participate in activities that potentially increase their exposure to a liability lawsuit, they need to not only have strong risk management controls in place, but should consider management/professional liability insurance to help protect their employees and their balance sheets.”

Pollara, a public opinion and market research firm in Canada, conducted the Chubb Private Company Risk Survey in late 2007. The firm interviewed specialty insurance decision-makers at 469 U.S. for-profit companies. Chubb also sponsored the survey in 2005 and 2003.

Source: Chubb