Survey Finds Private Companies Acting More Like Public Companies; At Increased Risk of a Liability Lawsuit

“Many private companies are planning activities that may increase their exposure to management liability risks,” said Lisa McGee, vice president, Chubb & Son, during the Inc. 500 Conference. According to the 2005 Chubb Private Company Risk Survey, 67 percent of private companies are likely to broaden their product offerings, 20 percent plan to reduce or eliminate some employee benefits, 21 percent plan to reduce their workforce, 18 percent plan to add an outside board member, 27 percent plan a major acquisition, and 31 percent plan to outsource functions or operations.

“As privately held companies continue to escalate their activity in areas that were once considered the domain of large publicly owned companies, they have increased their exposure to potentially costly liability-related lawsuits, as well as to crime events such as workplace fraud and extortion,” said McGee, the private commercial product manager for Chubb Specialty Insurance. “In an area such as directors and officers liability, the stakes can be especially high and financially devastating.”

Survey participants in those 112 companies that were named in a directors and officers liability lawsuit reported average total defense, settlement and/or judgment costs of $308,465.

“Private companies have many of the same exposures as publicly traded companies,” said McGee. “For instance, outsourcing jobs can lead to an employment practices liability lawsuit alleging discrimination and/or wrongful termination, and an expansion of products or services can increase a company’s risk of an errors and omissions lawsuit. These and other activities are often triggers to lawsuits, potentially placing the firm in greater financial peril.”

Survey results showed that 33 percent of private companies do not purchase any type of management liability insurance product (defined in the survey as directors and officers liability, employment practices liability, fiduciary liability, errors and omissions, crime, kidnap/ransom and extortion, and workplace violence expense). The top two reasons cited for not purchasing management liability insurance products were “no need” or “low risk.” Ironically, almost two-thirds of private companies surveyed had experienced some management liability event in the past five years, most often an employment practices liability, directors and officers liability or crime event. Of those 161 companies that reported an employment practices liability lawsuit or Equal Employment Opportunity Commission charge, the average cost was $1.1 million. Respondents also reported an average loss of $348,000 resulting from the theft of stolen company funds, equipment, inventory or merchandise.

Most private companies, regardless of insurance purchased, use an array of business practices to help mitigate their corporate risk to a liability lawsuit or crime-related event. Nine out of 10 companies have a written policy banning employment discrimination and sexual harassment; 73 percent have human resources policies, procedures and training programs to help prevent losses; and 64 percent provide employment discrimination and/or sexual harassment training. Nearly three in four private companies routinely use contracts when engaging with third-party clients, and 71 percent conduct employee background checks. Furthermore, 44 percent of private companies have a published corporate governance program and 24 percent have implemented corporate governance rules under the Sarbanes-Oxley Act-further evidence that many private companies are thinking like publicly traded ones.

“Management liability insurance coverages are another very important part of a company’s overall plan to reduce liability and crime-related risk,” McGee said. “More than half of private companies with more then 250 employees purchase some type of management liability coverage, but they may not be purchasing the full amount of protection needed.”

McGee says that smaller companies, often more financially vulnerable to a liability lawsuit or crime-related event, are simply less likely to purchase any type of management liability coverage. “Moreover, the concern for these risks expressed by the executives surveyed does not always translate into an insurance purchase,” she said.

“For example, 43 percent of the executives said they are concerned about a possible lawsuit over termination, discrimination or sexual harassment in the year ahead, yet only 33 percent of the companies purchase employment practices liability insurance. As a result of these findings, we continue to remain concerned that private companies may not be financially prepared to manage the consequences of a liability lawsuit or crime event,” McGee added.

Marketing Leverage Inc., a market research firm in Connecticut, conducted the survey. The firm interviewed the chief executive, financial and other top officers at 451 U.S. privately held companies in 46 states. Summaries of the major report findings can be found on Chubb’s Web site at http://www.chubb.com/privatecompanysurvey.