BROAD MANAGEMENT LIABILITY COVERAGE IS CRITICAL FOR SMALLER COMPANIES

Rough Notes, Apr 2004 by Carcione, Sandra

Zurich package addresses variety of management exposures

Do your mid-sized and smaller corporate clients have D&O coverage? Probably. Do they have EPL coverage? Maybe. It's less likely, however, that they have fiduciary liability, crime, or ransom and extortion coverage.

There's good news on that front, however. Zurich North America's Management Solutions Group has assembled a cohesive package of coverages that address all of these liability risks.

According to Ken Sroka, CEO of Zurich's Specialties business unit, the number of lawsuits affecting the management of smaller companies has increased substantially. He suggests it is important that there be as few gaps as possible in coverage for the diverse liabilities that confront the managements of these companies. "While everybody knows about the huge settlements and judgments hitting large companies, judgments are not insignificant for smaller companies. The impact of even a $100,000 settlement can be very damaging to privately held companies," says Sroka.

Also, the management of privately held companies has limited time to devote to dealing with claims, which can damage the business. "They can't afford to divert time and energy away from their core responsibilities," he says.

Along with the fact that lawsuits against mid-sized and smaller companies are increasing, Sroka says there is rampant self-deception among the managements of such companies that tells them they don't need coverage. "Many of these companies either dismiss the statistics by saying, 'This won't happen to us,'" says Sroka, "or they think their general liability policy or directors and officers (D&O) liability policy provides adequate coverage."

Dick Clarke, senior vice president at J. Smith Lanier & Co., a large brokerage firm in Atlanta, says he thinks executives of private companies are more aware of the need for D&O coverage because of the corporate governance scandals that have been in the news in the past couple of years. However, they often don't realize that EPL and fiduciary liability may be larger sources of claims for their companies.

"Especially since Sarbanes-Oxley [Public Company Accounting and Investor Protection Act of 2002], all companies are held to a higher standard regarding corporate governance issues, whether they are generally subject to these regulations or not," says Clarke. "However, in my opinion, and backed by industry statistics, the likelihood of management liability claims among private companies could be ranked as follows:

1. Employment Practices Liability

2. Fiduciary Liability

3. Crime

4. D&O

5. Kidnap and Ransom

"When it comes to management liability risks, we have to distinguish between frequency and severity," Clarke says. "While D&O claims may be more costly to defend, EPL and other kinds of claims are definitely more frequent."

Zurich's Management Solutions package provides mid-sized, privately held companies with up to $25 million in aggregate D&O, EPL, fiduciary liability, kidnap and ransom, and employee crime coverage. (See sidebar for specifics on individual coverages.)

"The advantage of our package is that a company gets comprehensive, coordinated coverage from a single insurer," says Sroka. "Typically standalone policies can have gaps that leave companies vulnerable. Also, when one insurer handles the fiduciary coverage and another the D&O, there can be conflicts and delays about who pays for what claims."

Clarke agrees that a package approach like Zurich's is an efficient and easy way to buy all the management liability coverage a private company may need. "Especially in the area of employment practices liability, just about every company will have a claim at some point," he observes.

An integrated approach

The key to the cohesive nature of Zurich's Management Solutions products is an integrated approach and consultative way of operating.

"Our claims professionals are often involved with an account from day one. They work closely with underwriters to make sure that policy wording opens the way to clear coverage decisions and a clear-cut response when a claim occurs," says Sroka. "Claims personnel and underwriters interact constantly to make sure that clients have the right product for their exposure."

Another advantage Zurich provides is experienced internal claims counsel who work closely with insureds during the claims process. Moreover, while insureds have the freedom to choose their own defense attorneys for claims, Zurich can provide them with a roster of leading counsel to aid in their defense.

Zurich goes beyond defending and paying traditional EPL or D&O claims and can help restore the company's assets taken as the result of employee crime. "Say a company has assets of $30 million and an employee embezzles $4 million over a couple of years," says Sroka. "In real assets, that can comprise a company's entire cash flow. Also, when the word gets out, creditors will call in their debts, and the situation could snowball. This type of situation has driven companies into bankruptcy."