The Risks of Responsibility

Professional liability coverages can help stave off managerial disaster.

Responsibility carries a heavy burden, especially for management tasked with guiding a company through the current weak economy. Firms in survival mode have had to address staffing issues and make tough decisions. Pressured to make earnings goals, who knows what managers may have done to achieve them? Feeling wronged, employees are fighting back for lost jobs or overtime pay. Questioning the declining value of their portfolios, shareholders are scrutinizing company decisions that may have affected stock prices.
In short, times are tough, leading some to ask, "Who's accountable?" In most cases, ultimate responsibility falls on a firm's top executives. Professional liability coverages, including directors & officers coverage (D&O) and employment practices liability coverage (EPL), are important survival tools because they address constantly changing management liability concerns.

D&O coverages provide financial protection for the directors and officers of a company should they be sued for their actions related to company activities. For instance, securities class action litigation continues to be a big concern for publically traded companies, but now courts are seeing an increase in lawsuits alleging breach of fiduciary duty. Company executives may face shareholder lawsuits related to management decisions such as acquisitions or joint ventures that did not go well or affected the company's value. EPL insurance protects employers from damages resulting from workplace-liability claims including discrimination, sexual harassment, wrongful termination and breach of employment contract.

Litigation trends change all the time. Because of this constant fluctuation, companies are wise to keep a careful eye on emerging liability issues. Below are a few issues that are on the insurance industry's radar screen.


Technology allows us to conduct business anywhere in the world. But this growing dependency on online interaction leaves a business vulnerable to a variety of cyber risks. Carelessly copying and pasting material on a company website can lead to a copyright infringement claim. Security breaches can pose a threat to financial, customer, employee and other proprietary data, putting it in the wrong hands. Hackers can take down a website and totally interrupt a company's online operations.

Today's cybercriminals are more organized and are using more sophisticated technology to launch attacks. Likewise, as companies increase their presence on social media, they increase their interaction with consumers and take on some liability that once only impacted traditional media.

Employment Practices Liability

The U.S. Equal Employment Opportunity Commission (EEOC) had a near record year in 2009 with more than 93,000 claims filed and $376 million recovered from U.S. businesses. In a weak economy, businesses may find themselves more susceptible to employment claims, such as sexual harassment, wrongful termination, and age discrimination, as well as wage and hour lawsuits.

Recently, a Massachusetts State Court approved a $7 million settlement in a class action overtime lawsuit filed on behalf of garbage truck drivers. The court ruled that the waste management company used an illegal payroll method to establish the hourly rate, which was used to calculate overtime pay, and mandated that the company fund an independent audit of its payroll records. Additionally, employee actions may result from terminations, reductions in force or bankruptcy filings, and include class actions brought by laid-off employees under the federal Worker Retraining and Notification or WARN Act.

Global Warming and other Environmental Liability

Businesses are faced with increasing their transparency. That means that various stakeholders, whether shareholders or business partners, do not want to be caught off guard. They want to know where companies stand on a variety of issues and any potential liabilities. That's why another concern for company management is lawsuits related to failing to disclose liabilities related to greenhouse gas (GHG) releases or other environmental liabilities. Right now, lawsuits are being filed against the corporations, but there is growing concern that plaintiffs may eventually file claims directly against directors and officers for their roles in decisions related company emissions and climate change-related disclosures.

Fallout from the Recession

Surviving tough economic times often requires extraordinary managerial measures. Many businesses have had to cut expenses and layoff staff, each of which carries a threat in the form of employment practice liability, including wrongful termination suits. The current economic climate has forced businesses to deal with a whole slew of financial challenges, including increased vulnerability to mergers and acquisitions, shareholder litigation, or even bankruptcy. Some executives may discover that, unbeknownst to them, pressured staff have pushed the envelope a bit too far — say, practicing some "creative" accounting — in order to paint a rosier financial picture for their company. And with the recession only recently declared over, many of these potential exposures have yet to be brought to the surface. But it's likely that more directors and officers will be called upon to take accountability for these actions.

For businesses today, management liability risks are coming from all directions. That is why it's more important than ever to assure that your insurance coverage is offering the right protection.

Matt Gartner works for XL Specialty Insurance Company.

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