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Though privately held companies and nonprofit organizations are becoming more sophisticated in managing their executive risks, some misconceptions still persist with regard to the true nature of their liability exposures and the insurance products designed to guard against them.
More than one out of every four private or nonprofit firms doesn't have directors and officers insurance for their executive employees and board members, according to a 2012 Business Insurance survey.
Asked why they forgo the coverage, 48% of private companies and 80% of nonprofits said they do not believe their company needs it. At least 10% of the uninsured private and nonprofit companies said they believe their D&O risks are covered under another insurance policy, while 3% said they didn't know enough about their risks or the insurance products.
The reality is that executive liability claims can originate from a variety of sources, and they can harm a private or nonprofit organization of any size in practically any industry. The majority of those claims are filed in defense of an employee practices lawsuit, but other sources of litigation can include customers and clients, competitors, minority shareholders, lenders and donors, government agencies, foreign entities, and fellow executives or board members.
In this special issue of Business Insurance, liability and insurance experts and observers address key executive risk exposures, coverage issues, market trends and risk management solutions, all with an eye toward improving understanding of executive risk among insurance buyers at privately held and nonprofit companies.
Facing steady increases in state and federal investigations and enforcement actions, reforms in health care, as well as banking and consumer protection that are likely to generate new liabilities, a majority of surveyed risk managers and other insurance buyers said regulatory litigation was their most troubling liability exposure.
In particular, risk managers and insurance professionals in the health care industry are only beginning to sort out the potential impact of the formation of accountable care organizations in response to passage of federal health care reform.
Even before the passage of the Patient Protection and Affordable Care Act of 2010, consolidation was triggering antitrust litigation in the health care arena. Today, doctors and hospitals that are not included in ACO networks could sue the ACO's directors and officers, asserting they are being prevented from obtaining patients.
While the possibility of antitrust litigation is perhaps of greatest concern to directors and officers of hospitals, health care systems and other medical care organizations that integrate to form ACOs, they also may encounter allegations that they violated anti-referral and anti-kickback laws, legal experts note. Additionally, potential conflicts of interest could arise if directors and officers serve on hospital and ACO boards simultaneously.
Customers, clients and competitors also pose a significant risk to private and nonprofit companies. Industry observers have noted a recent increase in lawsuits among competing firms that accuse executives and board members of slander, defamation of character and comments disparaging their products or services. Litigation over the theft or infringement of intellectual property, trademarks and patents is also frequent. Depending on their industry and business model, some insurance buyers may find it difficult to secure coverage for those exposures.
Because family ownership is common among private and nonprofit firms, disagreements over management or investment decisions can get personal. When those disagreements spill over into a courtroom, even well-written D&O policy forms might not protect the company from incurring significant legal costs, since most underwriters won't cover litigation between insured parties.
Regardless of the service they provide, directors and officers of nonprofit firms can be sued by donors, beneficiaries or the government for breaches of their fiduciary responsibilities, mismanaging collected funds, acting beyond their chartered authority or violation of state or federal laws, nonprofit risk experts said. Nonprofit executives also could find themselves facing client accusations of harassment, discrimination, poor products or poor service; accusations by competitors alleging unfair trade practices; or accusations by vendors and suppliers alleging breach of contract.
In addition to a domestically purchased executive liability program, experts said any private or nonprofit firm that regularly conducts business with entities or individuals overseas should carefully consider buying locally admitted coverage as well. Directors and officers of private companies and nonprofit organizations are generally less exposed to securities law than public companies, but a wide range of overseas rules and regulations could still translate to litigation either in the United States or abroad.
Private and nonprofit insurance buyers that do approach the D&O market in 2012 will find it “in transition,” according to several experts. For most privately held and nonprofit organizations, D&O insurance and other companion policies are likely to remain affordable and fairly broad in terms of covered risks in the coming year, but the deep discounts on new premiums and double-digit percentage drops on renewal rates of the last six to seven years are proving unsustainable. As a result, some carriers have indicated they will take a stricter approach to placing and renewing D&O coverage for private firms this year, especially small and middle-market firms.
Though some purchases and best practices cut across all sectors of private and nonprofit business, all insurance policies are not created equal. The particulars of an effective executive risk management program can vary significantly based on industry, business model and the person ultimately responsible for procuring the coverage. Most D&O programs marketed to private and nonprofit firms are included as a package benefit with employment practices liability, fiduciary or fidelity insurance, or a combination of all three. However, even seemingly minor differences in policy terms and conditions can dramatically alter the scope of coverage.
This story is from the Jan. 23 issue of the weekly print edition of Business Insurance, a special theme issue featuring an in-depth look at executive liability risks and insurance for private companies and nonprofit organizations.
Copies of this issue, which includes exclusive research on the D&O buying habits of such organizations, are available for $100 by contacting our Single Copy Sales department at 888-446-1422.
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