Management liability risks: smaller, privately held companies exposed, too.

• Author: McKimmie, Kathy
• Position: INSURANCE

IT'S EASY TO LOOK AT the problems caused by mismanagement in large public companies such as Enron and WorldCom and say, "I'm small and private, that won't happen to me." In fact, that's pretty much what a Private Company Risk Survey conducted by Chubb in 2005 confirmed. But mistakes, and basically that's what you're trying to avoid paying dearly for, can happen at any size organization, and even in not-for-profits.

Just as you consider the risks and the need for general liability insurance for your building, cars, workers' compensation and the slips and fails of customers, it's a good idea to consider the risks from outside lawsuits against the corporation and its directors and officers, and from employees who feel wronged.

"The buzz is in employment-related liability coverage," says John Dinkel, outgoing president and CEO and current chairman of Forrest Sherer, Terre Haute, "like sexual harassment, retaliation and wrongful termination, based on race, national origin, obesity. That is usually employee to employer, but it can be a third party." An outside company rep, for example, harasses an employee and the employee sues the company.

The Chubb survey revealed that one in three of those responding had an employment-related "event," such as an EEOC complaint, in the last five years, with an average loss of $1,152,000, yet most do not carry coverage. At 25 to 50 employee companies, 81 percent go without, but a third of those are concerned about it. The reasons given for lack of coverage include: no need, low risk, and coverage elsewhere. The last one, says the report, is a misperception. In addition, the survey revealed that one in five of the respondents were planning reductions in force and one in three planned outsourcing, the same actions that frequently lead to complaints from employees in public companies.

"In conservative Indiana, the biggest exposure is an employee who has advances made from a supervisor," says Dinkel, "then is retaliated against, like no promotion." Once the word is out on an employment-related claim, he says, other employees say: 'Oh yeah, that happened to me too.' Very few times is there not a payout. A magistrate almost always pays the employee's attorney."

Generally, small companies will buy $300,000 worth of coverage, says Dinkel, larger ones $1 million to $5 million. Some small undercapitalized companies might say "I'll just close my doors if that happens and do something else," he says. But he recommends a...