By Nan Murphy, Senior Vice President, Management Liability, Munich Re Specialty – North America

Macro trends in the economy and in the workforce are contributing to an increase in management liability risks for private companies. With over 25 million private companies in the US, more than 99% of the country's 33 million businesses are privately held. Ongoing inflation, high interest rates, and the proliferation of remote and hybrid work arrangements have trickle-down effects that lead to exposure for employers and their directors and officers. For this reason, private companies should look closer at their management liability exposures.

The management liability environment has been changing since the coronavirus pandemic. Shutting down to prevent the spread of COVID-19 caused a great deal of uncertainty for businesses in all industries. Since reopening, workplaces are different now, with many organizations switching to remote or hybrid work.

Employees are working in more distributed settings than before, which makes it difficult to establish a cohesive workplace culture and maintain employee engagement. A remote workforce can make it more challenging for employees to follow established procedures and for employers to exert controls. Less supervision in offices also can lead to crime, such as theft and embezzlement.

At the same time, economic headwinds have increased the cost of capital and made refinancing debt harder for businesses. These financial challenges can cause investors to second-guess business decisions and/or lead organizations to file for Chapter 11 bankruptcy protection. Restructuring may force layoffs, which in turn can lead to litigation against directors and officers (D&O).

Any private company that faces a potential economic downturn may face additional D&O risk. As companies try to turn around their businesses, they may face lawsuits related to their tactics. These may include:

• Merger objection lawsuits: These are lawsuits filed by shareholders who are unhappy when a company is (or is about to be) acquired.
• Freeze-out mergers: A scenario where minority shareholders are forced to sell their stock for less than fair market value.
• Breach of fiduciary duty: This scenario includes self-dealing and conflicts of interest.
• General business mismanagement lawsuits: These involve allegations of poor management practices or negligence by company executives or directors.
• Bankruptcy lawsuits: These arise when a company or individual files for bankruptcy protection, leading to legal proceedings related to debt repayment, restructuring, or asset liquidation.

Munich Re Specialty offers four interchangeable coverage parts for private company management liability to protect against the most prevalent exposures. These coverage parts are:

• Directors and officers liability. D&O coverage for private companies is available with three principal insuring clauses, often referred to as “sides.” Side A provides financial protection for individual directors and officers when a company is unable to indemnify them. Side B coverage reimburses the company for indemnifying directors and officers, and Side C provides coverage for the corporate entity itself. Side A coverage can also be purchased as a stand-alone excess coverage, and it typically includes a difference-in-conditions (DIC), which offers the broadest coverage for directors and officers.
  
  Most companies focus too late on securing Side A D&O coverage. It is never too early in a company’s existence to buy D&O protection, because it can respond to situations that are difficult to predict, both inside and outside the company. For example, private organizations can face lawsuits from competitors over non-compete agreements on employees who leave. Investors can be a significant source of D&O lawsuits, particularly if they experience “buyer’s regret.” Once a company evolves to where it brings in non-executive directors, board members often push for D&O liability coverage. Having D&O coverage already in place can be critical in attracting qualified directors.
• Employment practices liability. EPL accounts for the most frequent lawsuits against private companies. EPL insurance responds to a wide variety of claim scenarios that can arise in the workplace. The most familiar kinds of claims are those relating to employees, but discrimination and other acts also can lead to employment practices liability lawsuits filed by non-employees, such as job applicants, customers, and suppliers.
• Fiduciary liability. Most employers offer employee benefit programs, such as retirement savings plans. Those who make decisions on how the plans are managed have fiduciary responsibilities, and they can be held liable for negligence, errors, or breaches of fiduciary duty to act in the best interests of plans’ participants. Fiduciary liability therefore can encompass directors, officers, and plan administrators.
• Crime. Criminal activity imposes a hefty cost on private businesses, and losses can come from their own employees or outsiders. Crime coverage protects a business from losses of money or other assets resulting from theft, fraud, burglary, or other activities. Social engineering is unfortunately on the rise, with many businesses facing fraudulent attempts to divert funds or supply sensitive information that can cause financial losses. To combat social engineering, businesses need consistent procedures and controls, which employees must follow, whether they are in an office or remote.

Management liability lawsuits can be baseless, but they still are expensive to defend to clear a company’s name. Having appropriate coverage and working with a strong, experienced insurance partner is a good way to mitigate management liability risks.

Munich Re Specialty combines underwriter expertise with innovative, value-added solutions and loss prevention resources for businesses. Our executive risk experts offer cost-effective programs tailored to an organization’s risk management needs. In addition, our in-house claims team includes attorneys with extensive experience in legal strategy and litigation management.

This article was produced in partnership between Business Insurance and Munich Re Specialty.