Private Companies Increasing Risk as Their Scope Widens

Competition is the name of the game in American business, and staying competitive means taking some calculated risks. Everyday, more privately held companies are choosing to take those risks by entering areas that were once considered the exclusive turf of large corporations. Of course, as these smaller players enter the arena of the big leagues, they find themselves part of another once exclusive domain of the large corporation – the liability lawsuit. Add workplace fraud and extortion to the mix, and you can’t tell the players apart without a scorecard.

The existence of this brave, new world of small business is revealed in data presented by the 2005 Chubb Private Company Risk Survey. The data showed that 67% of the private companies surveyed are planning to enlarge the scope of their product offerings, while 20% plan to reduce employee benefits, 21% plan to eliminate workers, 18% plan to take on an outside board member, 27% plan a significant acquisition, and 31% plan to outsource some part of their operations.

Despite their newfound need to push the envelope, amazingly enough, 33% of private companies questioned do not plan to purchase any type of management liability insurance such as directors’ and officers’ liability, employment practices liability, fiduciary liability, errors and omissions, crime, kidnap/ransom and extortion, and/or workplace violence. The two major reasons given for not obtaining coverage were that they didn’t see a need, or they felt there was an extremely low risk of the company encountering a problem. High hopes aside, about two-thirds of the private companies responding to the survey had experienced some management liability situation within the past five years, primarily in the areas of employment practices liability, directors’ and officers’ liability and workplace crime. The 161 companies that admitted to having been a defendant in an employment practices liability lawsuit or Equal Employment Opportunity Commission charge faced an average cost of $1.1 million. Companies that were victims of stolen company funds, equipment, inventory or merchandise saw an average loss of $348,000.

Most of the private companies polled indicated that they had tried to implement business practices that would mitigate risk from a liability lawsuit or crime:

  • 9 out of 10 companies have a written policy regarding employment discrimination and sexual harassment;
  • 73% have policies, procedures and training programs regarding loss prevention;
  • 64% provide employment discrimination and/or sexual harassment training to their employees;
  • Approximately three out of four companies use contracts in dealings with third-party clients;
  • 71% use employee background checks;
  • 44% have a written corporate governance program;
  • 24% have implemented corporate governance rules under the Sarbanes-Oxley Act.

Despite their previously utopian outlook, many executives of these surveyed companies realize that they are entering into much more turbulent waters: 43% indicated concern about a possible lawsuit over termination, discrimination or sexual harassment in the year ahead. However, only 33% of these companies protected themselves by purchasing employment practices liability insurance. The unfortunate conclusions drawn from this data seem to show that companies most vulnerable to a liability lawsuit or crime are the least likely to purchase any type of liability coverage.