Private company leaders should not make the mistake in thinking they are protected from personal lawsuits simply because their company is not publicly traded. According to Chubb’s Private Company Risk Survey, 27% of private companies experienced a D&O lawsuit over the previous decade, compared to 33% of public companies. And in 2013, the cost of a lawsuit against a director or officer of a private company was an average of nearly $700,000. Despite such risks as costly lawsuits, government fines, and more, a large percentage of company leaders are not taking steps to protect themselves. So, before you write it off entirely, keep these 5 factors in mind.
- The threat of lawsuits
Private companies are statistically less likely to be sued in comparison to public companies, but a few instances stand out:
- Creditor suits. If your private company were to go bankrupt, there is a chance creditors could sue. D&O insurance would protect the personal assets of company leadership from these creditor lawsuits.
The Demoulas/Market Basket saga has dominated the news here in New England over the past month. From a risk management perspective, the developments of the case should signal risk managers to review their Management Liability policies and insurance program, especially in the following areas:
Crisis Management coverage – Some insurers offer a sublimit of coverage to assist companies that must announce adverse news relating to business operations. Typically, insurers offer a select group of public relations firms to assist the insured with press releases and interviews. The expense sublimit can vary between $25,000 to $75,000 by Insurer. Read more…
In one of the first 401(k) fee cases to go to trial, a St. Louis appellate court ruled against a power and technology company for violating its fiduciary duties to 401(k) plan participants. According to the case, the company failed to control plan costs and negotiate rebate terms with investment firms, costing employees millions of dollars in hidden plan fees. The Court awarded over $13 million to the company’s employees- a sign to plan sponsors that their role extends beyond simply offering low-cost investment options.
Experts note the growing frequency of retirement plan cases, as more judges develop fiduciary standards and laws for plan sponsors to protect retirees. In a similar case, employees of a military contracting firm lost hundreds of millions of dollars after company officials neglected to manage plan investment fees being charged by the bank sponsoring its 401(k) plan. Court documents reveal the bank collected additional fees for managing a single-stock portfolio for the company, directing cash from the fund into its own investments and using that cash to paying itself for managing the fund. Read more…
In an unusual twist in shareholder litigation, four different public companies – EMC Corp, Express Scripts Holding Co., Omnicom Group Inc. and Chipotle Mexican Grill Inc. – recently filed lawsuits against a 68-year old retired investor shareholder filing numerous shareholder proposals. Over the past several decades, retail investor John Chevedden of Los Angeles has targeted over 400 large organizations, including, Google, GM, Dreamworks Animation and Hewlett Packard, issuing nonbinding proposals to pressure companies to change their governing and pay practices.
Having filed and won more proposals than any individual or institution in history, Chevedden has gained widespread notoriety amongst large corporation executives, attorneys and shareholders as the most “persistent provocateurs” around. Unlike big-money shareholder activists, he typically only buys the minimum number of shares ($2,000) required to submit proposals before launching reform measures, which often digs deep into the details of corporate governance issues such as how directors are elected and when shareholders can call special meetings. He claims the companies’ litigation is an attempt to thwart investors from pushing reform movements through the proxy process. And although he’s been successful in many of his previous efforts more and more companies have begun suing Chevedden for abusing the proxy process.
With an increase in the number of defined benefit plans and the use of alternative investments, the Department of Labor (DOL) is spending more time and manpower in scrutinizing these plans and the parties that are entrusted to oversee and administer them.
The various officers of an organization, as well other persons acting in various capacities, have always been exposed to liability imposed under ERISA (Employee Retirement Income Security Act of 1974) when they are performing services for a qualified plan. But recent developments and market conditions have increased the focus on the fiduciary responsibility of these trustees, administrators and vendors.
The three biggest areas of concern for the DOL are Limited Scope Audits, Audit Quality and Fee Disclosures. ERISA allows for limited scope audits in situations where investment Read more…
Discussion surrounding Scheme Liability, or “aiding and abetting,” continues to filter throughout the Directors’ and Officers’ Liability (D&O) world, particularly among publicly traded companies and those considering public offerings. The issue has caused debate for decades, but recent challenges to current securities law, from proposed amendments to shareholders class action suits, indicate an increased awareness about the risks of fiduciary, aiding and abetting claims throughout the D&O insurance community.
In 1994, the U.S. Supreme Court ‘s landmark opinion, Central Bank of Denver vs. First Interstate Bank, abolished secondary actor liability in civil litigation brought under Rule 10b-5(b), meaning private litigants may not bring aiding and abetting claims under the federal securities laws. The Court declared that only primary violators — those who actually Read more…
Over the last decade, private company Management Liability policies (Directors’ & Officers’ Liability, Employment Practices Liability, Fiduciary Liability) have been very competitively priced with generally loose underwriting guidelines. But, as a famous Greek philosopher once said, “Nothing endures but change” – and we are currently in the midst of a pendulum swing towards stricter underwriting.
Management Liability underwriters with leading insurers, including Arch and Chubb, have confirmed that complete applications, with all requested supplemental information, have become the new norm. In addition to encountering more rigid underwriting, most companies are also likely to be subject to some combination of: higher retentions, higher premiums, and/or reduced Read more…