Today’s volatile economic, political and social climate has led to higher risks for businesses, with small and medium-sized enterprises (SMEs) not exempt. These risks are likely to cause greater damage to small and medium-sized businesses, as they often don’t have the resources and insurance owned by larger companies.
According to the Coalition’s 2022 Executive Risk Report, risks such as directors and officers (D&O) and liability in employment practice (EPL) are not to be ignored. The report found that the average D&O lawsuit cost more than $120,000 and the average EPL loss was $68,867 — a terrible amount for smaller businesses. However, many smaller businesses ignore the coverage for these risks.
Patrick Mitchell (pictured above), head of executive risk at the Coalition, cites a company survey that found many executives don’t buy D&O (48%), EPL (46%), fiduciary responsibility (45%) and crime (40%) relevance because they think their organization is too small to need it.
“This line of thinking can be damaging to small businesses as it exposes them to all sorts of executive risks, including discrimination, harassment or requests for an end to wrongdoing, or violations of financial-related fiduciary obligation requirements, legal cases related to the pandemic, or Mitchell told Corporate Risk and Insurance.
Mitchell said: “While the level of risk is similar regardless of the size of the business, dealing with executive risk is different for large businesses than for small and medium-sized enterprises. In smaller organizations, executives are often “closer to action,” such as financial activity, hiring practices, and other day-to-day aspects of the business. This makes them more vulnerable to being held accountable for anything that might happen.
He added that small and medium-sized businesses do not have the same breadth or depth of resources – such as human resources, finance, law and regulation – available to larger companies. This makes executive hedging more important to help bridge those gaps and protect the business.
“With small and medium-sized businesses, there’s an assumption that they don’t need executive hedging because they don’t think they’re at risk, but as we saw in the survey and its report, that’s completely untrue,” Mitchell said. “Businesses of all sizes are vulnerable to executive risks, and the perception that no one can be immune to them is an important first step that small/medium-sized businesses can take to protect themselves. No company size or revenue figure can keep executives safe from being targeted.”
In the worst case, a small and medium-sized business that fails to manage its operating risks properly will face full-blown failure or bankruptcy.
“Many small businesses may think they are immune to liability requirements, but in reality, they are extremely vulnerable,” Mitchell said. Our survey found that 36% of small businesses with D&O coverage have experienced claims in the past two years, and nearly 18% of EPL coverage experience claims in the same period of time.”
According to Mitchell, the Coalition survey echoes the Small Business Administration’s (SBA) Advocacy Office which found that 36% to 53% of small businesses were sued and 43% of small businesses said they were threatened with suing. The SBA also calculates that, for every $1 million a business earns, it can spend $20,000 on lawsuits.
He said: “Dedicated executive hedging gives small businesses the ability to withstand these risks, even if they lack internal expertise that can help prevent such debts.
In addition to buying insurance, Mitchell advises small and medium-sized businesses to take advantage of risk management services, many of which are provided by insurance companies.
“Insurers often provide free risk management tools such as pre-request hotlines, anti-harassment training, or access to appropriate risk management materials, such as best practices when implementing a company-wide COVID-19 vaccination policy,” he said. In addition, small businesses should ask their broker about executive hedging and see what kind of protection is available to them. By learning about different types of insurance and realizing that general liability or umbrella insurance won’t solve every possible lawsuit, small and medium-sized businesses put themselves in a favorable position to minimize potential risks. ”