Study Finds Employers More Exposed to Liability Risks but Less Protected

By Bill Leonard Aug 20, 2008

While a downturn in the U.S. economy and a steady rise in the number of employment-related complaints filed with the Equal Employment Opportunity Commission (EEOC) have increased liability risks for private-sector employers, many businesses don’t have adequate protection for costly lawsuits and employee wrongdoings, a study released by the Chubb Group of Insurance Companies has found.

“Private companies may not be purchasing sufficient management liability insurance to help protect their bottom line from costly liability lawsuits,” said Lisa Jones, vice president, Chubb & Son, and private commercial product manager for Chubb Specialty Insurance. “In addition, companies that are uninsured and experience workplace crimes or an employment practices liability lawsuit, for example, may find that a tight credit market makes it difficult to obtain credit to pay for such a loss or to continue their business operations.”

Researchers for the Chubb 2008 Private Company Risk Survey found that 37 percent of U.S. companies do not have any type of management liability/professional liability insurance. Nearly two-thirds of respondents reported they don’t have any coverage for employment practices liability or for directors’ and officers’ liability. More than 90 percent of the respondents said their organizations do not have insurance coverage for cyber or computer-based liability. The study’s researchers collected the data at the end of 2007.

Many of the respondents cited “low risk or no exposure” as the primary reason their organization does not have the liability coverage. Researchers also found that respondents were less concerned with potential financial setbacks caused by employment-related lawsuits than in 2005 (23 percent vs. 43 percent of respondents) when Chubb last conducted a similar survey of private employers.

However, statistics clearly show that the threats of employment-related charges may be increasing. In March 2008, the EEOC released a report that filings for job discrimination claims rose 9 percent during fiscal year 2007 and that for the first quarter of fiscal year 2008 (Oct. 1, 2007-Dec. 31, 2007), the number of filings jumped 21 percent from the previous year.

EEOC officials say they cannot pinpoint the primary reason for the jump in job discrimination claims. However, sources agree that two of the primary causes for the increase are probably a new online charge-filing system and the recent economic downturn in the United States.

“Economic conditions exert a significant impact on employment-related claims and lawsuits,” Jones said. “This makes employment practices liability one of the bigger—and more costly—potential risks faced by private companies.”

Sources agree that the economic conditions could create a “double-edged” sword for business leaders. As the economy worsens, business leaders will be looking to cut costs and therefore be less willing to either purchase or increase their organization’s liability coverage. However, statistics show that a troubled economy can increase the risk of employment-related lawsuits and problems such as theft or unethical behavior from employees.

“Despite all the warning signs, we are surprised to see so many private company executives believe that executive liability protection is not necessary in today’s global market,” said Jones. “As private companies continue to participate in activities that potentially increase their exposure to a liability lawsuit, they need to not only have strong risk management controls in place, but should consider management/professional liability insurance to help protect their employees and their balance sheets.”

Bill Leonard is senior writer for SHRM Online.


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