While the need for executive protection is universally recognized in
publicly traded companies, CEOs of closely-held companies often fail to understand that they have some of the same exposures as their counterparts in public firms.
Directors and officers in closely held corporations can be sued for unfair competition,
restraint of trade, wrongful termination or
harassment says Royce Sheetz, a commercial insurance broker with Westland Insurance Brokers. They may have personal
liability whether the claimants are relatives,
shareholders or investors.
The best time for CEOs of private firms to
seek and secure protection is sooner rather
than later, because as the time nears for a sale
or an IPO, it may become too expensive or
difficult to secure the coverage that you need.
“With all insurance, it is easier to secure
coverage if you have a documented history,” says Sheetz. “As companies approach a
financial event such as bringing in outside
investors, an IPO, or even the sale of the
company, they will find it much easier to
find adequate limits at an affordable premium if they already have a track record.
Fortunately, there have been changes in
coverage and availability that make securing the insurance more affordable from the
outset.”
Smart Business spoke with Sheetz about
how CEOs can benefit from the recent
changes in executive insurance protection.
What are the policy form changes that CEOs
should be aware of?
There has been an increase in flexibility
when purchasing coverage that simulates a
‘cafeteria plan’ in employee benefits insurance. This enables a CEO to combine a
number of different coverages in one policy under a single liability limit. Here are the
types of coverage that are available and a
brief description of their protection.
- Directors and Officers Liability
(D&O) – The directors and officers of a
company make operating decisions every
day, and those decisions could ultimately
result in litigation by other businesses for
wrongful business practices such as fraud
or unfair competition. Also, D&O provides protection in the event investors sue the
executives if they don’t get the return that
they anticipated. - Employment Practices Liability
Insurance (EPLI) – Employment-related
offenses include wrongful termination,
harassment (sexual and otherwise), discrimination, failure to promote, even failure to hire. - Fiduciary Liability – This provides coverage should employees (or former
employees) sue the company because the
pension and or retirement plan didn’t perform up to expectations. The Enron situation of several years ago is the most obvious example of the need for this coverage,
but any company with any kind of retirement plan (401[k], profit-sharing, etc.) has
this exposure. - Internet Liability – Any company that
uses e-mail or has its own Web site has
exposures in this area. - Errors and Omissions (E&O) – This is
professional liability for those companies
that might need it such as computer technology firms. - Crime – Provides expanded crime coverage, such as employee theft or unauthorized credit card usage, which may not be
available in a standard business package
insurance policy. - Kidnap and Ransom (K&R) – Because
it provides coverage should you or your
employees be the victim of a kidnapping or
some other form of extortion, this is very
important if a company has employees
traveling internationally.
How have these policy changes affected premiums?
There have been two very positive
changes. First, there are more carriers offering coverage, so pricing is more competitive.
Also, when these coverages were purchased
a la carte, each policy was subject to its own
minimum premium, which could have been
$2,500 to $5,000. Now with only one policy,
there’s only one minimum premium charge
for all of the coverages you select.
Buying the insurance when your risk is
lower will also help keep your premiums
more affordable over time. It’s like buying
auto insurance: it’s harder to secure and
more expensive if you wait until you have
an accident.
What factors should CEOs consider when
purchasing executive protection coverage?
It’s important to consider your business
plan and any upcoming changes such as
bringing in outside investors, new product
development, adding a location or increased
hiring. All of these events increase your
exposure, so it’s better to contemplate them
in advance when you are making your purchase so you can select higher limits from
the outset.
What role should my broker play?
In order to partner with your broker successfully, it is important to share all anticipated changes in your business. The application for coverage will ask about plans
that will increase exposure and your broker will have the best advice about how to
secure the coverage you need well in
advance of the event.
ROYCE SHEETZ is a commercial insurance broker with
Westland Insurance Brokers. Reach him at (619) 584-6400 ext.
3261 or [email protected].