In this section we elaborate on additional liability risks and insurance solutions:
- Auto liability
- Professional liability
- Employment practices liability
What about the business liability exposures not covered by the CGL? Space limitations prohibit discussing all of them, but several merit some attention: automobile, professional liability, and workers’ compensation. Workers’ compensation is discussed in more detail in "16: Risks Related to the Job - Workers’ Compensation and Unemployment Compensation".
If the business is a proprietorship and the only vehicles used are private passenger automobiles, the personal auto policy or a similar policy is available to cover the automobile exposure. If the business is a partnership or corporation or uses other types of vehicles, other forms of automobile insurance must be purchased if the exposure is to be insured. The coverages are similar to the automobile insurance discussed in "14: Multirisk Management Contracts - Auto".
The nature and significance of the professional liability risk were discussed in "12: The Liability Risk Management". Most professionals insure this exposure separately with malpractice insurance, errors and omissions insurance, or directors and officers (D&O) insurance. These liability coverages were discussed in "12: The Liability Risk Management". You are urged to review the current conditions of the D&O coverage featured in the box “Directors and Officers Coverage in the Limelight.”
Directors and Officers Coverage in the Limelight
William Webster had enjoyed a long and distinguished career in public service, most notably as the only person ever to head both the FBI (under President Carter) and the CIA (under President Reagan). The onetime U.S. District Court judge retired from public office in 1991, at age sixty-seven, and devoted his time to practicing law in Washington, D.C., and sitting on the boards of several large corporations. One of them was U.S. Technologies, which develops and supports emerging Internet companies. But in July 2002, Webster was told the company could no longer provide adequate liability insurance to its directors and officers. He resigned.
All publicly traded companies must have a board of directors, a group of people elected by the stockholders to govern the company. Generally, the board is charged with selecting and supervising the executive officers, setting overall corporate policy, and overseeing the preparation of financial statements. This role leaves directors vulnerable to lawsuits from shareholders, creditors, customers, or employees on charges such as abuse of authority, libel or slander, and—the biggest concern these days—financial mismanagement. Board members at many corporations became concerned about their personal liability and started taking a closer look at the insurance known as directors and officers (D&O) coverage that is supposed to protect them.
Not surprisingly, the corporate scandals of 2001 and 2002–2004 had driven up the cost of D&O insurance. Following WorldCom’s June 2002 announcement that it had “inappropriately classified” nearly $4 billion in expenses, D&O insurers pulled back from covering not just WorldCom but also its banks, its suppliers, and its business customers. Another reason for the shrinking D&O insurance pool was the late 1990s trend toward astronomical settlements in class-action securities lawsuits. By 2002, high-risk companies—in the aircraft, financial, health care, technology, and telecommunications industries—were paying triple what they used to for D&O, if they could find coverage at all.
Directors and officers were made even more vulnerable with the passage of the Sarbanes-Oxley Act in July 2002. With this key piece of legislation, Congress hoped to restore the public’s confidence in U.S. financial markets by holding chief executives, directors, and outside auditors more responsible—even criminally liable—for the accuracy of financial reports. Sarbanes-Oxley was passed just one month after Enron’s outside auditor, the accounting firm Arthur Andersen, was convicted on obstruction of justice charges for its role in the financial fraud.
The days of shortage in D&O availability and affordability ended as the market softened. According to the 2005 Directors and Officers Liability Survey conducted by the Tillinghast business of Towers Perrin, the 2005 standardized premium index (that was created in 1974) decreased about 8 percent in the D&O coverage cost. The average index decreased from its highest level of 1,237 in 2003 to 1,010 in 2005. The only business classes that reported an increase from 2004 were durable goods, education, health services, and nonbanking financial services. The report also indicated that coverage limits and deductibles remained level.
The leading insurers for the line are: Chubb (21 percent) and AIG (35 percent). Interestingly, AIG, one of the major players in this line of insurance, saw its own 2005 D&O rates increasing in the midst of allegations of its improper accounting.
Sources: Roberto Ceniceros, “WorldCom Adds to D&O Ills,” Business Insurance, July 8, 2002; Rodd Zolkos and Mark A. Hofmann, “Crises Spur Push for Reform,” Business Insurance, July 15, 2002; Richard B. Schmitt, Michael Schroeder, and Shailagh Murray, “Corporate-Oversight Bill Passes, Smoothing Way for New Lawsuits,” Wall Street Journal, July 26, 2002; Carrie Coolidge, “D&O Insurance Gets Closer Scrutiny,” Forbes, November 22, 2002; 2005 Survey of Directors and Officers Liability by the Tillinghast business of Towers Perrin is available at www.iii.org and www.Towersperrin.Com/Tillinghast/Publications/Reports/2005_DO/DO_2005_Exec_Sum.pdf, accessed March 27, 2009; Matt Scroggins, “AIG Board Panel to Oversee Director Indemnification,” Business Insurance, May 25, 2005; Regis Coccia, “AIG to Pay Directors’ Expenses Amid Suits and Probes,” Business Insurance, May 16, 2005.
Employment Practices Liability
The ISO’s Employment-Related Practices Liability Program, which is available to all ISO-participating insurance companies, was filed with state insurance regulators for approval effective April 1, 1998.ISO press release as of August 19, 1997, at www.iso.com/press_releases/1997/08_19_97.html, (accessed March 31, 2009), www.iso.com/Press-Releases/1997/ISO-INTRODUCES-FIRST-STANDARDIZED-INSURANCE-PROGRAM-FOR-EMPLOYMENT- PRACTICES-LIABILITY.html. It was the newest line introduced in more than twenty years. Because of an increase in the number of lawsuits filed for sexual harassment and many more employment-related liability suits, the coverage became imperative to most businesses. The ISO is considered a baseline program. “The [Employment-Related Practices Liability Program] covers insureds’ liability for claims arising out of an injury to an employee because of an employment-related offense, as well as providing legal defense for the insured. Injury may result from discrimination that results in refusal to hire; failure to promote; termination; demotion; discipline or defamation. Injury also can include coercion of an employee to perform an unlawful act; work-related sexual harassment; or verbal, physical, mental or emotional abuse.”
The ISO program excludes the following:
- Criminal, fraudulent, or malicious acts
- Violations of the accommodations requirement of the Americans with Disabilities Act
- Liability of the perpetrator of sexual harassment
- Injury arising out of strikes and lockouts, employment termination from specified business decisions, and retaliatory actions taken against whistleblowers
The program makes available a number of optional coverages:
- Extending the claims-reporting period to three years
- Extending coverage beyond managers and supervisors to all of a firm’s employees
- Insuring organizations that are newly formed or acquired by the insured during the policy period for ninety days
- Insuring persons or organizations with financial control over the insured or the insured’s employment-related practices
In this section you studied business liability exposures not covered by the CGL:
- In a proprietorship, if the only vehicles used are private passenger automobiles, the personal auto policy is available; if the business uses other types of vehicles, other forms of automobile insurance must be purchased.
- Most professionals insure professional liability exposure with malpractice insurance, errors and omissions insurance, or directors and officers insurance (D&O).
- The Employment-Related Practices Liability Program covers liability for injury to employees because of employment-related offenses and provides legal defense for the insured; injury may result from discrimination that results in refusal to hire, failure to promote, termination, demotion, discipline, or defamation.
- How does malpractice differ from errors and omissions?
- The Employment-Related Practices Liability Program is concerned with what kind of injury to employees?