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 x3261 or email@example.com.