Key management liability risks to monitor and address in today’s digital transformation

Patrick Mitchell is Coalition’s Chief Risk Officer. He can be reached at [email protected]

Executive risk coverage (also known as executive liability coverage) hasn’t changed much in the past 20 years, but the world has moved on from the analog era. And while this coverage is still seen as an essential tool to protect businesses against potential litigation, executive risk is increasingly impacting businesses. Executive risks and digital risks are now intertwined and it is becoming increasingly difficult to separate them.

The digital transformation of businesses has created new types of exposures while exacerbating existing ones. Executive risks are no longer confined to the office; they are now entering digital channels in both our work-from-home setup and our traditional workplace.

Because the insurance industry largely uses outdated processes that do not capture real-time changes to businesses and their exposures, most current risk coverages for executives do not accurately reflect the nature of ever-changing risks faced by businesses today. Coverage requires a new model of “active” insurance that allows companies to continuously monitor and manage the changing risks a business faces.

As companies adapt to the new normal, it’s important that they also stay informed about evolving risks and what they can do to avoid liability in an increasingly risky environment.

Risks evolve with a new facade at high speed

The digital landscape not only introduces a new set of risks that leaders must consider and manage; it also transforms those that already exist. Directors and Officers (D&O) insurance generally protects the personal assets of corporate officers who are sued because of actions taken in their role within a company. Examples of traditional D&O risks include breach of duty, negligence, error, and misrepresentation. Although these risks still exist, they have evolved in the digital environment.

Everything is faster with technology, which means risk managers need to monitor multiple areas and be able to mitigate risk in real time. Key D&O risks include:

  • Shareholder litigation: News travels faster than ever. A company’s shareholders are able to pay more attention to the publicly known actions of a company. When news of a questionable corporate decision breaks, we see social media used to escalate issues and mobilize shareholders to speak out against a company’s actions.
  • Reputation risk: In the pre-digital age, this could take the form of negative newspaper articles or perhaps even petitions or picketing outside a company. Now, reputational risk includes a negative online presence, whether it’s Google, social media, or a job board, with long-lasting impacts.
  • Price fixing and collusion: Traditionally, a company’s management may be targeted for complaints after coming together in a trade association and agreeing that prices for a particular product should be higher due to the increased cost of supplies. Now, business leaders have digital means to track competitor prices, potentially increasing a company’s exposure to antitrust claims.

These executive risks are exacerbated by the changing digital landscape. They can also lead to Employment Practices Liability (EPL) issues., for example, when online communication channels provide new opportunities for traditional risks to proliferate and evolve, leading to litigation against a business.

EPL insurance covers business owners’ costs related to lawsuits arising from employment-related claims, such as discrimination, harassment, and wrongful termination. Key EPL risks to watch out for include:

  • Harassment: Workplace harassment complaints are no longer limited to office interactions. The digital economy means new, often unmonitored means of employee interaction, including email, texting, private messaging and video conferencing, all of which can foster harassing behavior in a company.
  • Privacy issues: The remote work environment has led some companies to adopt employee tracking or monitoring systems to ensure that employees are working during their working hours. While this practice may reveal productivity details, it could also violate privacy policies, particularly when this software is installed on company-owned computers and employees are not notified or do not provide written consent. . Some companies also use this monitoring data as the basis for promotions and terminations. In some cases, these software accuracy in real reflection productivity has been questioned, which could lead to wrongful termination or other employment claims against a business leader.
  • Collective actions: Digital transformation means risks can hit harder and faster than ever before. Plaintiffs and class action attorneys can now leverage technology and social media to target businesses, find new clients and file job applications in bulk. While many of these lawsuits may be legitimate, not all of them are. For example, earlier this year, district attorneys in San Francisco and Los Angeles filed a joint complaint against a law firm that has filed “fraudulent” lawsuits against more than 250 businesses in San Francisco, claiming they violated the Americans with Disabilities Act (ADA).

Not just for large companies

It is often thought that D&O and EPL insurance is for large public companies, but the reality is that companies of all sizes can benefit from coverage.

Many small businesses feel that because they are not a big business or a public company, they will not be sued or that any lawsuits against them can be resolved quickly. Of course, that’s not true. Unfortunately, small or new businesses are the most vulnerable to job applications because they often lack the experience, resources, or expertise to successfully recruit, hire, manage, or fire employees.

According Coalition 2022 Executive Risk Report, 36% of small and medium-sized businesses (SMBs) covered by D&O in the United States experienced a claim in the past two years, with the average cost exceeding $120,000 and the highest claim reaching $1 million. The same report found that 26% of businesses with 100 or more employees experienced an EPL claim in the past two years, at an average cost of more than $68,000.

SMEs often don’t have the balance sheet to cover the cost of these lawsuits. Without this, the officers of an organization subject to a lawsuit may be personally liable for damages awarded in a case, which could lead to the bankruptcy of the company. and the individual.

To navigate the new digital landscape that has transformed traditional executive risk, businesses need executive risk insurance that appreciates the added complexity of digital risk and can navigate a new environment.

How to track the speed of risk

Active insurance can help businesses respond to and recover from digital risks faster by combining the power of scanning technology, real-time data analytics, and comprehensive insurance coverage. It can detect potential issues more quickly by looking for specific violations. With greater risk awareness, businesses can take the right steps at the right time to avoid costly litigation and fees.

With the new digital environment, SMBs need an active solution that can help them stay ahead of executive risks before they become a claim. &

Edward N. Arrington