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Executive Liability Extends Beyond the C-Suite to HR Team

Understanding the risks that your HR team might be imposing on your executive liability.

Each year businesses large and small face executive liability-focused claims triggering their Directors & Officers, Employment Practices, Fiduciary and Cyber/Data Security liability insurance policies. Unfortunately, many of these claims are denied due to late reporting. For example, HR executives may have a claim sitting in their inbox that, if not reported in a timely fashion, could snowball into a bigger claim or lawsuit.

Add new federal compliance initiatives that HR is being tasked with, like those from the U.S. Securities and Exchange Commission, the Employee Retirement Income Security Act (ERISA)/Department of Labor and the Patient Protection and Affordable Care Act (ACA), into the equation, and it can turn into a vortex of paperwork and finger pointing between the CFO, in-house legal, the Board and HR staff. The result can be unnecessary lost dollars and opportunity cost that can significantly affect a business’ reputation. For publicly-traded companies, this can have a significant impact on stock value as well.

The source is a clear gap in risk management education and practices.

HR Executive Liability“Executive liability discussions happen at the board, CFO/finance and in-house legal level. Unfortunately, HR is usually left off the meeting invite when it comes time to discussing EL risks and insurance,” said Adrian Atilano, executive vice president, California Executive Liability Practice Leader, HUB International. “But, the reality is that HR, through employee discussions, administrative compliance, health data collection/wellness initiatives, and privacy data collection, operates in a vortex of exposure every day. If HR is not educated on executive liability insurance coverage and when incidents need to be reported under these policies, then a claim denial has a much higher probability. An overview of these policies must be part of the value the broker provides the HR team.” 

The Interdependence of Insurance – Real Life Case Studies

From workers’ compensation to employment practices, privacy/data security, wellness initiatives, ACA compliance and more, the HR executive juggles many balls. But, many of these balls – and their corresponding claims - are interconnected with executive liability. Here are three real-life scenarios illustrating the interdependence of multiple insurance coverages and claims.

Scenario I: One San Diego-based food processing plant has multiple HR executives and in-house attorneys. Their HR department sat on a workers’ compensation claim for too long that eventually led to a 132a claim of employment practices discrimination. The basis for the claim was the employee’s belief that he was discriminated against at the office as a direct result of his workers’ compensation claim. Because the HR staff was unaware of the fact that a 132a matter was a claim by definition of their employment practices liability (EPL) policy, coverage did not trigger and the claim was denied. The out-of-pocket company losses exceeded $20,000.

Scenario II: One woman at a Miami-based accounting firm accused a firm partner of sexual harassment. She sent the HR department an email that contained all the information needed to meet the definition of a claim under the firm’s EPL policy. The HR department failed to submit an official EPL claim and instead chose to wait for a letter from the victim’s attorney, which never came. A year later when three more employees came forward and the firm’s HR team finally submitted all relevant claims, the EPL policy denied each one on the grounds that the first wasn’t reported in due time.

Scenario III: As part of a corporate wellness initiative, a Midwest-based marketing firm collected health data from its employees. When the company moved, the health data was left in boxes outside and the local police found the files. The HR department immediately emailed the entire company letting them know what happened, promising to “take care of the issue.” Unfortunately, the firm’s cyber liability policy, which covers data breach losses, denied the firm’s subsequent claim because the HR department didn’t act in the agreed upon manner when reporting the breach to the victims. This resulted in lost insurance dollars that would have paid for forensic costs, legal fees, notification costs, regulatory fines and penalties totaling $530,000.

The common dominator in each of these scenarios is the need for increased communication between the CFO/Board/legal and the HR team. The objective is to create transparency between departments and increase the understanding of responsibility and governance between employee benefits and executive liability.

HR Executives Can Ask Themselves These Questions to Determine Their EL Risk“Everything you do impacts every other part of your organization,” said Bev Gregory, senior vice president, Employee Benefits, HUB International. “Without executive liability education and dialogue among staff, how will the HR executives know when, where and how to report a claim? The education needs to start with the benefits staff.”

A new playbook for HR

Reporting claims in a timely manner will ensure that you receive necessary coverage for damages and other related expenses. What good is the premium if you never receive the coverage? 

Executive liability policies renew annually. However, unlike employee benefits, EL policies may not renew in sync with the calendar year, which can create confusion. For example, the renewal for one company’s EL policy is March 1. If an HR employee receives a written discrimination demand in January, they must report it before the next policy is issued on March 1.

Furthermore, each insurance policy will likely have a different renewal date based on when it was first purchased. Keeping a list of renewal dates handy will help promote timely reporting. Asking your broker to align the policies on one date may help with tracking renewal dates and creating leverage in the insurance marketplace.

HR executives can ask themselves the following questions to determine their executive liability risk:

  • What EL coverages do we have and what is their value to the leadership team and the organization?
  • When do they renew?
  • What limits do we carry?
  • How is a claim defined and when do I need to report it?
  • What are some common exposures specific to my business? 

When organizations engage the same broker for employee benefits and executive liability policies, the gap in risk management practices narrows dramatically. Contact your HUB executive liability specialist or employee benefits advisor to learn about HUB’s unique employee benefits executive liability training program that helps c-suite and HR executives alike understand the interdependence of their insurance policies.