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.
“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.
“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.