Insurer Finds D&O Lawsuit Fear Pervasive
NU Online News Service, Jan. 21, 2:54 p.m. EST?Nearly 40 percent of privately held companies fear that their directors and officers will likely be sued by shareholders, customers or vendors in 2004, a new survey found.[@@]
The study was sponsored by the Chubb Group of Insurance Companies and conducted by Los Angeles-based market research firm Impulse Research Corp. The firm interviewed the chief executive, financial and other top officers at 300 privately held businesses.
Chubb spokesman David Hilgen said it's the first survey that he knows of that focuses exclusively on D&O lawsuit issues for private companies. Chubb is now considering conducting the survey on a regular basis, he said.
The study results showed that the prospect of getting slapped with lawsuits by various plaintiffs is very much on private company officers' minds. Executives at 37 percent of the companies surveyed, for example, said they anticipate customers to sue their directors and officers in the coming year. In addition, some 30 percent of those surveyed said their vendors are likely to sue, while 21 percent said their shareholders may sue.
Such anticipation is based in part on these companies' past experiences. According to the study, 18 percent of private businesses reported that the company, or its directors and officers, were sued by customers during past few years, while seven percent of the respondents reported being sued by vendors and six percent said they were sued by shareholders.
"The Chubb ?Private Company Risk Survey' supports what we've been seeing as an insurer over the last few years: private companies–large and small–and their directors and officers are not immune to lawsuits from customers, investors and other parties," commented Lisa McGee, vice president at Chubb & Son and Private Company Customer Group manager for Chubb Specialty Insurance in Warren, N.J. "If anything, the problem appears to be worsening," she said.
Additionally, more than 30 percent of the companies surveyed said the Public Company Accounting and Investor Protection Act of 2002, also known as Sarbanes-Oxley, has an effect on private companies, either directly or indirectly.
Fifty-four percent of the respondents also reported they were not sure what impact Sarbanes-Oxley or similar legislation at the state level had on their companies. Chubb noted that although the legislation was intended for publicly traded companies, many of the standards it set are now also being applied to private and nonprofit companies.
The survey also showed that many private companies are responding to the growing threat of lawsuits. Some 36 percent of the respondents said they plan to conduct a risk assessment of executive protection-related exposures, including directors and officers liability, in 2004. Some 36 percent of the respondents also reported that they have a published corporate governance program already in place.
"Many of these companies need to reevaluate the depth and quality of their loss-control measures in light of the heightened exposures," added Ms. McGee. She advised that smaller businesses, which are less likely to be able to withstand the financial shock from lawsuits, should consider a comprehensive loss-control program and possibly insurance.
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