Almost half of small businesses don’t purchase executive risk coverage, study

The digital transformation, COVID-19 and an increase in financial activities like mergers and acquisitions have elevated risk and increased the need for businesses to have directors and officers insurance and employment practices liability insurance, according to a recent study from Coalition, a commercial insurtech.

The 2022 Executive Risks Report from Coalition, conducted with Wakefield Research, surveyed 1,000 small business executives, who make insurance decisions for their companies, about risk.

Almost half of small businesses choose not to purchase executive risk coverage, according to the study. The most common reason in the survey for why business executives didn’t purchase executive risk coverages like D&O, EPL and Fiduciary Liability, was that they believe they are too small to need it.

Patrick Mitchell, head of executive risks at Coalition, says the digital acceleration related to the pandemic has led to more risks for businesses.

“For example, moving from brick-and-mortar sales to online stores is a transformation that creates privacy, tax, supply chain and security issues unique to online transactions and data. Data is the single most valuable asset of modern businesses, making poor data governance and security even bigger risks,” Mitchell says. “The digital acceleration has also exacerbated existing reputation issues for companies, such as concerns around fair working conditions (and litigation) and the influence of social media trends on businesses’ image. We know that these trends aren’t going away anytime soon, so businesses who don’t address corporate risk stemming from digital transformation procrastinate at their own peril.”

Almost half of the small businesses, across industries, have reported being threatened with a lawsuit and between 36-53% of small businesses are sued every year, according to statistics from the Small Business Administration’s Office of Advocacy.

“Risk is a great equalizer for organization, no company size or revenue figure can keep executives safe from being targeted,” the report states. “Any privately held organization’s officers or board members or even employees can be sued over the decisions, errors, willful actions, or even statements they make.”

Additionally, more than one-third of small businesses with D&O coverage have experienced a claim in the last two years and one in five businesses with EPL coverage have also had to file a claim.

“The larger employment trends impacting businesses of all sizes are hitting SMBs even harder because they have fewer resources to deal with these risks,” Mitchell says. “The pandemic hit SMBs hard, resulting in layoffs at businesses that don’t have the sophisticated risk management operations, or budget to get advice from an outside law firm or provide employees with severance, to help them avoid some of the classic pitfalls.”