Litigation puts small businesses at risk

Small businesses are becoming more vulnerable in today’s litigious environment and are facing a range of legal threats, warns insurance company Vero.

Companies and their directors can be subject to lawsuits from regulatory authorities, shareholders, liquidators and even their own employees. Unfair dismissal cases, the most frequent type of employment dispute, often involve legal costs in the tens of thousands of dollars.

Sums of this size can be crippling to the small to medium enterprises (SMEs) involved.

While the majority of larger publicly-traded corporations have Directors and Officers’ (D&O) Insurance cover which protects their senior executives against allegations of wrongdoing, only around 5% – 10% of smaller private businesses are similarly protected.

Most SMEs have the option of purchasing Management Liability (ML) insurance to cover themselves against a wide range of litigation. In addition to providing D&O cover, it also includes Employment Practice Liability and Fidelity, and covers the company itself in addition to the directors and officers. This packaged insurance solution has proven a valuable addition to the insurance portfolio of the average SME.

“There are a lot of examples of the peace of mind and financial relief that having the right policies in place can bring to SMEs,” said Mr Rob White, a Vero spokesperson.

“But there are also some horrifying stories around the significant financial losses that can be incurred when businesses aren’t insured.”

An example is an industrial accident where a crane falls from a building resulting in injury to the driver. A regulatory investigation could follow and find that both the employer and a company director have failed to provide a safe system of work. They would need to appear before an inquiry and both could be subject to considerable fines.

“Management Liability insurance would take care of the cost of representation at the inquiry and may even cover the fines,” said Mr White.

In the highly-litigious climate where SMEs now operate, insurance brokers are also marketing this addition to the small business insurance portfolio.

“It may add a few hundred dollars to the SMEs annual insurance bill, but with the financial risks involved, it’s a small price to pay.” concluded Mr White.