Mitigating Management & Professional Liability Risk

Mark Azzolino 


December 7, 2022

Management and Professional Liability Risks

As public and private companies focus on growth and profitability, there are many challenges that their executives face as they navigate their complex business environment. From inflation to supply chain to interest rates, there is an ever-evolving list of compounding issues that need their attention. Couple this with increased public and regulatory scrutiny around environmental, social and governance (ESG) issues, and the pressure can be intense on leaders to make the right decision for their investors, customers and employees. While long a critical component of a risk management program, with these dynamic forces impacting enterprises of all sizes and operations, management and professional liability insurance, especially directors and officers (D&O) liability insurance is an important risk mitigation tool.

Broadly speaking, the management and professional liability market is transitioning to a more buyer-friendly environment in several lines of business with greater capacity and a more balanced rate environment. While the marketplace in general is improving for purchasers of D&O lines of management and professional liability insurance, the exposure environment remains dynamic and there are things that businesses of all sizes can do to help best position themselves for the most advantageous insurance program and experience.

First, it is imperative for businesses to partner with an agent or broker that has specific expertise in management and professional liability and related lines of insurance such as D&O. Then, companies should seek opportunities with the insurance carrier to tell their story. This includes company history, culture and strategic plans, which will help to build a long-term relationship with the insurer and increase familiarity with the business and leadership team. The dialogue here is significant because it can lead to more consistent and comprehensive insurance terms over the duration of the relationship.

Steps should also be taken to improve corporate governance and culture, which can subsequently reduce risk. In addition, this will have a positive impact on the corporation itself and become an asset for the firm when it looks to obtain the best terms in the insurance marketplace. Some areas of corporate governance for businesses to consider include ESG, pay equity, retirement plan administration and macroeconomic conditions.

As consumers and employee demand more transparency around corporate sustainability efforts, corporations should have sufficient focus on ESG-related issues in their strategic activities. Working with outside advisors—such as legal counsel—can help firms navigate the evolving landscape around ESG disclosure requirements and further demonstrate their action around ESG-related activities for insurance carriers.

Pay Equity
Several states and localities have passed or are considering pay equity and pay transparency laws. Business would be wise to consider utilizing an expert to conduct a pay equity audit of the company. In addition to identifying potential risks under pay equity regulations, this audit can help identify internal gaps that could contribute to employee dissatisfaction in a tight labor market.

Retirement Plan Administration
Retirement, health and similar benefit plans are a critical part of attracting and retaining talent.  While these offerings are meaningful, they also come with additional responsibilities for the company. Fiduciaries of employee health and retirement plans have a duty of care to run the retirement plans solely in the interest of the plan participants and beneficiaries. This includes the selection and oversight of various service providers such as record keepers and investment managers. Having a documented process and completing regular RFPs including competitive bids to ensure the plan is subject to reasonable fees not only helps ensure compliance with ERISA duties, but also improves the risk profile.

Macroeconomic Conditions
It has been well documented that this is a unique business environment with near record low unemployment, 40-year high inflation, war in Ukraine and lasting supply chain impacts resulting from the COVID-19 pandemic. Being able to demonstrate how the company is managing the environment to support consistent financial results, employment levels and customer satisfaction will help differentiate the company in a competitive insurance market to secure the best terms and likely the most lasting relationships.

Being able to demonstrate how the company is being proactive in dealing with their specific operating environment (e.g., how they might be adjusting operations to deal with the rising costs of raw materials or supply chain delays) will help position the company more favorably in the marketplace. In addition, underwriters will consider the company’s ESG commitment, including how the company treats its employees and interacts with the community and environment. These are some of the factors that underwriters use selecting risks and determining pricing, terms and conditions.

Mitigation Measures

In addition to purchasing insurance, risk managers can take the following steps to address management and professional liability issues within their organizations:

  • Stay informed of, and ensure managers are aware of, federal, state and local requirements and regulations regarding topics such as equal pay/pay transparency, family/sick leave requirements.
  • Make sure the organization has documented processes and procedures relative to human resources functions, methods for employees to access avenues to report (without fear of reprisal) any instances of harassment, discrimination or other perceived wrongdoings.
  • Establish a cadence of internal risk review/analysis, tabletop or practice/preparation exercises to help the organization prepare for unforeseen crises such as a network security/data breach event, workplace violence event, adverse publicity, event impacting the operation of a facility or location, such as a weather event or power outage.
  • Engage with their professional network and associations available to risk managers to stay informed of developments related to management and professional liability.

Risk managers can also consider consulting with independent directors or advisers who can bring different perspectives to operations, governance and strategic direction. Additionally, organizations can seek advice from experienced legal and financial advisers on a regular basis, including when to share business information with stakeholders, possible merger and acquisition activities and how to address emerging risks. Businesses can also work with a licensed insurance agent to ensure that a robust risk management program is in place to adequately protect the directors and company.

Mark Azzolino leads the management liability and enterprise solutions profit centers of The Hartford’s global specialty financial lines segment. He is responsible for The Hartford’s private/not-for-profit management liability businesses and the sales and process execution for the management and professional liability lines of business distributed through its small commercial and middle & large commercial segments.