Risky business of uninsured SMEs

Most directors of small to medium-sized enterprises (SMEs) in Ireland are leaving themselves and their companies open to lawsuits and may risk losing their personal assets because they haven't taken out special insurance to mitigate ever increasing levels of regulations governing businesses, an insurance expert has warned.

Fewer than 10 per cent of SMEs take out insurance to cover directors' and officers' liability and employment practice liability, mostly because they are not aware of the exposure they face, according to Martin Adams, special risks director at Arachas Insurance. By contrast, virtually every publicly listed company has insurance to cover these liabilities, he says.

"This will become a much bigger issue, especially around directors' liability," says Patricia Callan, director of the Small Firms' Association (SFA). "Many directors, especially voluntary ones who end up on boards of SMEs, are not even aware this has legal implications for them."

Bill McCabe, the entrepreneur who served as chairman of tech firm SmartForce between 1991 and August 1998, and Greg Priest, the former chief executive of SmartForce, were named as defendants in a class-action lawsuit taken against the company by investors, who alleged SmartForce defrauded investors by making untrue statements to induce people to buy shares, enabling the defendants to sell stock at artificially inflated prices during 1998.

SkillSoft, which inherited the lawsuit after acquiring SmartForce in 2002, paid $15.5 million (€12.3 million) to settle the case, with US insurance firm AIG paying $15 million to cover the remainder.

"Being a director or officer of a company or indeed an institution or a charity, has always involved pretty onerous responsibilities, but the ever-increasing level of regulation means that those responsibilities are becoming ever more far-reaching," says Adams.

"Directors and officers are personally liable for any action taken against them if they do not have directors' and officers' insurance, and there are instances where individual directors have suffered severe reductions in their lifestyle and livelihood as a result of being sued."

Pleading ignorance is not always a defence to directors if the case comes to trial: the High Court ruled in 2004, when Tralee Beef & Lamb went into liquidation, that each director had a duty to the company to inform themselves of the company's affairs.

"It's often only when directors run into problems that they think about insurance," says Callan. "But the most effective protection is putting in place proper management and procedures, and this is where we can give advice."

There are a quarter of a million small businesses in Ireland, employing about 777,000 people. About 88 per cent of SMEs do not have a human resources manager, an SFA survey published in November found. Therefore, the SFA seeks to "fill in the gaps" in knowledge at small businesses, according to Callan.

The organisation received about 40,000 calls from member companies about employment-related matters in the year to the end of November. Callan says there are about 40 pieces of employment law that SMEs have to comply with, on top of annual changes to legislation.

"Employment law is the single biggest concern for small companies," she says. "Insurance cover would stand to some companies in this respect."

Arachas says the number of employment-related claims against companies is rising and that any organisation runs the risk of being sued over issues ranging from sexual harassment and discrimination to redundancy and dismissal. Because of the lack of human resources managers at SMEs, directors and managers who often don't have the skills to deal with sensitive employment issues can end up handling allegations of sexual harassment or discrimination against the company.

"The cost of settling these claims is steadily increasing and there is a clear perception that employment legislation is more likely to be interpreted in favour of the employee," says Adams.

"The attitude of 'it won't happen to me' is far too prevalent among SMEs and, as the volume of accounting and employment legislation increases, it is the SME, with its far more limited resources, that is at much greater risk than the large corporate with its battery of advisers."

A company that employs fewer than 100 people and turns over less than €5 million in revenue a year would likely pay a premium of €3,000 for cover of up to €1 million for directors' and officers' liability and €250,000 for employment practice liability, according to Adams. Companies with 1,000 employees and a turnover of €100 million could expect to pay about €7,000.

Directors' liability insurance provides personal protection for directors and officers for damages, judgments, settlements and defence costs for any actual or alleged action or inaction they may face, while employment practice liability insurances covers the company itself against the employment-related matters, Arachas says.