3 Management Risks Faced By Staffing Firms (and How D&O Insurance Can Help)
March 9, 2022
Today’s society places a harsh spotlight on corporate practices. If you’re not the CEO of a multimillion dollar staffing agency or a publicly traded firm, you might not think you’re at risk. But the truth is: there are countless management risks all private companies face on a day-to-day basis. And given their unique position as the bridge between employer and employee, Staffing & Recruitment firms are particularly vulnerable to corporate litigation.
Unfortunately, the consequences for business leaders facing allegations of mismanagement can be severe. According to recent data from Victor Insurance, mismanagement claims cost nearly $60,000 on average to defend. Both your business and personal assets could be at stake, especially if drawn out litigation drives up your defence costs. And if your company is unable or unwilling to reimburse your losses, as an appointed Director or Officer, you could be left personally responsible for paying the damages.
Directors & Officers (D&O) Insurance can help. While Staffing & Recruitment firms aren’t contractually or legally obligated to purchase D&O Insurance, it’s the only coverage that’ll shield both your corporate and personal assets from the threats of today’s business environment. Skeptical? Here are three common management risks faced by private staffing firms and how a D&O policy can help you protect your interests.
Disclaimer: While the claims examples outlined below are realistic in nature, they are not based on any particular individual, situation, or circumstance and are intended to demonstrate the importance of Directors & Officers Insurance for effective corporate risk management. Any resemblance to actual persons or real events is purely coincidental.
1. Wrongful Dismissal
At 44%, wrongful dismissal suits are the number one management claim for business leaders. Why? Even if you’re not directly responsible, a disgruntled employee won’t just name your company in a lawsuit if they’re looking to recoup a loss—they could also name you personally. And since business leaders in Staffing & Recruitment firms tend to wear multiple hats and be more closely involved in company affairs, they’re more likely to be sued over a bad placement or termination.
Even worse? Wrongful dismissal suits are fairly easy for employees to prove, especially in Ontario. While employers have the right to terminate anyone for good reason, all employees have to do is show proof they weren’t provided adequate warning or “reasonable notice of dismissal” to win the suit, regardless of why they were fired in the first place. Plus, adequate warning for each employee differs based on a variety of factors, like their role, age, years of service, and more, and even though your employment contracts may specify a standard period of reasonable notice, not all contracts are legally enforceable.
A recruiter at your staffing agency is fired, with cause, for removing classified documents from the company office, which goes against your corporate policy. The recruiter sues the company and you, as the CEO, for wrongful dismissal, alleging that you gave verbal permission to take the documents home so they could work over the weekend. Ultimately, the jury finds you not guilty, but the total cost to defend is extensive. Rather than investing your earnings back in your business, your firm is forced to allocate funds to defend the claim.
HOW COULD THIS HAVE BEEN AVOIDED?
Directors & Officers Insurance protects past, present, and future directors, officers, board members, senior managers and executives, and other business leaders if they’re held personally liable for any actual or alleged wrongful acts in managing a company. That means if your firm chooses to cover the cost of legal fees, defence, and settlements on behalf of a business leader, D&O Insurance will protect your balance sheet by providing a reimbursement for all expenses incurred.
2. Coverage Exclusions
If you’re hit with a mismanagement claim, you might expect your company to foot the bill, especially if they’re financially strong enough to withstand a loss. But while company bylaws generally provide some level of claims support to business leaders, there are several instances in which your organization may be unable or even unwilling to reimburse you, whether that’s due to insufficient capital, legal clauses, or conduct exclusions if they feel you’ve acted in bad faith.
Even if the allegations are frivolous, you’ll still have to pay for a lawyer to defend you. And these days, attorneys are looking to capitalize on heightened public sentiment against businesses and corporations by taking more claims to trial, raising your defence costs overall. If your company can’t cover your losses, you’ll have to pay out-of-pocket. You could lose everything you’ve worked for—your home, your car, and your hard-earned savings. If the allegations are serious enough, even your spouse’s assets could be on the line.
Your agency secures a top software developer for a placement with one of your IT clients. Unbeknownst to you, the software developer had an existing employment contract with a competing tech firm. The competing firm sues your agency, alleging that you violated a no-poach clause in the contract. After a long trial, your competitor is awarded thousands in damages. Your agency can only afford to cover the legal defence fees, leaving you to pay the rest. Without adequate coverage, you must sell your personal assets to afford the costs.
HOW COULD THIS HAVE BEEN AVOIDED?
In addition to corporate reimbursement, Directors & Officers Insurance also offers personal liability and asset protection for business leaders. If you’re sued personally and your organization isn’t able to reimburse you, D&O Insurance will cover the defence costs, damages, and settlements from a lawsuit, protecting you and your spouse’s assets and your estates in the process.
3. Employee Lawsuits
While the risk of shareholder suits are low in a private firm, you could still face lawsuits from a variety of parties, including: clients, competitors, creditors, vendors, suppliers, regulators, and of course, employees. In fact, the majority of mismanagement claims—just over 60%—are brought on by employees.
As a Staffing & Recruitment Professional, you know just how aggressive and unpredictable employees can be. But it’s not just your own team you have to worry about. If your firm offers temporary staffing solutions, you’re also exposed to lawsuits from anyone working on assignment, including independent contractors and temporary workers.
You recruit a consultant based out of Toronto for a company in Vancouver on the condition that they can work from anywhere. Despite agreeing, this is not reflected in the company’s employment contract and after a few months they require the consultant to move cross-country to be closer to their head office. The consultant refuses and ultimately quits their job. But because you recruited them, they then sue you for misrepresentation. The total cost to defend and settle the claim is high. Your agency cannot afford the damages and your firm’s reputation is tarnished, resulting in an inability to secure new clients.
HOW COULD THIS HAVE BEEN AVOIDED?
D&O Insurance often comes bundled with Employment Practices Liability (EPL) Insurance, which protects your business from claims brought against you by employees, such as wrongful termination, discrimination, harassment and more. In general, EPL only applies to your own internal employees, not independent contractors or freelancers. However, PROLINK has a unique advantage for staffing firms, which offers up to $250,000 in EPL coverage for temporary employees or anyone working on assignment.
How can D&O Insurance help?
Your firm may already have Professional Liability Insurance and Commercial General Liability (CGL) Insurance to respond in case you get sued. And if you do, you might even have $250,000 of D&O protection for business owners and key employees bundled with your package. But your general liability policies won’t kick in for claims of mismanagement.
Why? Professional Liability Insurance covers allegations of errors, omissions, and negligence, whereas CGL applies to third-party claims of bodily injury, property damage, and reputational harm. In short, they protect your business from mistakes or accidents that occur throughout the delivery of professional services; they don’t cover the blowback from any poor managerial decisions—or the personal liability you’ll face as a result. And your D&O coverage? In the event of a lawsuit, $250,000 is the bare minimum you’ll need to settle a claim, let alone defend.
Regardless of your company’s size, revenue, and ownership status, a dedicated D&O policy is critical. Even if your organization hasn’t had a management claim before, you can’t predict when a choice you made in the regular course of work could result in a lawsuit. Having a standalone policy that’s carefully crafted for your needs will help you avoid financial strain and ensure that mismanagement claims don’t jeopardize your business, your brand, or your assets.
To learn more, watch our video: D&O Insurance: Sail Through Troubled Waters With Confidence.
How can PROLINK help you?
With over 40 years of experience and over a decade of serving staffing firms, PROLINK understands the unique threats you face like no one else. We can share what steps others in your industry are taking and help you chart the road to organizational resilience.
Our dedicated team of risk advisors will help you:
- Navigate industry trends and identify exposures based on your needs and business operations;
- Adopt a proactive approach to risk management to control your costs long-term;
- Conduct a full analysis of your existing insurance policies to detect any coverage gaps; and
- Secure a specialized solution that aligns with your strategic objectives.
To learn more about your exposures—and how you can protect yourself—connect with PROLINK today!
PROLINK’s blog posts are general in nature. They do not take into account your personal objectives or financial situation and are not a substitute for professional advice. The specific terms of your policy will always apply. We bear no responsibility for the accuracy, legality, or timeliness of any external content.