The Optional Coverages – Are they really optional?

The Optional Coverages – Are they really optional?

Employment Practices, Directors & Officers Liability, Employee Dishonesty/Crime/Fidelity, Fiduciary Liability, Cyber 

When insurance coverage is required by specifications and you intend to win that job, your decision to buy the insurance is easy. The hard part is finding the right coverage at the best price.

But, what about the optional coverages? I’m not talking about coverage for buildings, equipment, and property. I’m talking about protecting your reputation, your family, your livelihood, and the livelihood of your business partners and employees – the most important assets of all!

We all know the basics of risk management – Risk Identification, Risk Analysis, Risk Avoidance, Risk Prevention, Risk Reduction, and Risk Transfer.  Every decision we make involves risk management analysis – formal, informal, or inherent.  As a business owner, director, or officer, you’ve automatically assumed tremendous risk. You make decisions constantly that impact your clients, vendors, creditors, shareholders, employees, sub-contractors, and the family members of all of those connections.  It is virtually impossible for you to contemplate how your actions can affect all of the people who are connected to your business.  You simply don’t have the time or the resources.

The insurance industry offers a number of products specifically designed to protect you AND provide resources to reduce and prevent loss. These products are rarely required by specifications or by law making them technically optional. I would argue that, unless you have no one depending on the outcome of your decisions, and therefore live in a vacuum, transferring some of this risk using available and affordable insurance products is essential.

So, what are these products?  In general, five major coverages fall under a blanket product called Management Liability Insurance – Employment Practices Liability Insurance, Director’s & Officer’s Liability Insurance, Fiduciary Liability Insurance, Crime Insurance or Fidelity Bonds and Cyber Liability Insurance.   In addition to providing coverage, most of these products include access to online portals, response teams, hotlines and defense attorneys – all designed to minimize your risk.  Unlike other insurance products, these coverages come with immediate benefits.  In addition, we are seeing an increase in requirements for Crime Coverage and Cyber Liability coverage in specifications.

Describing each of these coverages in detail is beyond the scope of this article but, I hope I’ve given you an incentive to learn more. If not, let me leave you with a few coverage scenarios provided by our insurance companies:

Sexual Harassment

XYZ Inc. is a construction company in Detroit.  Jane was hired six months ago as a laborer on a road crew in Minnesota. She was one of only two women on the road crew. When she failed to show up for work for two days, she was sent a termination letter. Two weeks later, Jane’s attorney sent a letter to XYZ alleging sexual harassment.   Jane alleged that her supervisor, Mr. Smith, and one of her co-workers, Mr. Jones, made sexually explicit comments to her. In addition, Jane alleged that Mr. Jones grabbed her inappropriately and brushed up against her. She alleged that Mr. Jones asked her if she wanted to have sex with him and often bragged about his sexual conquests. Jane said that she told Mr. Smith that Mr. Jones made her uncomfortable at work, but Mr. Smith told her “she was being a baby.” As a result, Jane alleged that she could no longer return to work as a result of a hostile work environment.  XYZ had a written sexual harassment policy which was reviewed by its attorney. In addition, the policy had a good reporting procedure which instructed all employees to report any discrimination or harassment to the HR department in Detroit. Jane did not take advantage of these complaint procedures which would have provided XYZ with a good defense. However, XYZ Corp. did not distribute the policy to many of its new employees on the road.  XYZ Inc. crew, including Jane. As a result, Jane reported the matter to Mr. Smith who did not handle the complaint appropriately settled the matter for $100,000. – Scenario provided by CNA

Misrepresentations – long term disability plan

XYZ is a manufacturing company that specializes in women’s apparel and had a long-term disability program for its employees. A few years ago, one of its employees, Mr. Smith, was injured in an automobile accident. He called the HR manager at XYZ who told him he would not be eligible for disability benefits under the program because he was not employed at XYZ for long enough. The HR manager did not realize that Mr. Smith was covered under an exception to the policy and was eligible for benefits. Mr. Smith sued XYZ and the plan for violation of ERISA and demanded lost benefits and attorney’s fees. He was awarded $95,000 in lost benefits as well as an additional $200,000 for attorney fees. – Scenario provided by CNA


A former employee filed a complaint with the Department of Labor and later filed suit alleging FMLA violations. The claimant contended she was on leave for pregnancy complications and was terminated for falsifying a physician’s note to extend her leave. The parties eventually settled, and $28,000 was paid toward settlement and defense costs. – Scenario provided by Great American


A former employee alleged he was terminated for complaining about unsafe work conditions. The matter settled for $35,000, but only after $70,000 was incurred in defense costs. – Scenario provided by Great American

Discrimination/Failure to Accommodate/Retaliation/Wrongful Termination

An HVAC installer suffered a knee injury and went on a covered leave. When the employee said he was returning to work, the employer sent a back-dated letter stating that because leave had been exhausted and the company had not heard from the employee, the company would consider him to have resigned. The employee claimed that he had provided a doctor’s note extending his leave and should not have been terminated. The employee alleged disability discrimination, failure to accommodate and engage in an interactive process, retaliation, and wrongful termination. The settlement was for $200,000 in favor of the employee.  – Scenario provided by Hanover

Discrimination/Failure to Accommodate/Retaliation/Wage and Hour Violations

What happened: An office manager was terminated after being out on sick leave. She turned in a doctor’s note and then had the leave extended two days later. While she was out of the office the owner discovered that she had not billed their clients for months and the company was losing money. The termination letter stated she was dismissed for failing to report to work for two days. The company claimed it never received the second doctor’s note. She alleged disability discrimination, failure to accommodate and engage in the interactive process, retaliation, as well as wage and hour violations. The Settlement was $150,000 in favor of the employee. – Scenario provided by Hanover

Unfair competition

A construction company bid on a project to redesign and build highway off-ramps.  Just after placing the bid, an engineer who contributed to it left for a competitor. The competitor also bid on the project with the new engineer’s help and won. The former company accused the engineer of sharing confidential information. The engineer’s former employer issued a cease and desist letter, then sued for tortious interference with prospective business advantage, unfair competition, trade secret violation, and breach of the non-compete agreement. It cost upwards of $1 million in defense and settlement costs to resolve. – Scenario provided by Travelers

Data Breach

A small construction firm maintains employee and 1099 contractor records on its network. The records contain private personally identifiable information for tax reporting, including social security numbers/taxpayer IDs. The firm’s network security is breached. The attacker steals personal records. The firm must notify all affected individuals in writing. It also purchases one year’s worth of credit monitoring services on its behalf to detect unauthorized activity in its credit accounts. Later, the attacker sells the stolen information to an ID theft ring. The ID thieves age the information for a year (after credit monitoring stops). They then begin using it to fraudulently obtain credit in the name of the compromised individuals. The affected individuals sue the firm for breach of privacy and seek consequential damages. Defense costs totaled $500,000, privacy expenses were $100,000 and customer damages were $900,000. – Scenario provided by CNA

Breach of contract

A family farm underwent substantial growth in the past 40 years and is now a large regional company. Two grandchildren of the founder ran the daily operations and are board members. Three other grandchildren are shareholders but not involved in operations. The family decided to forego annual distributions to shareholders to make capital investments to support continued growth. The three shareholder grandchildren and their spouses sued the board demanding payment of the annual distribution and access to financial records and asserting breach of contract. This situation cost the farm $400,000 in defense and settlement costs.  – Scenario provided by Travelers

Employee Theft

An employee of a small private firm embezzles $250,000 from her employer over a four-year period.  The employee obtained the necessary signatures on the checks either by altering the payee upon being signed by an authorized individual or by using a facsimile signature stamp. She then issued checks in her name and purchased items for her personal use. The firm was reimbursed for its loss.

Employee Theft of Client Property While on Client Premises

An accounting firm places several of its employees with one of its clients to help complete its monthly payroll. As a part of the accounting firm’s placement contract with the client, they are required to provide protection against theft by their employees. One of the accounting firms’ employees steals several of the client’s laptops. The accounting firm reimburses its client and is paid for their loss.

Forgery and Alteration

An unknown individual gains access to an insured’s accounts and obtains checking account numbers. The individual creates $5,000 in fictitious checks using the insured’s account numbers and goes to a check-cashing business to cash them. The check cashing company contacts the insured requesting it transfer funds for the fraudulent checks they have paid. The insured is paid for the loss and is able to reimburse the check cashing company


Tonry Insurance Group, Inc. has two convenient locations in Massachusetts, Braintree Executive Park, 150 Grossman Drive in Braintree, and Bedford Street in Lexington. Tonry has served New England insurance clients since 1926, providing personalized, professional service and competitive product pricing from a wide range of local, regional, and national insurance companies. Our courteous, knowledgeable staff has the experience to assist you with all of your insurance needs