Small to medium sized privately owned film production companies face several of the same management exposures as larger corporations - yet many don't purchase directors and officers liability insurance. A simpler approach could change all of that.
There are several hundreds of production companies in Canada and it is clear they are important to Canada's economy. What's less clear is why so few of them buy management protection in the form of directors and officers (D&O) or Employment Practices (EPL) liability insurance. Several studies show that the take-up rate of management liability protection amongst production companies has been slow.
While Canadian data is scarce, a recent survey by Chubb Insurance found that 37% of U.S. companies do not purchase any type of management liability or professional liability insurance. In a survey of private companies, the majority of survey participants (63%) did not buy directors and officers liability or employment practices liability insurance. Based on our experience, the same trends likely apply in Canada.
Smaller privately owned companies may think their exposure to management liability risks is low or negligible, but that is not necessarily the case. In fact, another study by Chubb Insurance Company of Canada showed that private firms both here and south of the border are facing similar rates of lawsuits against their directors and officers, legal action involving general management liability and lawsuits from their customers.
In a survey released in September 2008, Chubb discovered that private companies in Canada and the U.S. faced similar lawsuits from customers (16%), competitors (5%), Vendors (6%) and partners or shareholders (3%) in the last five years. The average cost of the affected Canadian companies was $338,699. One-third of Canadian companies and almost a quarter of U.S. firms experienced an employment-practices related incident in the last five years. Judgments, settlements, fines and legal fees for such incidents cost affected companies an average of $63,724.
Based on our experience, there are numerous factors as to why film production companies tend to decline management liability protection. Many of the privately held film production companies we talk to say the application process is too cumbersome and the information requirements too broad. The second is that film production companies tend to perceive the price as too high.
Film production companies also tend to have fewer internal control mechanisms, such as human resources or compliance officers and company protocols, than larger suppliers.
Moreover, private held companies are likely to face short-term cash flow issues, which is reflected in relatively higher bankruptcy rates for small businesses.
The bottom line is the film production companies can, and do, face a number of liability issues related to directors and officers and employment practices. Executive and non-executive business owners are increasingly being held accountable for their actions.
We know of several distinct examples of privately held companies facing litigation related to bankruptcy, misrepresentation, wrongful dismissal and dissolution of a partnership. In one case, a retail company over expanded during a time of economic difficulty. Its revenues shrank, but inventory and supplies continued to grow. The result was bankruptcy. The company faced statutory liabilities and the directors were left exposed to pay for amounts owing 9including unpaid wages). The settlement amount came to $765,000 (including $165,000 for defence costs).
In Ontario, Bill 198 has also made it easier for shareholders to sue companies along with their directors and officers. In the last 18 months, the number of lawsuits has increased significantly as a result of this legislation.
It's clear there is a potentially significant coverage gap for many privately held companies in Canada when it comes to management liability. The main purpose of any new D&O or EPL insurance solution should help to protect these organizations.