The Growing Risk of Personal Liability for Senior Executives

Executives face significant risks as they conduct business in an increasingly challenging and litigious environment, and as business leaders struggle to help their business recover from the Great Recession, personal liability for senior executives is fast becoming a growing concern.  Construction executives frequently believe they have no personal risk in operating their businesses.  Unfortunately, they may learn a costly lesson when they incur defense costs or, worse, pay settlements, judgments, or even face criminal liability.  There are countless potential bases for personal liability.  Many stem from the construction work itself, while others are tied more to the management activities.  The following are a few of the growing areas that should concern senior executives:

• Errors and Omissions and Insurance Gaps - It is well known that architects and engineers can be personally liable for any performance that deviates from the standard of care in the industry.  However, most professionals are unaware of the many exclusions and conditions within their policies, and professionals can easily find themselves without coverage if they are not careful.  In addition, as the construction community strives for more collaboration, contractors may find themselves without insurance coverage to the extent that they provide design-assist services, as most commercial general liability and builders risk policies exclude this risk, leaving contractors who perform design services unprotected.

• Foreign Corrupt Practices - As construction firms expand their business overseas, they frequently encounter cultures where bribery is an accepted business practice.  Regardless of the foreign culture, such conduct could expose the executives involved to civil or even criminal penalties at home, as U.S. authorities clamp down on U.S. firms involved in corruption overseas.

• Director & Officer Liability - There is an emerging trend among disgruntled shareholders and bankruptcy trustees to try to hold a company’s directors and officers personally liable for the company’s disappointing performance or bankruptcy.  While most large companies now purchase D&O liability insurance to try to protect their executives, some bankruptcy courts have barred the executives from using policy funds to pay legal defense fees in order to preserve the policy funds for the company’s creditors.  As a result, executives are forced to use their own assets to defend themselves, often facing six figure legal fees.

• Sarbanes-Oxley - Sarbanes-Oxley imposes civil and even criminal penalties upon senior public companies’ executives who fail to satisfy their oversight responsibility.  Senior executives now have a serious and compelling personal incentive to take reasonable steps to try to discovery whether fraud has occurred within their organizations.  Under section 302 of the act, CEOs and CFOs must individually affirm the accuracy of the business’s financial statements, under the pains and penalties of perjury and the risk of criminal prosecution. 

• Employment Practices - Various state and federal employment laws impose personal liability on controlling senior executives for company violations.  Senior executive can be personally liable for discrimination, OSHA and wage-hour violations, denial of overtime, failure to grant leaves of absence, equal pay issues, failure to provide proper notice of extension of benefits, and immigration and form I-9 issues and other violations. 

• ERISA - Many companies offer 401(k) plans to their employees as a benefit, however, executives from these firms face personal liability if they do not take adequate steps to ensure that employees have fair and reasonable investment options.  Companies offering a retirement plan must appoint a plan trustee who is responsible for the plan’s proper operation.  This administrator owes a personal and fiduciary duty to the plan’s participants to look out for the participants’ best interests.  This includes making sure that investors have reasonable investment options and do not need to pay unreasonable investment fees.  Even if the company attempts to outsource this responsibility, the plan trustee will still be personally liable for the selection and oversight investment manager.

Senior executives face a variety of perils in today’s litigious business climate, however, most of these threats can be significantly limited through effective legal and insurance planning.  While it is impossible to remove all risk, proactive companies can help their executives to greatly reduce their potential personal exposure. 

Learn more about Preti Flaherty's Professional Services Practice here or contact Timothy Bryant or Ken Rubinstein with questions.