Questionable partners happen.

The Mistake. 

A marketing/public relations firm is retained to develop and implement a media campaign for a group of small business owners sponsoring a three-day town fair. Per the contract, the firm was required to advertise the fair on local radio, television and in the newspaper. The firm subcontracted the media purchasing to a media-planning company. The business owners provided the funds to the PR firm who then passed the funds to the media-planning firm to execute the purchases. However, the principal of the media-planning firm absconded with the funds. Advertising for the event was never purchased. Since the fair did not reach its expected turnout, the association sued the marketing firm for failing to do adequate due diligence on the media-planning firm. In addition to the lost funds, they alleged damages, including the fair’s operating losses, were a result of smaller crowds.

The Consequences

Marketing Firm:
Deductible: $5,000
Lost work time: 12 days for Principal = $10,000
Lost Client: $7,000
Increase to E&O premium at renewal: $2,400
Total: $24,400

Defense costs: $32,000
Indemnity: $185,000 ($45k in stolen funds, $140k in operating losses)
Total cost to carrier: $212,000 (after deductible)
Total Costs of Claim: $236,500

The Avoidance

  • Perform due diligence on subcontractors, including contracts and fidelity requirement.
  • Establish a direct bill/payment system between the media outlets and the client.
  • Set up and follow through on deadlines for print/radio advertising to be submitted to vendors.