Really?

For how long?

In a recent New Jersey case, Schoon v. Troy Corp., two directors of were sued for breaching their fiduciary duty.

One of the directors named in the suit had retired from the company a year or two before the suit was brought. Subsequent to the suit being filed, the board had negated the bylaw extending insurance coverage to directors who had left the company.

By-laws can be amended at any time by the board. Thus it is vitally important for all directors to know how the by-laws and amendments to those by-laws affect them personally.

It is also vitally important to make sure that D&O coverage matches the prescribed intents of indemnifications contained in the by-laws. If coverage does not match up a tremendous gap could arise.

If you are contemplating retirement from a board how can you protect yourself?

• Have your Attorney draw up a personal indemnity contract whereby the company or its insurer covers you into retirement for legal fees and damages in cases involving your board service.

• Buy coverage against service related torts for a six year period, after that you will have been gone from the board long enough for them to forget about you, presumably. It is available and not that expensive. Well worth looking in to.

• In addition to the above, request that the company up a “minitrust” to pay the director for any deductibles or retentions that may apply in the company’s D&O policy.

Remember, every D&O policy has different terms and conditions. They can be tailored to meet the needs of your company. The bottom line is don’t get a shocker, review and assess your coverage.

The issues surrounding business survival in the event of loss can be nearly insurmountable even with a comprehensive insurance program in place. Keep in mind that insurance does not cover it all, nor is it meant to.

So how then do you protect your company and save money?

Step #1: First, an assessment of a business’s true needs must be performed to identify company risk and exposure to loss.

Step #2: You need to develop a well-thought-out program on how to lessen, mitigate or eradicate potential exposure to those identified risks.

PROTECT AND SAVE

The true purpose of this exercise is to ensure the protection of company assets and the company’s future should a loss occur.

But let’s go even deeper than that. In a real and practical sense it all boils down to Return On Investment. From the actual cost (hard dollars) of the insurance products (policies) you buy … to loss control and safety programs you institute … to deductibles paid and retentions assumed … to uninsured losses to underinsured losses … to a variety of other factors — all these make up what is called your Total Cost of Risk.

Depending on factors such as a company’s risk appetite, exposures, losses, and insurance coverage purchased, the cost of risk can vary from year to year.

Most businesses have cycles. Just like all real world expenses, over the years we have seen significant swings in the cost of insurance.

As a C-Level exec you’re savvy enough to know that the insurance industry has market cycles (soft – meaning insurance company capacity is high, broad coverage terms are plentiful and premiums are low; hard – capacity is diminished, coverage is restrictive and premiums are high).

Here’s the point: The objective of any insurance and risk management program should be directed toward steadying, if not lowering, costs over a long period of time relative to a particular company’s production (revenue).

How do you think about the cost of insurance?

Is it an expense?

Or an investment?

As a CEO, CFO, COO, VP, Controller, Manager or Board Member of a company, if a part of your responsibility is to oversee or provide input on your company’s insurance program, then -

You ARE a risk manager. Whether or not you are fluent in “insurance” is another issue. Regardless, you still have to ask yourself, “Do I view risk management as an investment or an expense?”

The answer will drive the success of your program.

The recent “Protecting Value Study“ from the commercial and industrial property insurer FM Global, the Financial Executives Research Foundation, and the National Association of Corporate Treasurers (NACT) polled nearly 400 CFOs, treasurers, and risk managers at both U.S. and international companies from a broad variety of industries. They asked the “How do you view risk management?” question.

The study found that 85 percent of the respondents indicated that they view risk management as an investment. In particular, they do so because they believe that it protects their business continuity. As a result, they believe there is a realized return on investment.

One of the surveyed CFOs summed up risk management in this way, “Risk Management is an investment because it is instrumental in protecting the future value of the company and mitigating exogenous events that could impact the ability of the company to generate a positive return to its shareholders/owners.”

Executive level insurance decisions are not just about hedging bets. It’s as fundamental to the well being of the entire business enterprise as the investment in, say, labor or materials. And, as with all investing, the measure of “the best” insurance isn’t necessarily that it’s the cheapest.

Still, the insurance decision-making process often has “how much does it cost” as its pivotal consideration.

Let’s take a more specific look at what exactly risk management is about. Searching the literature I find a number of definitions. Here are a few I think focus your thinking:

1. Risk Management is the practice of protecting an organization from financial harm by identifying, analyzing, and controlling risk at the lowest possible cost.

1. Risk management is the active identification, evaluation and management of all potential hazards and exposures to loss that a company may experience.
2. Risk management should be a continuous process of identifying loss exposures, measuring them against the firm’s ability to tolerate them, then handling them with the appropriate control, transfer or financing techniques.

The most fitting is the first definition because it is very blunt with regard to “protecting an organization….at the lowest possible cost.” Everything else is a discussion point. You should always try to keep this in mind when discussing the purchase of an insurance product or discussing other risk management techniques because, after all, that is what we are all after – the lowest cost.

The challenge is to think about ways in which to reduce costs, properly communicate the pros and cons of each choice and arrive at the proper solution that will best protect the organization.

However, the key to definition #2 is that it has the word “active” in it. It’s absolutely essential that you keep informed about things going on around us – locally, nationally and internationally – that bristle with the potential to affect your business/organization in an adverse way. Once you recognize a certain “exposure”, you must act on it one way or the other. And, obviously, one of the “act on it” steps may be classic insurance.

REDUCE THE RISK / BOOST YOUR BOTTOM LINE

Protecting your organization from financial harm is the #1 Goal. Doing that, at the least possible cost, is admirable (but not practical) – you must be actively involved in recognizing potential exposures and hazards on a continuing basis throughout the year. Jump in with both feet and ask, “How can we improve our risk management program today and tomorrow and beyond?” That’s a continuous process.

Definition #3 identifies risk management as a “continuous process.“ It’s not appropriate to establish or simply renew your insurance program and then put it up on the shelf until next year. Risk management is a continuous process that begins even before a policy is written and does not really end at all.

It is a work in process/progress where you continually look to improve coverage, terms, conditions, claims reporting/handling, loss control/mitigation, exposure analysis/identification and the like, year after year.

From Pensions and Investments; 1 in 2 insurance investment officers heighten risk control

Just over half of insurance company investment officers surveyed said they’re strengthening their risk management practices, and 35% are changing their investment policies and guidelines.

Also, 27% expect to increase their reliance on third-party investment managers, and 14% plan to rely more on third-party consultants, according to the survey of 112 investment officers by Insurance Asset Outsourcing Exchange, an insurance industry research firm.

From P & C National Underwriter: Survey: Insurers Focus Now On Reallocation, Risk Management

Most property-casualty and life insurers find growing and keeping business their biggest challenge and are reacting to the recession by increasing cash allocation and strengthening risk management, a survey finds.

The research was reported by the Louisville, Ky.-based Insurance Asset Outsourcing Exchange, which analyzes and aggregates confidential insurers’ data for exchange participants.

There have also been a few global stories and speeches about risk management that deal directly with the economic crisis, but we do our best to sort through and provide executive level summaries to information that can have direct impact on your business.

Whether your organization is a publicly held company, private company (and yes private companies should have D&O too) or nonprofit it is vitally important to have a thorough understanding of the corporate charter, its indemnification of corporate officers and directors and how the directors and officers insurance policy protects their interests and that of the entity itself.

 Not all policies are the same nor are their meanings.

D&O policies differ from carrier to carrier in many respects – while the primary coverage issue is to indemnify corporate Directors and Officers for defense expenses as well as settlements and judgments made against them – how each carrier does that is the real issue. There are very subtle differences.

Bottom Line:

When dealing with D&O policies and coverage make sure that you have a full understanding of the terms and conditions that are incorporated into that particular policy – it may surprise you as to what and who is actually covered and how the policy will respond once a claim has been filled (that’s really when it counts).