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).

The view from 30,000 feet: One of the most important roles of any executive is to orchestrate and gather resources that can help them to optimize the performance of their company. There are many risks — organizational, strategic, traditional hazards, regulatory, environmental and technology, just to specify a few.

The C-Level executive must be in a position to draw upon talent in every area to better identify risk. The investors require it. The Board requires it. Employees require it. Orchestrate and gather your resources!

Many times losses (physical, human and financial) are the result of not identifying hazards that can lead to a loss. Sometimes it’s just common sense. And other times it’s a lot more involved.

Be proactive in your approach. Identify potential hazards and remove them or have them eliminated. It can save you, your business and most important of all, your employees from suffering serious harm.

Example: There, on every pack of cigarettes, is the Surgeon General’s hazard warning. It’s there for the consumer’s enlightenment.

But what about the hazard cigarettes pose for the company? If smoking is allowed in your building there is an increased likelihood that fire will occur.

And, relatively speaking: How great a hazard is that compared to the overloading of workplace outlets or if your non-licensed maintenance/repair staff installs additional electrical wiring in a shoddy manner thereby increasing the likelihood of a short which could cause a fire? This may seem to be getting down to fine detail, but sometimes this is the difference between the success and the failure of a risk management program.

Always keep in mind: Risk management is not meant to be negative. It is clearly a positive opportunity to increase margins and decrease expenses – resulting in an increased or optimized return on investment.

The real trick is to recognize and address hazards that can lead to a potential disaster or even an opportunity. While most C-Level executives are lay people in this regard, there are experts in varying disciplines as well as loss control experts who can assist in identifying these hazards.

Perform a due diligence study when acquiring or merging with a company, buying property or forming a new company.

Scenario:

Recently we received a call from a company that was looking at a 50% increase in their workers compensation insurance. They were moving their company from New Jersey to New York. They were surprised to learn at the last minute that the rate in New York for the classification of their business was double as compared to the rate in New Jersey. This situation might not have been avoidable but at least it should not have come as a complete surprise.

A more compelling example might be that after an acquisition has been made it is only then that you find out what the true cost of the insurance and risk management program really is along with the fact that the liability assumed is way in excess of that which was disclosed or recognized on the balance sheets. Of course when the extra insurance costs are discovered it obviously will have a direct impact on the purchasers return on investment. This situation skews the profit margins assumed when the acquisition was pending.

Bottom Line:

It is vitally important to a company’s balance sheet and projected profit margins that due diligence analyses be performed by an insurance professional, as a part of the due diligence team, prior to an acquisition, merger, purchase of new property or contemplation of forming a new company. Doing so will provide you with complete disclosure and have a positive impact on your long term return on investment.

The “notice” provisions in all insurance policies should be modified to mean notice to a specific individual.

 Here is another one of those “missed” clauses. How many times have you heard someone say “I never received the notice”?

Just recently a prospect was explaining to us that they were sent a letter from a law firm placing them on notice of a potential claim. “Someone” at the front desk apparently signed for the letter but it never reached the person in charge of handling the insurance.

A second request was sent but months later, which was finally forwarded to the insurance carrier. Unfortunately, the second letter placing the insurance carrier on notice was submitted after the expiration of the prospect’s claims made policy.

The insurance company held their position that they would not defend on the basis of late notice because the first letter the plaintiff’s attorney sent was in fact signed for by the insured (someone in their office i.e receptionist) and they should have placed the carrier on notice at that time.

Obviously this was a big problem. One way to avert that from happening is to have the insurance policy state that proper notice/knowledge of claim must go to a specific person before the clock starts ticking.

Bottom Line:

The insurance company knows what every single word of the contract means and how various clauses will work at the time of a loss or claim – make certain that you know how your policies will work in the event of a claim or loss.