QUESTIONS DIRECTORS SHOULD BE ASKING ABOUT CORPORATE RISK MANAGEMENT

1. Do we carry directors and officers (D&O) liability insurance?

   Background: Common wisdom has been that D&O coverage is only important for public companies.

   This is no longer (if it ever was) true.

   Almost 50% of claims are brought by parties other than stockholders: employees, customers, competitors, government agencies, other third parties.

   Examples of types of claims (other than stockholder claims): wrongful termination, discrimination, refusal of credit, unfair business practices, civil rights violations.

   If an IPO is planned, D&O coverage will be crucial because claims can arise if stock performance is not as buyers had been led to expect.

2. Are we doing everything we can to minimize our liability under ERISA (the Employee Retirement Income Security Act)?

   Background: Employee retirement plan issues are leading to more lawsuits against employers, and this problem is expected to worsen. CEOs, CFOs and Board Directors should be aware of this so they can take preventive action and/or decide to finance the exposure via fiduciary liability insurance.

   In the attempt to protect assets of employees, ERISA imposes obligations upon retirement plan "fiduciaries," and fiduciaries can be sued for failing to meet these obligations. Two vaguely defined duties of fiduciaries are acting with prudence and diversifying to minimize risk. ERISA, Section 404(c) grants some protection from liability as long as there is "participant control" of the investments. Employees must also be given "sufficient information." Sorting out all these issues is not easy. It would be wise to obtain a copy of Department of Labor interpretive bulletin 96-1 of 29 CFR, Part 2509 which attempts to shed light on the requirements.

   Because the issues are so complicated, most employers carry fiduciary liability insurance.

3. Are we protecting ourselves against employee suits?

   Background: Employees can sue - and are suing - their employers, and in greater numbers than ever before. Three major categories of employee suits are discrimination, wrongful termination and sexual harassment.

   Risk management in these areas is very effective. The various statutes and case law have given human resource people rules to follow. Theoretically, if you follow the rules, you will be okay. This applies both before the loss (hiring practices, etc.) and after the loss (how the employer reacts when first made aware of the "situation"). Courts have found in favor of employers when, after advised of the complaint, the company immediately springs into action with prompt and thorough investigations and disciplinary action.

   Risk management is not foolproof, however. The company may need to go through expensive litigation just to prove it did nothing wrong and companies may be held responsible for the actions of managers and supervisors they employ. Also, the 1991 Civil Rights Act specifically allows jury trials in most personnel actions, a frightening thought to employers. Because of all this, insurance is available and many employers have bought it.

4. What umbrella limits are we carrying?

   Background: You know there is a chance your company could be involved in a major lawsuit. However, you are probably not sure how much umbrella insurance to maintain in these litigious times. [The umbrella policy is the liability policy which provides excess limits over and above underlying general liability (including products), automobile liability, employers liability, etc.] Umbrella limits companies carry can vary from $5 million to $500 million, depending on the size of the company and the exposure.

   Consider the following questions and criteria when setting your umbrella limits:

   • What is the extent of your products liability hazard? Products expose the business to large numbers of customers. A product defect or problem may have been replicated many times, subjecting many of these customers to its effects.
   • Are automobiles used in your business operations? The automobile exposure is catastrophic by nature.
   • Where is the business exposed to bodily injury claims by the general public?
   • Are there concentrations of people other than employees on business owned or operated premises? Hospitals, hotels, theaters are examples where large numbers of people are subject to a single occurrence like fire or collapse.
   • What are the property damage exposures? Tenants in large buildings could be responsible for destruction (by fire, for example) of the entire building.
   • What is the legal climate to which you are exposed? The section of the country or world in which you operate will influence the potential for damages. The U.S. is prone to higher awards than other parts of the world, and certain states in the U.S. like California and Texas are also prone to sizable awards.

   You should pick limits after an in-depth review of exposure to risk, the company's ability to absorb a major loss and the comfort level which you expect.

5. Have we bid our insurance program lately?

   Background: The insurance industry is very responsive to competition, in fact is driven by competition. You cannot expect a simple negotiation with a single broker to yield the price reductions (and coverage enhancements) you should expect. Even when your broker says he is bidding your insurance program out to several insurers, this is not true competition. A truly effective insurance bid involves more than one broker. The timing of the bid is important. Usually we suggest a bid every three or four years, and not more frequently than that. Bids should be conducted professionally including production of insurance specifications, allocation of insurance markets and a thorough analysis and evaluation of the proposals including detailed comparison of policy language. If your company hasn't conducted a bid in quite some time, you may be shocked to find out how much better you can do by putting the wheels of competition in motion.

Frank Licata, J. H. Albert International Insurance Advisors, Inc. 781-449-2866.

J. H. Albert is a consulting firm in Needham, MA offering impartial counsel. It does not engage in the sale of insurance.

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