Corporate insurance is much more important these days. Adequately covering directors and officers is much harder and more expensive. The risks and liabilities are much better defined - but also much more severe. Investors need to make sure that the right coverage at the right price is firmly in place.
The board of directors has a fiduciary responsibility to protect the assets of the company they serve. Good governance involves the use of insurance for various predictable risks. Some companies opt to self-insure for some risks, a strategy to employ when a company has a large number or employees or a large amount of control over the activity they are self-insuring against. If a company chooses to purchase insurance against risk, a good understanding of the policy chosen is important. In today's litigious society, a company, CEO or corporate director cannot afford to be without coverage.
When reviewing insurance policies, directors or committees should pay particular attention to exclusions. Exclusions are items not covered by a particular insurance policy. The following are three main reasons why certain issues are not covered:
Covered elsewhere: Insurance companies write policies in an effort to provide companies with protection for a variety of issues. Some things are included in coverage while other things not. Companies must add to the policy if they need a particular risk covered not addressed in the policy they are reviewing. An example would be a company using sales vehicles or delivery trucks. Automobile accidents would not be covered under the company's general liability policy even though delivery is part of the company's normal work activities. This item would likely be marked as covered elsewhere, because the insurance company believes the company will carry automotive insurance in addition to general liability insurance.
Covered only by extra cost or modification: This is an attempt by the insurance provider to keep the cost of basic insurance low. This also provides an opportunity for companies to be able to add items where they are particularly exposed and eliminate the costs associate with items their company believes have a low probability of happening.
Uninsurable: These exclusions are generally low probability risks with very high costs if they were to occur, such as warfare, or nuclear accidents or even intentional damage. These events might be covered by the federal government or through special programs.
Insurance coverage like most other business activities should be selected strategically to protect the company from catastrophe. When reviewing the company's current policies and the future needs, the board should assign a committee to conduct an assessment of loss analysis. An adviser in risk management can be a valuable resource to assist a committee with identifying the true costs of losses and guide the company in securing adequate protection to off-set likely future losses.
A risk management professional can also educate senior management and staff on the fundamentals of risk management. The board may also choose to utilize coaching programs to train employees on the most important risk and exposures costing the company the most. Strategies can be developed to provide financial rewards to employees for safe and productive work habits. By focusing on reducing specific losses, a company can reduce the most frequent or the most expensive losses.
Coaching for success can be a strategy to implement changes in the workplace to lower exposure and cut insurance premiums. Some large insurance companies will provide risk management experts to assist a company with identifying and reducing exposure to certain losses. Corporate boards should charge at least one director with risk management responsibilities and the CEO should report on losses at each board of directors meeting.
Insurance is necessary to conduct business in today's litigious business environment; however, professional governance will find ways to mitigate risk and to minimize exposure and losses wherever possible.
© Dr. Earl R. Smith II
The board of directors has a fiduciary responsibility to protect the assets of the company they serve. Good governance involves the use of insurance for various predictable risks. Some companies opt to self-insure for some risks, a strategy to employ when a company has a large number or employees or a large amount of control over the activity they are self-insuring against. If a company chooses to purchase insurance against risk, a good understanding of the policy chosen is important. In today's litigious society, a company, CEO or corporate director cannot afford to be without coverage.
When reviewing insurance policies, directors or committees should pay particular attention to exclusions. Exclusions are items not covered by a particular insurance policy. The following are three main reasons why certain issues are not covered:
Covered elsewhere: Insurance companies write policies in an effort to provide companies with protection for a variety of issues. Some things are included in coverage while other things not. Companies must add to the policy if they need a particular risk covered not addressed in the policy they are reviewing. An example would be a company using sales vehicles or delivery trucks. Automobile accidents would not be covered under the company's general liability policy even though delivery is part of the company's normal work activities. This item would likely be marked as covered elsewhere, because the insurance company believes the company will carry automotive insurance in addition to general liability insurance.
Covered only by extra cost or modification: This is an attempt by the insurance provider to keep the cost of basic insurance low. This also provides an opportunity for companies to be able to add items where they are particularly exposed and eliminate the costs associate with items their company believes have a low probability of happening.
Uninsurable: These exclusions are generally low probability risks with very high costs if they were to occur, such as warfare, or nuclear accidents or even intentional damage. These events might be covered by the federal government or through special programs.
Insurance coverage like most other business activities should be selected strategically to protect the company from catastrophe. When reviewing the company's current policies and the future needs, the board should assign a committee to conduct an assessment of loss analysis. An adviser in risk management can be a valuable resource to assist a committee with identifying the true costs of losses and guide the company in securing adequate protection to off-set likely future losses.
A risk management professional can also educate senior management and staff on the fundamentals of risk management. The board may also choose to utilize coaching programs to train employees on the most important risk and exposures costing the company the most. Strategies can be developed to provide financial rewards to employees for safe and productive work habits. By focusing on reducing specific losses, a company can reduce the most frequent or the most expensive losses.
Coaching for success can be a strategy to implement changes in the workplace to lower exposure and cut insurance premiums. Some large insurance companies will provide risk management experts to assist a company with identifying and reducing exposure to certain losses. Corporate boards should charge at least one director with risk management responsibilities and the CEO should report on losses at each board of directors meeting.
Insurance is necessary to conduct business in today's litigious business environment; however, professional governance will find ways to mitigate risk and to minimize exposure and losses wherever possible.
© Dr. Earl R. Smith II
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