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Monthly Archives: October 2015

Devastating Reputational Risks

ReputationA strong reputation has the potential to be your largest asset, but just one crisis could irrevocably tarnish your image and ruin your business. According to a recent survey from Deloitte, the largest professional services network in the world, 87 per cent of business executives believe that reputation is their largest risk area, and only 19 per cent of respondents think their business is adequately protected. In order to be prepared, you need to identify and mitigate the potentially devastating risks to your business’s reputation.

Health and safety incidents, product recalls and regulatory investigations are just a few of the incidents that have the potential to damage your reputation; and, now that social media and other online sources have accelerated news coverage, you may only have minutes to respond to a crisis and protect your image. The failure to quickly and effectively address a crisis can result in lost business, litigation, regulatory fines and more.

The Many Forms of Reputational Risk

The damage to a business’s reputation is often the result of other risks. For example, a cyber attack that disrupts your business operations is generally not considered a risk to your reputation. However, an extended disruption could cause customers to think less of your business and its products.

Here is a partial list of risks and events that can cause damage to your reputation:

  • Product recalls or concerns over product quality
  • Allegations of poor or improper business practices
  • Health or safety incidents, involving either employees or customers
  • Regulatory investigations
  • Negative associations with third parties

The Role of Social Media

Social media can be a powerful tool to connect with customers and extend the reach of your business, but it can also be used to quickly spread negative publicity that can severely harm your reputation.

In an increasingly connected world where anyone with a smartphone can act as a journalist, any negative experience a consumer has with your business has the potential to go viral and be seen by thousands—even millions—of people. Make sure that your business has a social media presence that is constantly monitored, and that it quickly responds to any criticism or negative customer experiences in order to maintain your reputation.

Online review services can also damage your reputation and result in lost business. According to Dimensional Research, a United States-based organization that provides market research to technology companies to help them make smarter business decisions, 90 per cent of customers check online reviews before buying products, and 80 per cent make decisions based on what they read. Clearly, the best way to ensure that reviews for your products and services are positive is to maintain effective and comprehensive quality control procedures. However, it’s important to regularly check online sources to get feedback on your products, and to identify malicious or fictitious information that could reflect poorly on your image.

Strategies to Lower Reputational Risks

There is no such thing as complete protection from the risks to your reputation, but there are strategies you can use to limit exposure and respond to a potential crisis:

  • Create strong, relevant corporate values: Upper management should create—and regularly communicate—strong corporate values that permeate every level of your business. Though these may be created by upper management, they should reflect the values of all of your employees and stakeholders.
  • Integrate a risk evaluation into business planning: Identify the opportunities, threats and assumptions that accompany your business’s plans and strategies. Don’t assume that longstanding strategies or well-developed plans are free from reputational risks; instead, develop hypothetical scenarios to identify how your reputation could be affected.
  • Promote positive interactions with customers and other stakeholders: You can strengthen your reputation before a crisis occurs by aligning your goals and connecting with your stakeholders. Customers appreciate regular and positive interactions, and you can use social media as a tool to reach out to them.
  • Develop a reputation plan: Train everyone at your company on how to recognize a reputational crisis, and put together a response team. Your plan should identify all potential risks to your reputation and map out a response for each. These responses should include key statements that identify at least three talking points and restate your business’s core values. If a crisis occurs, distribute relevant messages as quickly and widely as possible.

In the event of a crisis, it’s important to respond quickly and decisively:

  • Don’t sacrifice your reputation to protect your finances or products. It’s usually more prudent to recall a dangerous product immediately; for example, if it’s discovered that you delayed a recall at the expense of health or safety, your reputation may suffer a serious blow.
  • Respond to questions and concerns. If you attempt to stay under the radar during or following a crisis, it will only cause negative attention to linger. Instead, respond to any concerns and continue to communicate your corporate values.
  • Always remember the broad range of your reputational risks. Following a crisis, it may seem easy to only focus on preventing a similar incident in the future. Be sure to keep all of your risks in mind.

Limit Your Risks

It’s inevitable that every business will experience some form of reputational damage, but there are ways to limit your exposures and to cover losses. Contact your insurance broker to identify your unique risks and protect your business.


© Zywave, Inc. All rights reserved.

The Pitfalls of Directors and Officers (D&O) Insurance

business-presentationAfter assessing your company’s risks, you’ve made the decision to purchase Directors and Officers (D&O) insurance. Now what?

It’s essential to know the ins and outs of your D&O policy, including policy limits, what’s covered and, most importantly, what’s not. Why? Because you may assume you’re covered for a claim when policy exclusions could apply. As time-consuming as it may be, it’s critical to read the fine print in your policy, as the language in the exclusions may affect the coverage of potential claims.

Types of Exclusions in D&O Policies

Some exclusions that insurers and insureds dispute concern incidents that happened or allegedly happened before the D&O policy went into effect. In some cases, the insurer simply won’t cover the claim; in other cases, the insurer may render the policy void.

The Known Circumstances Exclusion. With this exclusion, the insurer will not pay for claims that arise from a negligent act, error, omission or personal injury that occurred prior to the start date of the D&O policy. The insurance carrier attests that the insured knew or could have foreseen that any of the above happened and could have been the basis for a claim. This exclusion is found more frequently in private and non-profit policies than in public company policies. What is especially important to note is that the premium is usually not returned to the insured if it is determined that they withheld their knowledge of circumstances that occurred prior to the start of the policy.

In the case of a rescission scenario, the premium is returned to the insured. Rescission means that the policy is rendered void after the insurer discovers that the insured answered untruthfully to any of the warranty questions on the insurance application. Warranty questions ask the applicant if they know of any fact, circumstance or situation that might reasonably be expected to give rise to a claim. Rescission also can occur if the applicant provided false or misleading information in the company’s financial data. These scenarios usually happen only in public company D&O policies.

Prior Acts Exclusion. Similar to the known circumstance exclusion, this exclusion is also concerned with pre-policy circumstances. The insurer is not responsible for wrongful acts committed or attempted before the coverage was enacted. A wrongful act is that which damages the rights of another. These acts are not only limited to criminal offences, but can also include acts that result in civil lawsuits.

Other exclusions found in D&O policies revolve around the duty to defend and defence expenses in the event of a claim. If the insurer has the right to the duty to defend, then they are able to select the insured’s defence and have greater control over the rates and billing practices of the defence counsel.

Reasonableness of Defence Fees. This is more prevalent in private company and non-profit D&O policies, as most of those policies give the insurer the right and duty to defend the insured’s claims, whereas public companies retain the right to choose their own defence counsel. If this is written into your D&O policy, it means that the insurer will only pay for “reasonable and necessary” defence fees. Some insurers also provide detailed information on litigation guidelines.

Consent to Settle and the Hammer Clause. If the insurance carrier has no duty to defend, such as in cases against public companies, then they have no right to settle the case when they want to settle it. As a result, the insured may elect to continue with litigation, even if that would exhaust the policy limit, because the defendants don’t want settling the case to be perceived as an admission of their wrongdoing or incompetence. This creates a lot of tension between insurers and the insured, especially if the insured does not include the insurer in the settlement discussion. Therefore, some insurance policies have a consent to settle exclusion in the policy, prohibiting the insured from settling the claim without the insurer’s prior written consent. The hammer clause is similar to the consent to settle exclusion, although less common. Basically, the hammer clause informs the insured that if they go against the insurer’s recommendation to settle, the insured will be responsible for any judgment won by the plaintiff and legal fees that go beyond the settlement offer.

Most D&O insurers expect that D&O insurance is only a part of a company’s wider insurance portfolio. In some cases, however, this assumption doesn’t always prove to be true. Certain firms may go without Umbrella insurance or even General Liability insurance policies, making D&O one of their only forms of insurance. Because of this, many D&O insurers write exclusions in their policies stating what claims they won’t cover because other types of insurance would potentially cover the claim.

“Other Insurance” Exclusions. D&O insurance is just one form of insurance in a comprehensive risk management plan for most companies. Because of this, most D&O policies have exclusions for claims that involve bodily injury, property damage and fiduciary claims, which could be covered by other types of insurance such as a Commercial General Liability policy or a Fiduciary Liability policy. To protect their best interests in the event of a claim, the insured should notify all insurers from their various policies, thus allowing the insurers to determine who is liable for the claim.

Contractual Liability Exclusion. This exclusion is especially pertinent to private companies and non-profits that have broad entity coverage under a D&O policy. Since contractual obligations are not liabilities imposed by law but rather an obligation that is voluntarily undertaken, many D&O policies have an exclusion that prevents insurers from having to cover contract-related claims, especially breaches of contract that arise when the company enters into a contract with another party. When examining this exclusion in your D&O policy, make special note of the wording of this clause. This exclusion can substantially affect the extent of your coverage under the policy—the narrower the scope of the exclusion, the better for you.

D&O insurance protects directors and officers from poor business decisions, but most policies do not protect them from wrongful acts and gross misconduct. These exclusions include:

Conduct Exclusions. Most D&O policies have exclusions that deny coverage for certain types of misconduct. There are two categories of misconduct exclusions:

  1. For loss relating to fraudulent or criminal conduct
  2. For loss relating to illegal profits or remuneration to which the insured was not legally entitled

It’s especially important to look at the wording on these exclusions in the policy; subtle wording differences can significantly impact the accessibility of the coverage.

Insured vs. Insured Exclusion. In some D&O cases, one insured director may bring a claim against another insured director, and some insurers do not want to cover this because they don’t want to get involved in the infighting between a company’s directors and officers.

Obtaining D&O insurance is important to protect the directors and officers of your company; but simply purchasing the policy won’t benefit you unless you know the extent of your coverage.


© Zywave, Inc. All rights reserved.

Why Excess Liability (Umbrella) Insurance is a Necessity?

Risk umbrellaExcess Liability Insurance (ELI), more commonly known as Umbrella Insurance, is one of the most important types of insurance your company can buy. It protects your business from holes or limits in existing policy coverage as well as from financially draining lawsuits. Just as you carry an umbrella to protect you from a potential downpour, ELI protects your company from the types of claims that could close your business.

Umbrella Basics

Businesses choose ELI to back up the limits contained in their underlying liability policies (commercial general liability, business auto, employer liability, and professional liability.) For the most part, it is used to cover exceptionally large events or losses with low probabilities of occurrence. Without ELI, these events – as few and far between as they may be – would be financially devastating to many companies.

Who should consider ELI?

All types of companies would benefit from ELI. Because it extends coverage so at a relatively small additional cost, many choose to pay the extra price. The amount of coverage needed will always depend on the total value of your assets. Here’s how it works:

  • Assume a jury ordered your business to pay $3 million in damages for a liability claim, but your general liability policy has a $2 million limit. Your company would normally be required to cover the additional $1 million. However, with a $4 million ELI policy, the $2 million commercial policy would exhaust itself, and then the Umbrella policy would cover the outstanding $1 million.

Other Benefits of ELI Coverage

Ultimately, ELI acts as a sort of dual policy, providing coverage in two ways:

  1. Paying liabilities in excess of existing policy limits
  2. Providing coverage in areas not included with existing policies

You have already read how ELI acts with basic coverage to cover costs; however, it also provides extra coverage in other areas by using a Self-Insured Retention (SIR), a dollar amount that functions like a deductible. So if ELI is being used in areas without any other basic coverage, it will kick in after you pay the set SIR.

ELI is also beneficial because an effective policy can save your business money and cover more assets by using fewer individual policies. However, depending on your policy, some coverage may be excluded under ELI. Common exclusions include employment practices liability, professional liability and product recall coverage.


Zywave, Inc. All rights reserved.

Review Your Pollution Liability

Pollution liability

At first glance, your company may not appear to be at risk for the pollution liability exposures facing the heavy manufacturing sector. However, pollution liability coverages also address common exposures that you might face.

Are you adequately protected?

Does your business have all the insurance protection it needs—or does it even have all the coverage you assume is in place? Here are some examples of pollution claims:

  • Carbon monoxide escapes from a restaurant’s heating, ventilating or air conditioning system causing illness and dizziness among patrons.
  • A fuel line on a contractor’s air compressor suddenly ruptures, discharging fluid, which scars a recently resurfaced parking lot.
  • A cleaning compound is inadvertently deposited down the drain of a day care centre, causing fumes, which makes some children ill.
  • A private country club dumps herbicides in an abandoned well, causing groundwater contamination.
  • An off-site service person ruptures a chemical hose, resulting in extensive premise damage.
  • All of these incidents occurred and none were determined to be covered under the applicable commercial general liability policy.

Review your coverage

Every business should review these exposures since coverage varies among types of commercial policies and court interpretations.

Furthermore, individual insurance companies vary with how their policies address the issue, and there are even differences among company claims adjusters, managers and executives in their applications of pollution exclusion clauses.

It is also important to be certain your primary liability policy endorsements track with your umbrella policy so there are no coverage gaps. We recommend careful analysis on a case-by-case basis to avoid any surprises concerning coverage.

One popular solution to gaps in coverage is to obtain additional, specific coverage for on- and off-premise pollution liability or for on-premise pollution liability alone. An alternative may be to add an endorsement, which provides limited pollution coverage to existing policies.

By gaining a better understanding of pollution and product liability and the extent of your policy exclusions, you could avoid unexpected financial loss.


© Zywave, Inc. All rights reserved.



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