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Directors and Officers On the Line For The Importance of Protecting Corporate Assets

Date

November 1, 2005

Read Time

4 minutes

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The protection of corporate assets is key to ensure not only the longevity of the corporation, but also to guard against shareholder suits against Officers and Directors. One of the major changes in the corporate climate over the past few years is the enactment of Sarbanes-Oxley, resulting in increased liability of Directors and Officers. In today’s climate, Directors and Officers must be strident in overseeing the workings, and protection, of the corporation. If corporate assets are not adequately protected via the appropriate risk management tools, and litigation ensues culminating in a hard hit to the corporate bottom line because sufficient, or the right kind of, insurance was not in place, it is easy to imagine shareholder litigation against Officers and Directors. The shareholders might claim, for instance, that the Officers and Directors did not adequately ensure protection of the company’s assets.

Risk management should be an essential, corporate consideration. It is a specialty unto itself and should be treated as such. Whether to protect corporate assets by purchasing insurance, self-insuring or creating a captive, as well as the types and limits of insurance, requires a specialized knowledge taking into consideration numerous factors including: emerging case law, damage awards, the corporate market, the geographic span of the company, the company’s loss ratio, available insurance products, and options as well as coverage law.

A solid risk management plan requires ground-up analysis to ensure that the best possible protection is in place. In order to achieve a well-thought through risk management plan, consulting with a specialist is key. At the very least, the following factors should be considered:

  • The type of business will affect the type of insurance which may be necessary. A manufacturing company, for instance, will need insurance which provides protection from product litigation, while a service industry company will not need such protection.
  • The geographic market of the business will affect the scope and limits of the insurance as well as necessitate consideration of the appropriate carrier. A company which only does business in the Midwest will likely be subject to different issues and liability risks from one which competes in the national marketplace.
  • The current and emerging legal climate should be considered in determining both the type and amount of insurance, or whether your company might receive a greater benefit from a captive plan. Examples of the way changes in the legal climate affect corporate bottom lines are: (1) shareholder litigation has increased the risk and size of corporate payouts; (2) mold litigation directed against owners and managers of real estate companies has reached such proportions that it may be difficult to obtain insurance protection for these losses.
  • The company’s loss ratio and the loss ratio of the industry in general. The consideration of the number and seriousness of claims made against the company must be considered as well as the same information for the relevant industry as a whole. Obviously, claims emanating from a company which specializes in information technology will be far different from those specializing in medical device manufacturing. The loss ratio will be key in determining the limits of insurance and the premium amounts or whether a particular company might fare better in a captive.
  • The short- and long-term corporate market plans are key. If, for instance, the company is developing a new product or idea, it should ensure that protection for that product or idea is in place as soon as possible. Intellectual property protection, for example, may be key. This type of insurance can be extremely important as the more established or cash rich company may file litigation challenging the smaller company’s rights to a product or idea, knowing that the smaller company does not have the cash to withstand the legal fees and expenses of litigation and thereby essentially putting the small company out of business before it begins.
  • The assets owned by the company. Whether your company owns buildings, facilities, or simply rents, all of these factors should be considered to ensure the right type of protection is in place.
  • The amount of premiums versus liability limits. It is often beneficial to consider the ratio increase of limits to premiums. For instance, a corporation may be able to significantly increase its limits, or purchase excess coverage, for a rather minimal increase in premiums, as generally, the risk of loss is less at higher limits than it is for first dollar coverage. Thus, the premiums or cost of this higher cover is often significantly less and affordable.
  • A coverage chart should be developed to denote your insurance protection and to provide a tool to clearly analyzing your company’s risks and gaps.

In summary, risk management should be considered one of the major tools protecting the corporate bottom line. Sarbanes-Oxley has increased the responsibilities of Officers and Directors, and it is not difficult to envision corporate management being placed in line for the liability of a company which failed to protect its assets by way of risk management.


Filed under: Employment & Executive Compensation

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