Archive for October, 2009

Legal Agreements and Risk Management – Franchising, Leases, Contracts, etc. & Compliance or Non-Compliance

October 29, 2009

Have you ever really given any thought to that legal agreement you have signed or are about to sign?  Have you thought about the insurance and risk management consequences you have or are about to assume on behalf of your business?

An example is a lease that requires $X Million in Liability Insurance – do you have adequate protection currently?  If you are non-compliant with your Landlord’s lease, what consequences might you face?  I know of an instance, several years ago, where the seller of a business had previously provided me with a copy of his lease; the requirement was for $5M (they were serving alcohol) and, to nobody’s surprise, the cost of the insurance was significantly more than it would be for $1M in Liability coverage.  The buyer of that business refused to purchase the mandated insurance from me – and went elsewhere for less cost because his choice of insurance providers did not request to see a copy of the lease.  What happened?  When the lease was to be renewed, the Landlord did not renew it, having chosen to replace the Tenant with a National Franchisee that provided an insurance policy in compliance with the terms of their lease.  And yes, the tenant was required to vacate, not relocating, thus risking the closure of the business.

What about Contracts?  Have you ever contemplated the consequences of a “Hold Harmless Agreement” or an “Indemnification Clause”?  Are you aware that you may be assuming the risk of a supplier or a customer by agreeing to those terms and driving the cost of your insurance policy higher?  Examples abound here with Property Managers, Contractors, etc.

And we all love Franchises, correct?  Did you know that some firms will require that your policy have coverage that may be difficult to find, on a “stand-alone” insurance policy?  This means that you should investigate what conditions are being required and how easy it might be to purchase a policy on your own as opposed to that of the “Master/Franchise” policy.  What about terms relating to the Financial Strength and Rating of your Insurance Carrier?  That “B” rating that your insurance company carries may not be sufficient to retain your franchise.  Or, what if you have a “protected territory” where your risk could be that you face the introduction of another Franchisee into your region because you were in default of the conditions of your Agreement?

Don’t just assume that what you have is the “norm” and that everyone must sign the agreement.  I have seen Loan Agreements with terms that can be amended, no different than Leases, etc.  The best Risk Management decisions should only be made when discussing your risks and options with an expert in the field.  Don’t assume that your present insurance provider can handle your business adequately and don’t be afraid to ask for a 2nd opinion – from a Risk Management consultant like ourselves.  We are not paid a commission to sell but a fee to offer our professional advice, including to lawyers and accountants who are not trained in insurance issues but their own expertise.

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Directors’ & Officers’ Liability Insurance general information

October 27, 2009

What is Directors’ & Officers’ Liability Insurance?  What does it do; who does it protect; why buy it?  These are just a sample of questions anyone in the business of D&O (buyer or seller) will have heard throughout their years of working in this particular specialty of insurance.

I once heard an esteemed partner in a well-recognized law firm offer that, in Canada, if there were 100 insurance companies that sold this form of insurance policy one would not find 2 identical policies anywhere in the country – can you imagine that this might be any different in the USA?  I can’t.

Who sells Directors’ & Officers’ Liability (more commonly called D&O) today?  Many insurance companies will offer the coverage but some will only write the “non-profit” market or Not-For-Profit Organizations, Associations, etc.  Others will write both classes (“For Profit”, as well) of business and still, other sources might include the “wholesale” marketplace or Managing General Agents (MGA’s).  These MGA’s attempt to access markets (e.g. Lloyds’) and design a policy specific to an industry or sector, in some cases.

What might be the Purpose of D&O insurance?  A simple response might be “good corporate governance” but nothing will truly be simple in a discussion of D&O.  Why is D&O necessary?  Legislation and the many decisions of the world’s Judicial System have required that anyone in the place of a Director and/or an Officer of any Corporation be protected due to the large personal risk that one faces – the loss of “personal assets” of a director/officer.  In the case of a “volunteer” director on a board, can you imagine explaining to your spouse that your family may face the loss of your home, business, savings, etc. when you have been volunteering for a church, service group, social activity, or other worthwhile cause and are named in a lawsuit?  Absolutely ridiculous!  Correct?  NO!  What about those individuals who served as Directors or Officers in prior years?  Yes, past and future directors can be covered by the insurance policy, as well as current directors.

What is covered by a normal policy?  Legal and Defense Costs (have you recently asked a lawyer who specializes in this area, how much their hourly rates are?), Damages, Settlements and Judgments are normal and, most people will agree, can be quite substantial.  Actual or “alleged” wrongful acts are covered but what will not be covered (nor should it be) are Fines, Penalties and other charges deemed uninsurable (e.g. profits or gains realized due to insider information).

Some of these acts may be “negligent”, “errors”, “omissions”, “misstatements”, “misleading statements”, “neglects or breaches of duty”, etc.  but will NOT cover “acts of bad faith”, “bodily injury or property damage” (that is what other Liability insurance covers), “claims relating to employee pension or welfare plans”, “environmental claims” (again other Liability insurance can be obtained for that), “claims resulting from facts known prior to the inception of coverage”, “failure to maintain insurance:, etc.

Claims can be brought by shareholders, creditors, employees, suppliers, competitors, government bodies, etc. – can you think of anyone who is not included here?

What about the corporation that no longer exists due to wind-up or other reasons?  Yes, the policy can have an “extended reporting period” whereby the insurance company will extend coverage for an additional term for additional premium, usually less than the full term’s cost.

Examples of claims could include any of the following:

  • Class action lawsuits against a Board of Directors for alleged mismanagement – hindsight will definitely be 20/20 so who is to determine that there was actual mismanagement?
  • Damages against various directors and officers of a firm for alleged non-disclosure of financial conditions and performance (I have an example where a bank claimed this from a Borrower);
  • Shareholders questioning whether their interests were adequately represented by the Board of Directors;
  • Corporate Governance issues which have become a major source of concern to the financial markets and to governments;
  • A suit against a group of directors over a dispute about the value paid by one company for another (and the odd item of note, here, was that the D&O insurance did not survive the takeover);
  • A public offering of stock where directors are quoted as touting the prospects where the stock fails to perform in a manner consistent with those statements and shareholders subsequently sue for damages, “alleging that they were induced to buy at an inflated price because of the excessive promotion of the stock by its directors”;
  • A wrongful termination of an employee, whereby an employee argues that a “sales decline was due to a weak economy and failure of the company to keep its prices competitive”;
  • The directors of a struggling company were unaware that management was using Sales Tax collections to finance the day to day operations and when the company took bankruptcy with unremitted tax monies, the government assessed the directors personally for outstanding tax liabilities;
  • Unpaid wages in the event of a bankruptcy;
  • Sexual harassment and discrimination;
  • And the list can go on.

What makes “non-profit” so different from “for-profit”?  Many of the above examples are strictly for profit, right?  Yes, most are but a non-profit organization can have instances of termination, harassment and discrimination, too!

One of the differences is that a non-profit may need and benefit from a “duty to defend” clause in their policy whereby the insurance company is required to defend the lawsuit, as opposed to participating or reimbursing an Insured following a judgment.  Some companies will even cover for administrative errors and omissions and not have a specific exclusion for “failure to maintain adequate insurance” (WOW!).  This may be a small benefit to a non-profit but is an example of a major difference from insuring a “for-profit corporation”.

There will be many other questions that a reader may have but this information should give an overview of Directors’ & Officers’ Liability insurance, the importance of obtaining and some of the differences between the two types of coverage available.

Please feel free to comment or ask further questions.

Facebook, XING, Ecademy, LinkedIn, Twitter, etc.

October 23, 2009

It is truly amazing what results are beginning to be seen in posting to a blog and a “Fan Page” on Facebook with all the accompanying Social Media sites in which I participate.

Yesterday, I had contact with 2 individuals who were solely a result of my online efforts.  One was a Restoration Contractor who had questions about “mold” and I referred them to one of my sources of expertise; they’ve now subscribed to that firm’s newsletter, a sign of the value of my extensive network.  They also inquired about issues surrounding the “Chinese drywall” situation in North America.  I have read some on this new and growing issue and would appreciate any feedback from my readers re their thoughts, questions, etc.

The other individual was sourcing a blogger on Directors’ & Officers’ Liability insurance and I have agreed to prepare an upcoming blog on this issue – the whys of buying the coverage and the issues surrounding a policy for D&O.

It is now Friday afternoon and I know that my next blog will be quite lengthy so this will be much shorter.  Everyone have a great weekend and for those who are using Facebook, please become a fan of WRiskManager 🙂 .

Another update to my exciting week!

October 23, 2009

What is of special interest this week, my friends?  Well, let’s begin by thanking the online friends I have south of the Canadian/USA border.

One terrific connection provided me with the contact information for 50 lenders he uses in his brokerage business.  Where did this lead?  I always like to return the favor (favour here in Canada) and am now trying to introduce him to another friend who has a very interesting concept to discuss where I will relish helping both of these fine gentlemen.

This evening, I spoke with another American friend who has connections to Lenders, Accountants, Lawyers and the Franchise Industry – meaning I can emphasize Lender Reviews with the Commercial Lenders, financial issues (including employee dishonesty with CPA’s), suggested/recommended(?) insurance requirements for contracts, leases and Franchise Agreements – 3 of my enjoyable aspects of Risk Management consulting.

I also had 1+ hour of wonderful “free” motivational consulting from “Linda” today and I so appreciate that.  I’ve set-up a “fan page” (is that what it is termed?) on Facebook now – WRiskManager – just like here!  I hope these efforts to “brand” me as the North American “expert” (sorry but my competition is reluctant to utilize the internet and find it a waste of their time 😉 ) will pay huge dividends (and I am very optimistic).

Well, that appears to be it for a Thursday evening.

RISK – My 1st Post! – Well, at least it is #1 for here (and maybe better than my other attempts)

October 22, 2009

This is my first blog attempt here and I hope better than my previous efforts 🙂 .

I have just had the most amazing week in so many ways that my excitement is bubbling over, hehe.  Reason for this is that I wished one of my many online friends a Happy Birthday on Friday last week and he (Craig, you know who you are) then proceeded to offer me immense advice on blogging and setting-up my blog on this site 🙂 .  He explained that I should be blogging every time I see, meet or hear something about “risk” since that is my expertise.  Well, here goes my effort then.

So, what else made my week so spectacular?  Well, one call to a friend of mine (Mike B.) that led to a request to speak to a group of bankers, accountants, advisors, etc. and then an e-mail from another good friend of mine (Mike A.) to gauge my interest to speak for 1.25 hours early next year to a group of Managers and then a follow-up Skype message (Andy – No, not another Mike hehe) re another speech to a group of independent management advisors – this all on Friday!

I then proceeded to mentor another online friend (Victoria) who is making a career move from agent to commercial broker and I offered my years of experience and continuing guidance to assist her.  Even in the same geographic area, it is much easier to use phone/computer communication than managing the headaches derived from fighting traffic to meet face to face.

What else has happened since Friday, then?  Well, I’ve been working with a management consultant friend of mine on his one client’s insurance requirements and ensuring that they’ve been met at affordable premiums.  I’ve provided two contacts’ names/info to another contact of mine who is in need of their services, been provided a list of 50 lenders by a new online connection (sure is nice to share contacts who can recommend me) so that my work during the next week will be quite busy in prospecting.

Well, you can see where my excitement originates from, correct?

What do I do, though?  I work in Risk Management – identifying and analyzing risks, controlling and financing risks.  My expertise is derived from nearly 20 years of Retail Commercial Banking and 20+ years of Insurance/Risk Management.  I work in the realm of Legal Contracts & Leases to Financial Statements through the spectrum of Property, Liability, Income and Human Resources and include Currency, FX, Interest Rate (yes, I did work in Banking), Employee Dishonesty, Media, Trade Credit, Business Continuity and Continuation Planning, Workers’ Compensation and Occupational Health & Safety – a broad spectrum.

Where do I spend the bulk of my time?  I review various Lenders’ Loan Agreements and Borrowers’ Insurance Policies for compliance with the terms/conditions of a Loan, recommending improved security where appropriate and knowing when a particular condition may be waived, as needed.  I even was called upon by a Lender during this week to recommend whether a loan condition for a “seismic report” be required or not – the Borrower already had Earthquake insurance and was located in a zone known to have activity so that I recommended the file be notated to never allow the Borrower to not include “quake” coverage on the policy.

As you can see, a busy and interesting week.  Not knowing when to curtail my comments, I will sign off now and be back later in the week to add something new.