Appraising the rocky shore of risk

Canadian corporations are facing an increasingly litigious environment resembling that of the U.S., delegates were told at the Canadian Risk & Insurance Management Society conference held recently in St. John’s, Newfoundland. Dubbed “Risk on the Rock”, the conference’s speakers portrayed a risk management profession facing greater challenges and a wider scope of corporate responsibility. The insurance tools to protect corporations both big and small are available, speakers say, and it is time risk managers begin utilizing directors & officers coverage, employment practices liability policies and balance sheet insurance in hedging risk exposures.

At a seminar entitled “Risk Management, A Matter of Value!” at the 99 Canadian Risk & Insurance Management Society (CRIMS) conference, John Johnstone, vice president at Marsh Ltd., unveiled a graph outlining top risk concerns of corporate chief financial officers (CFOs) and risk managers. 85% of CFOs prioritize the financial health of their corporation as a top concern while chief priorities among risk managers include business interruption and product liability (both 62.5%). The bad news, Johnstone notes is that these have been corporate concerns since the dawn of free enterprise, the good news, is that the risk management profession in conjunction with insurers and brokers have devised methods to hedge many emerging previously uninsurable corporate concerns.

Enterprise-wide risk management has been a buzz phrase throughout industry circles, referring to the integration of a number of corporate risks into a combined insurable product. Canadian risk managers are under more and more pressure to enact these types of combined programs, with triggers added in responding to liabilities that until recently had been more heavily utilized in the vastly more litigious U.S.

Earnings and operational liabilities can damage even seemingly solid company share values, delegates were told. In his presentation, Johnstone refers to a recent Mercer MC study showing that 10% of Fortune 1000 companies lost 25% of shareholder value in a one-month period at least once in the past five years. “Operational and strategic risks lie behind the vast majority of these shortfalls,” he observes.

In the past, the consequences were simple enough. Shareholders lost money. Today, those same shareholders can use the courts to “balance the books”. The times are definitely changing, delegates were told by the array of conference speakers, as employment practices, shareholder value and directors and officers responsibility is becoming more scrutinized by an increasingly litigation-sophisticated public.

Hedging sales

Generally, the largest uninsured asset on a company’s balance sheet is its accounts receivable, which presents a serious dilemma for corporate directors and officers. A wide variety of extraneous circumstances can affect the collection of account receivables including distributor bankruptcy and a wide array of political and financial instabilities that can occur when a sizeable segment of sales are conducted offshore.

At a seminar entitled “Trade Credit Insurance — A Cost Effective Manifestation of Common Sense in Business”, Neill Cooke, senior vice president of credit insurance services at AON Reed Stenhouse Inc. discussed this relatively new coverage and the benefits it extends to the corporate balance sheet. He used U.S.-based Adac Laboratories as an example of this type of exposure. The company saw its share price decline from $30 a share in the beginning of 1999 to a low of $9 due to exposure to non-payment from Latin and South American customers experiencing political and economic unrest. “The company could have protected itself with a program like trade credit, and might have retained shareholder value,” says Cooke.

The principle to this traditional insurance offering is a fairly simple one. Corporations that invoke the policy reduce their company’s credit risk against bad-debt losses, enable a company to safely expand without the concern of non-payment, and secure better financing terms because of its secured accounts receivable situation.

Trade credit insurance, Cooke remarks, enables risk managers to hedge themselves against a number of corporate-wide contingencies. He suggests in a scenario similar to the Adac experience, the protection of this program would limit the possibility of shareholders suing the company, the directors and the officers for irresponsibly managing the company and losing significant shareholder value.

Employment litigation rising

Risk management delegates were also warned of a rising wave of employment practices liability. At a seminar entitled “Employment Practices Liability (EPL) and Insurance Coverage”, Thomas O’Reilly, of legal firm Cox Hanson O’Reilly Matheson, notes that Canadian employees are beginning to mirror their U.S. neighbors becoming more vigilantly litigious to settle work-related problems.

“Canadian businesses, now more than ever, are being forced to deal with the threat of liability from employees or potential employees,” he adds, citing a recent judgement delivered in a British Columbia courtroom which could truly impact businesses across the country.

O’Reilly refers to the case of Tawney Meiorin who was hired as a forest firefighter with the British Columbia Ministry of Forestry. Her job performance had been satisfactory, however in 1995 she was dismissed after failing one of four fitness tests that had been adopted by the government. Her union filed a grievance on her behalf and an arbitrator ruled in her favor. The BC Court of Appeal disagreed with the decision, which in turn was later over-ruled by the Supreme Court of Canada which restored the arbitrator’s decision. Not only did she have to be compensated for lost wages and benefits, but got her job back.

The implications for risk managers, O’Reilly insists, cannot be understated. The decision suggests neither subjectivity nor objectivity are insoluble grounds for dismissal — that someone failing to live up to their job requirements could still has the right to keep their job. What if, O’Reilly asks, instead of having to pay the lost wages and benefits and restore a job for one person, it had been ten? He also points out, what if instead of the defendant being a huge employer with deep pockets, like the government, it had been a small, privately held company?

The problem, says O’Reilly, is not necessarily the increasing litigation, but the inadequacies of current corporate coverage. Commercial general liability (CGL) policies are the most common form of liability insurance held by most businesses. The coverage provides indemnification from liability for bodily injury — and is not sufficient for the range of employment practices liabilities. “The risk of liability from employees or potential employees is not adequately addressed by CGL coverage, most businesses have to look to EPL,” he says.

According to O’Reilly, EPL covers wrongful dismissal, harassment, defamation, invasion of privacy, wrongful failure to hire or promote, wrongful discipline or demotion, conducting negligent employee evaluations, wrongful infliction of emotional distress, misrepresentation to an employee or potential employee and breach of civil rights. “In other words, large corporations and small businesses that only carry CGL coverage could be in a world of trouble as these types of litigation spread.”

D&O underused

Companies not adequately protected from balance sheet risks and employment practices liabilities can leave themselves exposed to shareholder lawsuits, notes Robert Patzelt, general counsel and group risk manager at Scotia Investments Ltd. Corporate directors and officers today are seen in both the legal context and the expectations of shareholders as responsible for their company’s actions, Patzelt notes. “Gone are the days of eating lunch, sleeping through the quarterly meeting and picking up a cheque,” he says. Despite the exposure, many small and medium-sized corporations have not implemented directors & officers liability protection, observe s Mark Reszel, vice president of Encon Insurance Managers Inc.

Patzelt and Reszel laid out a list of current lawsuits to which directors & officers of all types of corporations are exposed, drawing shock surprise from delegates. Included on his list were cases of bankruptcy claims whereby directors have been held liable for employee wages when companies have faced bankruptcy, and employment practices claims where directors and officers have been named even without personal involvement in the offense. “If a company is being sued, in effect their directors and officers can be personally sued as well,” says Patzelt.