News - Midlands
Take Cover
In cases from WorldCom and Enron to Hatfield, directors are increasingly coming before the courts as defendants in their own right. It's perhaps unsurprising then that Directors and Officers (D&O) cover is the fastest growing branch of corporate insurance.
Corporate insurance is focussing on the individual as never before.
It is not only protecting the bosses' personal position, but protecting the firm from the bosses' own mortality. The right cover can help stop an individual tragedy from becoming a corporate disaster.
According to experts the Hatfield case, which concluded earlier this autumn with fines totalling £313.5m against Balfour Beatty and Network Rail for breach of health and safety regulations, will be seen as a watershed in corporate insurance. Although the Old Bailey judge ordered that the five directors and senior officers should be cleared of manslaughter charges, pundits believe the case illustrates how staff are increasingly being held personally liable for their corporation's actions.
The focus on the individual has come about partly because the Government and its agencies are increasingly keen on issues of corporate governance and responsibility; partly because plaintiffs are aware that highly-paid directors have assets worth pursuing; and partly because angry shareholders want board members to suffer when things go wrong.
Says Alan Millband, a consultant at East Midland lawyers Berryman: "D&O is the fastest growing area of corporate insurance, and the Hatfield case has focused attention on directors' responsibilities and liabilities more than ever before.
"Although the authorities failed to secure manslaughter prosecutions the point is that they were keen to try and make them stick. It's an indication of the way things are heading. It will not go back to the way they were beforehand.
"Directors and senior officers must wake up to the fact that they are personally more at risk than ever before, both for criminal and civil actions, and increasingly individuals will be pursued through the courts."
Garon Anthony, senior associate with Birmingham-based law firm Pinsent Masons adds: "Any serious broker will now advise a company to take out a D&O policy. There is undoubtedly an increasing trend of civil cases being brought against not just the company, but against its directors, and that's set to increase.
"At the moment the emphasis is on pursuing the boards of large, FTSE 350-sized companies, but I think we'll soon see the directors of SMEs being pursued on a much more regular basis."
Adds Mauro Paiano, a partner at law firm Cobbetts: "In the UK the majority of companies with a turnover of £3100 million or more have D&O insurance.
"However, less than 10 per cent of companies with a turnover of below £35m have similar cover. I think that we will see a rise in D&O insurance among smaller firms, as policies are likely to now be combined with an overhaul of company practices in areas such as product liability, health and safety and general trading terms and conditions."
Of course protection of businessmen and women is nothing new - lawyers and financial advisers, for example, are not allowed to practice legally without professional indemnity.
However what has grown is the complexity and breadth of corporate insurance built around individuals. Just as directors and senior officers are aware of how personally exposed they now are, so the firms they run are conscious that they may be dependent on the health of a few individuals.
The past few years have also seen increases in insurance policies, such as keyman and shareholder protection, that protect the firm from the ill fortunes that may strike a critical member of staff.
Keyman does not cover against lost income if a vital member of staff is injured or killed: it provides funds that allow it to continue running properly.
Beverley Scott, investment adviser at East Midland accountants Cooper Parry, says: "Keyman insurance is effectively a form of life insurance, but for the benefit of the company rather than the individual.
"It's increasingly common, even among small firms. It isn't particularly expensive - a typical owner-managed enterprise could get keyman cover for as little as £32,000.
"Arguably keyman is far more important for SMEs than it is for larger corporations. If the chairman of BT suddenly died the company would carry on, but if a small business is built around the knowledge of one individual, that's far more risky."
Sam Holland, at law firm Wragge & Co, adds: "It's not just companies who demand keyman as part of their business plans. It's becoming a basic part of management buyout deals, as venture capitalists and banks demand it as a way of protecting their investments."
Similarly recent years have seen the rise of shareholder protection policies that allow shareholders to acquire a dearly departed colleague's stake in the business rather than seeing it go to outside interests. Again these policies are aimed at privately-owned SMEs rather than multinationals.
Despite the increasing sophistication of the corporate insurance market, it is surprising what little cover firms actually need to comply with the law. A bit of car insurance, some personnel cover, maybe something on the premises - and chances are your business is legally covered.
Says Adam Kendall, of Wragge & Co: "There are surprisingly few legal requirements on businesses for the types of cover they need. However many reluctant businesses are forced to get insurance cover by the constraints of the sectors in which they work.
"For example a contractor will need certain types of cover, say £35m of public liability, if they are to be seriously considered by a client."
In reality, of course, corporate insurance can be among the most complex parts of a business's strategy - professional indemnity, public liability, products, pensions, poor profitability.
It's also a major cost consideration. As a rule of thumb companies pay between 0.5 and 1 per cent of turnover in corporate insurance costs. However work in a "challenging industry' - say skydiving or the law - and costs can multiply tenfold.
As the corporate insurance industry has become more sophisticated, so has the attitude of companies taking out cover. Rather than signing the cheapest off-the-peg policy, many firms increasingly look for tailor-made policies that suit their circumstances, and are prepared to argue the toss about the wording.
Says Kendall: "Understandably firms want their corporate insurance to be business specific, effectively bespoke, especially as the UK becomes ever more litigious. And increasingly companies are prepared to negotiate the wording of policies. In fact policies should be constantly up for renegotiation as the company changes."
Paiano adds: "The major types of liability insurance - employers, public, product, professional, D&O - have remained fairly consistent. But what has changed is that there are many more niche areas now that can be covered, often on a bespoke basis.
"Large businesses tend to take out individual policies and shop around, using many different providers, negotiating bespoke terms, choosing the sums insured, and limits on indemnity that are appropriate for their business.
"However SMEs are more likely to take out combined policies, allowing them to choose cover from a list with some room for tailoring to individual needs."
And it pays to get the wording right. Many pundits say that insurers are increasingly hardening their attitude to "iffy' claims, and taking a far more literal, technical look at the wordings of policies to decide whether they pay out or not.
Says Chris Fitton, from the Leicester office of broking giant Aon: "By and large insurers have always paid out on reasonable claims made against good policies, and they've also often paid out against claims that might not have been too strong.
"But partly because of big payouts insurers have hardened their attitudes on those less solid cases, and are taking a far more technical line."
That sophistication and willingness to negotiate is also affecting how companies pay for their insurance.
Many are now demanding what are effectively no claim discounts - reduced premiums of up to a fifth if their claims come below a set level.
In addition, some SMEs are considering increasing their excess to reduce rates.
The sophisticated customer has led, not unsurprisingly, to the sophisticated broker. Rather than using brokers as middlemen to get the right - and often cheapest - corporate insurance cover, businesses are increasingly turning to them as consultants who can help reduce risk.
Aon's Hutton says: "SMEs are becoming savvier about risk management and are seeking more professional advice due to increased pressures on their business, such as more stringent legislation and regulation from the Health & Safety Executive.
"In fact clients should demand advice from the broker, because part of the broker's role is understanding the business and in turn recognising the specific risks it faces."
Peter Miller, managing director of Birmingham's oldest insurance broker, Ernest R Shaw, adds: "Instead of just finding the lowest prices, major insurers and brokers are increasingly acting as risk management consultants.
"A large part of our work is acting as experts who will sit down with a client, go around the premises to look at risks, advise them on changes in government legislation, and discuss ways they can reduce both exposure and premiums.
"For example we're advising firms on disaster recovery plans - most don't have one, even though they'll soon be required under Health & Safety legislation.
"Similarly most firms have problems thinking beyond their own walls when it comes to interruption polices - they don't consider the effects that a main supplier or customer being hit will have on them."
But despite all the choices about corporate insurance, decisions still often of course come down to "What's this going to cost me?'
Says Miller: "There's a tendency to look at insurance as a price-driven, off-the-shelf product.
"We'll produce a nice, bound report assessing their needs and risks, but they'll still flick to the back page and the bottom line to make their decision."
Corporate insurance is focussing on the individual as never before.
It is not only protecting the bosses' personal position, but protecting the firm from the bosses' own mortality. The right cover can help stop an individual tragedy from becoming a corporate disaster.
According to experts the Hatfield case, which concluded earlier this autumn with fines totalling £313.5m against Balfour Beatty and Network Rail for breach of health and safety regulations, will be seen as a watershed in corporate insurance. Although the Old Bailey judge ordered that the five directors and senior officers should be cleared of manslaughter charges, pundits believe the case illustrates how staff are increasingly being held personally liable for their corporation's actions.
The focus on the individual has come about partly because the Government and its agencies are increasingly keen on issues of corporate governance and responsibility; partly because plaintiffs are aware that highly-paid directors have assets worth pursuing; and partly because angry shareholders want board members to suffer when things go wrong.
Says Alan Millband, a consultant at East Midland lawyers Berryman: "D&O is the fastest growing area of corporate insurance, and the Hatfield case has focused attention on directors' responsibilities and liabilities more than ever before.
"Although the authorities failed to secure manslaughter prosecutions the point is that they were keen to try and make them stick. It's an indication of the way things are heading. It will not go back to the way they were beforehand.
"Directors and senior officers must wake up to the fact that they are personally more at risk than ever before, both for criminal and civil actions, and increasingly individuals will be pursued through the courts."
Garon Anthony, senior associate with Birmingham-based law firm Pinsent Masons adds: "Any serious broker will now advise a company to take out a D&O policy. There is undoubtedly an increasing trend of civil cases being brought against not just the company, but against its directors, and that's set to increase.
"At the moment the emphasis is on pursuing the boards of large, FTSE 350-sized companies, but I think we'll soon see the directors of SMEs being pursued on a much more regular basis."
Adds Mauro Paiano, a partner at law firm Cobbetts: "In the UK the majority of companies with a turnover of £3100 million or more have D&O insurance.
"However, less than 10 per cent of companies with a turnover of below £35m have similar cover. I think that we will see a rise in D&O insurance among smaller firms, as policies are likely to now be combined with an overhaul of company practices in areas such as product liability, health and safety and general trading terms and conditions."
Of course protection of businessmen and women is nothing new - lawyers and financial advisers, for example, are not allowed to practice legally without professional indemnity.
However what has grown is the complexity and breadth of corporate insurance built around individuals. Just as directors and senior officers are aware of how personally exposed they now are, so the firms they run are conscious that they may be dependent on the health of a few individuals.
The past few years have also seen increases in insurance policies, such as keyman and shareholder protection, that protect the firm from the ill fortunes that may strike a critical member of staff.
Keyman does not cover against lost income if a vital member of staff is injured or killed: it provides funds that allow it to continue running properly.
Beverley Scott, investment adviser at East Midland accountants Cooper Parry, says: "Keyman insurance is effectively a form of life insurance, but for the benefit of the company rather than the individual.
"It's increasingly common, even among small firms. It isn't particularly expensive - a typical owner-managed enterprise could get keyman cover for as little as £32,000.
"Arguably keyman is far more important for SMEs than it is for larger corporations. If the chairman of BT suddenly died the company would carry on, but if a small business is built around the knowledge of one individual, that's far more risky."
Sam Holland, at law firm Wragge & Co, adds: "It's not just companies who demand keyman as part of their business plans. It's becoming a basic part of management buyout deals, as venture capitalists and banks demand it as a way of protecting their investments."
Similarly recent years have seen the rise of shareholder protection policies that allow shareholders to acquire a dearly departed colleague's stake in the business rather than seeing it go to outside interests. Again these policies are aimed at privately-owned SMEs rather than multinationals.
Despite the increasing sophistication of the corporate insurance market, it is surprising what little cover firms actually need to comply with the law. A bit of car insurance, some personnel cover, maybe something on the premises - and chances are your business is legally covered.
Says Adam Kendall, of Wragge & Co: "There are surprisingly few legal requirements on businesses for the types of cover they need. However many reluctant businesses are forced to get insurance cover by the constraints of the sectors in which they work.
"For example a contractor will need certain types of cover, say £35m of public liability, if they are to be seriously considered by a client."
In reality, of course, corporate insurance can be among the most complex parts of a business's strategy - professional indemnity, public liability, products, pensions, poor profitability.
It's also a major cost consideration. As a rule of thumb companies pay between 0.5 and 1 per cent of turnover in corporate insurance costs. However work in a "challenging industry' - say skydiving or the law - and costs can multiply tenfold.
As the corporate insurance industry has become more sophisticated, so has the attitude of companies taking out cover. Rather than signing the cheapest off-the-peg policy, many firms increasingly look for tailor-made policies that suit their circumstances, and are prepared to argue the toss about the wording.
Says Kendall: "Understandably firms want their corporate insurance to be business specific, effectively bespoke, especially as the UK becomes ever more litigious. And increasingly companies are prepared to negotiate the wording of policies. In fact policies should be constantly up for renegotiation as the company changes."
Paiano adds: "The major types of liability insurance - employers, public, product, professional, D&O - have remained fairly consistent. But what has changed is that there are many more niche areas now that can be covered, often on a bespoke basis.
"Large businesses tend to take out individual policies and shop around, using many different providers, negotiating bespoke terms, choosing the sums insured, and limits on indemnity that are appropriate for their business.
"However SMEs are more likely to take out combined policies, allowing them to choose cover from a list with some room for tailoring to individual needs."
And it pays to get the wording right. Many pundits say that insurers are increasingly hardening their attitude to "iffy' claims, and taking a far more literal, technical look at the wordings of policies to decide whether they pay out or not.
Says Chris Fitton, from the Leicester office of broking giant Aon: "By and large insurers have always paid out on reasonable claims made against good policies, and they've also often paid out against claims that might not have been too strong.
"But partly because of big payouts insurers have hardened their attitudes on those less solid cases, and are taking a far more technical line."
That sophistication and willingness to negotiate is also affecting how companies pay for their insurance.
Many are now demanding what are effectively no claim discounts - reduced premiums of up to a fifth if their claims come below a set level.
In addition, some SMEs are considering increasing their excess to reduce rates.
The sophisticated customer has led, not unsurprisingly, to the sophisticated broker. Rather than using brokers as middlemen to get the right - and often cheapest - corporate insurance cover, businesses are increasingly turning to them as consultants who can help reduce risk.
Aon's Hutton says: "SMEs are becoming savvier about risk management and are seeking more professional advice due to increased pressures on their business, such as more stringent legislation and regulation from the Health & Safety Executive.
"In fact clients should demand advice from the broker, because part of the broker's role is understanding the business and in turn recognising the specific risks it faces."
Peter Miller, managing director of Birmingham's oldest insurance broker, Ernest R Shaw, adds: "Instead of just finding the lowest prices, major insurers and brokers are increasingly acting as risk management consultants.
"A large part of our work is acting as experts who will sit down with a client, go around the premises to look at risks, advise them on changes in government legislation, and discuss ways they can reduce both exposure and premiums.
"For example we're advising firms on disaster recovery plans - most don't have one, even though they'll soon be required under Health & Safety legislation.
"Similarly most firms have problems thinking beyond their own walls when it comes to interruption polices - they don't consider the effects that a main supplier or customer being hit will have on them."
But despite all the choices about corporate insurance, decisions still often of course come down to "What's this going to cost me?'
Says Miller: "There's a tendency to look at insurance as a price-driven, off-the-shelf product.
"We'll produce a nice, bound report assessing their needs and risks, but they'll still flick to the back page and the bottom line to make their decision."