Management Risky  Business To know your company  is fully protected, you first must identify all potential problems See our step-by-step guide to managing risk By Jerry Blackwelder Just when it seems you’ve established a firm foundation under your business, an unanticipated problem arises that undermines all your hard work. You feel like the ground is about to open and swallow you. Staying in business has become much riskier in 21st century America in the wake of corporate scandals rocking Wall Street, the proliferation of lawsuits with huge sums awarded by juries against companies, and the technological explosion giving any personal computer owner access to information from around the globe. Controlling risk factors and corporate risk exposure are everyday concerns for business owners across the country. Many may sleep soundly at night feeling they have insurance in place to cover all eventualities, but industry experts contend that insurance is only one facet of good risk management. Dr. David Wood, distinguished Freeman professor of insurance at Appalachian State University’s Walker School of Business, describes risk management as the “identification and analysis of exposures to loss, and the implementation of methods of handling losses.” The need to control risks in business was recognized hundreds of years ago when Venetian shippers invited other business owners to help capitalize potential risks associated with sea travel in exchange for a portion of the profits coming from successful deliveries. As civilization evolved, so did risk factors. Each new development to help business perform better brought with it more risk, and managing risk evolved into a thorough understanding of all potential hazards in the course of doing business and developing strategies to respond to those issues if and when they arose. Any company that does not purchase insurance coverage for all its myriad of potential risks is, in effect, self insuring against loss. If disaster strikes and loss occurs, the company is liable regardless of whether provisions are in place for coverage or even whether the company realized that it faced such potential problems.

Many companies deliberately choose the self insurance route, Wood says, financing its risks “either by borrowing against a line of credit or establishing a captive insurance company” to settle any claims.

Mari-Jo Hill, risk manager for SAS Institute in Cary, says, “It’s part of my job to decide whether we pay premiums or take the risk.”

But many times the decision is made for SAS, she notes, because “frankly it’s difficult to get insurance for some of the things we do. We use extreme caution in all our contracts and deciding what we use in our products,” she adds, but the Cary-based software developer’s creations often precede insurance coverage to cover potential risks. “It would be very difficult for a small start-up company in our field to find product liability insurance” to fully cover all eventualities.

A key facet of risk management is the analysis phase, wherein businesses identify all potential risk areas. Some companies, like SAS, hire risk managers to locate risk exposure and plan for corporate response to claims.

Without internal staff, a good insurance broker can become a business owner’s best friend in the complicated task of identifying and planning for all eventualities.

In recent years, three areas of risk have become increasingly important and highly publicized, and deserve the attention of owners of both large and small businesses. Medical malpractice, liability of directors and officers, and protection of intellectual property has become paramount in the minds of many business owners.


Medical Malpractice

“No other profession is held to a level of perfection where no mistakes are allowed, says Dr. Mark Dorfman, distinguished professor of insurance at the UNC Charlotte Belk School of Business, in describing the risk doctors face today.

Although not demanding perfection, even the legal system has seen the bar raised in medical malpractice trials. “Despite judges giving instructions that doctors aren’t perfect, everybody has heard horror stories about juries disregarding that and awarding huge judgments,” notes Bill Daniell, medical malpractice attorney with Raleigh’s Young Moore and Henderson law firm.

From the practitioner standpoint, Dr. Jim Hundley of the Wilmington Orthopaedic Group says one vulnerable area can be the expectation of patients. “Many patients think we can make them normal again, and sometimes we just can’t,” he says. The risk level has escalated to the point that “some doctors are leery of virtually every new patient that walks in,” Hundley adds.

Risk seems to be lurking at every turn in today’s practice of medicine, Hundley contends. He points out that medical professionals are just as vulnerable when providing care to unknown trauma victims as when treating familiar patients. Similarly, the risk level is the same in providing medical assistance to indigents or to paying patients.

Nor is medical malpractice liability confined strictly to businesses whose primary mission is medical.

While all medical practitioners are required to carry medical malpractice insurance, employing companies often find themselves at risk. “Some businesses may not realize their exposure from having a nurse on staff handing out Band-Aids,” says Wood of Appalachian State University.

With gigantic judgments awarded in courts come significant jumps in the cost of protecting against them. “Some people estimate that medical malpractice concerns are adding 15 percent to the bill as the cost of defensive medicine,” notes UNC Charlotte’s Dr. Mark Dorfman.

Dr. William Clark of Columbus County Hospital has watched his medical malpractice premiums soar from $200,000 to $750,000 in three years. “It’s been really tough because there is nobody to pass these increases on to,” he says. “It affects our ability to provide service.”

So severe is the problem and so high the stakes, says Hundley, that “experienced people are quitting medicine.”

These drastic reactions can be traced in part to North Carolina’s ranking nationally in exposure to risk. “North Carolina is among the top five states in the country in the high-risk category,” says Bob Whaling, managing director for Aon Risk Services.

An unresolved and highly publicized medical malpractice issue in the news today is whether or not to contain risk by capping jury awards in areas like pain and suffering and emotional distress. Some state legislatures have established such caps and companies with offices outside North Carolina find the existence of caps and dollar amounts vary across the map. “The climate in Texas, which has lower limits, is much different that in New York or California with much higher limits,” says Mari-Jo Hill of SAS.

NCCBI supports medical malpractice caps, and would like to see North Carolina follow the lead of 14 other states by placing limits on how much trial lawyers can collect. On average, patients receive only 43 percent of all malpractice awards. Under the proposed sliding scale limit on attorney’s fees, patients would receive an additional $160,000 from a $1 million award, while the lawyer would collect more than $200,000, plus expenses.

One way businesses are finding to rein in costs associated with medical exposure is to practice risk prevention measures themselves. “Take a look around and make sure there are no accidents waiting to happen,” advises Hundley.

There is no argument that tragic and costly mistakes are made in the delivery of medicine, whether as a business or as an employee benefit. But, for now at least, “there’s no solution that leaves everybody better off and nobody worse off,” says Dorfman.


Directors and Officers

The implosion of Enron and its domino effect of bringing to light wrongdoings in corporate suites and board rooms across America have left the best and brightest business leaders on a precarious ledge of liability.

Decisions made by officers and directors of public companies are subject to the scrutiny of shareholders. These shareholders hold the power to sue if they feel the decisions adversely affected the value of company stock.

In addition, executives and directors can be held personally liable in some cases if the company is not managed properly.

The liability spotlight also has meant companies have “great difficulty in recruiting outside directors and officers without liability coverage,” says Steve DeGeorge, a corporate attorney with the Charlotte law firm of Robinson Bradshaw and Hinson.

Insurance against corporate misdeeds has become a front burner issue for many companies. At the same time, the insurance industry, rocked by huge payouts owed to corporate policy holders, has reacted by raising premiums to cover the added exposure.

“There are some real horror stories out there,” says Hill of SAS. As a privately held corporation, she notes that SAS has not seen significant jumps in premiums, but for public companies “there has been a huge rise in insurance premiums since Enron. Underwriters want to make sure of their risk.”

But after two years of skyrocketing increases, “things are settling down considerably” in premium costs, notes William Butler, managing director for the southeast region of Aon Financial Services. “We’re seeing premium increases in the 0-10 percent range as opposed to multiples of premiums,” he says.

The reason for the sudden turnaround, Butler adds, is the infusion of “many new players that don’t have legacy claims, and that forces the long-term players to be competitive.” In issuing policies, “the underwriter wants to make sure the company is strong financially and there for the long term,” Butler says.

That includes “making sure the company has done due diligence and its homework,” Hill says. “It speaks to the credibility of management.”

Assuring credibility is vital, because come policies can be voided by deliberate falsehoods. Not only can corporate dishonesty result in loss of insurance protection, but the laws and courts “are increasingly imposing the duty to fully tell the truth and to disclose more fully than previously,” says Bill Trott, an attorney with the Raleigh law firm of Young Moore and Henderson, whose practice includes insurance coverage, analysis and litigation.


Intellectual Property

Insuring databases, software and electronic recordings against theft or loss is a new field created of necessity due to the worldwide access to information on the Internet, competing companies creating knockoff products, and the ingenuity of hackers in stealing and destroying information stored on computers.

The first high-profile proof of the risk in dealing with electronic intellectual property came in the early 1980s, says Wood, when Microsoft’s Excel spreadsheet was challenged by the makers of Lotus 1-2-3. That case was settled for an undisclosed sum.

One problem businesses face in developing insurance coverage against intellectual property losses is the “difficulty of identifying all the risk factors,” according to John Brosnan, director of Aon’s Intellectual Property Group.

Brosnan points out that software manufacturers must guard against “unintentional or deliberate infringement on products by other companies as well as similar indemnity against their own accidental infringement,” he says. “Litigation is so expensive that a business model can be severely impacted if a company has not done due diligence to see that their own infringements would be covered.”

Establishing laws to address intellectual property issues has also been a hot topic on Capitol Hill and in state capitals across the country. Veteran Congressman Howard Coble of Greensboro recently stepped down as chair of the House Judiciary Committee subcommittee dealing with intellectual property. During Coble’s tenure many new laws were enacted to update and overhaul the nation’s patent, trademark and copyright laws to stay in step with technology.

This year, Coble is sponsoring a bill to address the issue of database protection. “Databases have value,” he says. Federal legislation is needed, he adds, “because the existing patchwork of state and federal laws currently invoked to offer protection is inadequate.”

Among other sweeping changes, new laws have opened the door to allow software developers to patent their method of producing programs in addition to the end products, known as business method patents.

Exposure of protected material on the Internet also has led to unresolved issues of privacy, ownership and exposure of privileged information to potential thieves and hackers.

Underwriters have developed “cyber risk” policies to address those concerns, says Brosnan of Aon.

Member of the insurance industry and lawmakers stress that they are doing their best to come up solutions as problems arise in the ever-changing development of technology.

Nevertheless, coverage for electronic intellectual property risks “is still a developing industry,” says Mari-Jo Hill of SAS. “It’s such a new area in comparison with others that there is not much history, and premiums are based on history.

“Twenty years from now,” she predicts, “it will be a different story.”



A Step-by-Step Guide to Managing Risk

Identify all potential risks. “First and foremost,” says Dr. David Wood of Appalachian State University, “the identification of exposure is most important.”

Don’t overlook areas like providing on-site medical care to employees, which can bring medical malpractice concerns.

Consult an insurance broker. Brokers represent you and can place coverage with any insurance carrier. Some insurance brokers specialize in areas like liability for directors and officers, medical malpractice, intellectual property and others. Find a broker that you’re comfortable with — one with experience in dealing with your specific needs. “Brokers can be especially helpful in determining liability limits to be covered,” says Bob Whaling of Aon Financial Services Group.

The comfort level of the broker/company relationship is vital to SAS, says Mari-Jo Hill. “A broker should be the guide for the flow of information. It’s important to let them know the people behind the paper and that we’re more than just numbers. It’s definitely an issue of trust,” she says.

Make sure your insurance carrier is financially stable. Huge settlements in such areas as medical malpractice and corporate officials’ misdeeds have strapped many insurance carriers and even forced some into bankruptcy. Check the financial standing of the insurance carrier, its stock history, and industry ratings such as A.M. Best. “Don’t go with an insurance company just because the premium is cheap,” says William Butler of Aon. Instead, “look for alternatives. Get quotes from a few other experienced companies so you know on coverage and price you’re getting the best the market has to offer.”

Fully disclose your company’s risks when seeking insurance coverage. Failure to do so may result in the denial of claims, and further, says Bill Trott of Young Moore & Henderson, “there has been a change in the law in the past 25 years. Courts are increasingly imposing the duty to tell the truth and to disclose even more fully than previously. We are fortunate to have a 25-year history backed up by statistics on how we handle risk,” says Hill of SAS. “In terms of insurance procurement we do extra to show underwriters how well we do what we do. They want to be insuring what they think they are and that procedurally your house is in order.”

Have your attorney review coverage before purchasing your policy. Because of the attorney’s familiarity with your business, your legal representative can “discover holes in the policy and suggest coverage alternatives like adding endorsements that may have negligible effect on the premium but may be exactly what they need,” explains David Clark, intellectual property attorney at Robinson Bradshaw & Hinson.

Conduct a periodic review of risk exposure and coverage. Discuss with your insurance broker any changes in the operation of your business that might affect your company’s exposure and alter your coverage accordingly.

Notify insurance companies promptly when a loss occurs. “The policy holder has the obligation to give notice to the carrier,” says Steve DeGeorge, who works with Clark at Robinson Bradshaw & Hinson. Failure to give notice or even late notice may result in the loss of coverage, adds Clark. DeGeorge suggests companies file notices of claims to insurance carriers by certified mail in order to have tangible proof of notice.

Don’t give up if an insurance company denies your claim. DeGeorge says that “when a small business presents a claim to a carrier, sometimes the first reaction is to deny it and some companies don’t fight it.” But, he adds, “I’ve had situations where clients came to us with denied claims and one short letter from a lawyer changed the carrier’s mind. Don’t take the denial of a claim at face value.”

Keep all insurance documents. All written communication between a company and its insurance carrier can become important in settling claims, beginning with the application for coverage. DeGeorge cites a case where a client’s claim for medical coverage on the job was denied by an insurer who claimed the problem resulted from a pre-existing heart condition not divulged at the time the policy was issued. Fortunately the client had retained his application for coverage, which did include the existence of the heart condition.

Even expired policies have value years after they have lapsed. “Companies can be held responsible to asbestos removal or environmental clean-up form manufacturing processes years and even decades after the fact,” DeGeorge says. He notes one case in which a textile company facing a $2 million environmental clean-up charge located an insurance policy that had been in effect at the time the damage occurred.   — Jerry Blackwelder


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