There was an interesting take-away from one of the PLUS D&O Symposium sessions today I think might be worth sharing. The application of the concept extends to all insurance policies, not just D&O or E&O. This was the first time I had heard this particular concept expressed in this way.

In simple terms, from a legal standpoint, the burden of proof is shifted from the insurer to the insured when exclusionary language is moved from the exclusions section of a coverage form to the definitions section. This explains why the definitions sections in policies have been growing. When there is an interpretation in coverage to be made having the restrictive language reside in the definitions section allows the insurer to more safely interpret things in their favor without a court looking over their shoulder and applying the rules for contracts of adhesion we all know so well. The take-away was when possible to negotiate this stuff and to keep the definitions section in a policy as short and concise as possible with out a lot of “xyz does NOT mean or does NOT include exclusion”…

The above was shared by David Shaefer of AH&T Insurance.

To take a look at the PLUS blog go HERE

I gave my first directors and officers (D&O) liability insurance presentation to a board of directors in 1996. The CFO of this publicly traded company asked me to discuss the highlights of its recently renewed D&O insurance program. The presentation lasted less than five minutes—and not one question was asked by any of the board members present. In fact, most of them were engaged in other conversations that they must have deemed more important or more interesting than insurance. My presentation was a mere formality: the board essentially rubber-stamped the CFO’s insurance
decisions.

Since then, a board’s involvement in insurance decisions, like D&O coverage, has changed dramatically. Now our firm presents to its client public company boards and audit committees at least once a year. Board members are no longer passive and disinterested when it comes to insurance. Instead, most are well informed about the liabilities directors face and want to fully vet their D&O insurance protection—specifically its structure, limits and scope of coverage. Questions often arise about insurance carrier solvency, the importance of differences in conditions A-side coverage, appropriate coverage limits and the terms and conditions of the policy. A decade ago, CFOs generally made all these decisions; in today’s ever-litigious corporate environment, many executives now defer these important decisions to their entire boards for input and formal approval before finalizing major insurance placements.

Risky business

Boards are also becoming more engaged in risk management, specifically enterprise risk management (ERM). Traditional risk management identifies exposures to loss, examines various techniques to address the risk and then selects the most appropriate techniques to control it. Note that risk management focuses only on accidental losses, not all losses. A key technique used in risk management is insurance or risk transfer; however, insurance is only one facet of risk management. It’s been suggested that the paradox of insurance is that it is a good first and last response to managing risk, but is not always the most appropriate response. There are other important risk management tools, such as risk avoidance, self insurance, loss prevention, loss control, contractual risk transfer and alternative forms of risk financing.

All-encompassing risk

In contrast, enterprise risk management deals with all aspects of an organization’s risk, not just accidental loss. The Risk and Insurance Management Society defines ERM as “a strategic business discipline that supports the achievement of an organization’s objectives by addressing the full spectrum of its risks and managing the combined impact of those risks as an interrelated risk portfolio.” The Committee of Sponsoring Organizations of the Treadway Commission defines ERM as a “process, effected by an entity’s board of directors, management and other personnel, applied in strategy setting and across the enterprise, designed to identify potential events that may affect the entity, and manage risk to be within its risk appetite, to provide reasonable assurance regarding the achievement of entity objectives.” Both definitions are mouthfuls, but the point is that ERM is all-encompassing and comprises the spectrum of organizational risk. Note the key takeaway that ERM is a process “effected by an entity’s board of directors.” Since the recent financial and economic meltdown, the board’s involvement in ERM has grown significantly. Boards are expected to more effectively identify and assess risks across the organization, driven in large part by anxious shareholders and other stakeholders who want to ensure that both the balance sheet and shareholder value is properly protected. As such, the board’s role in ERM is one of the hottest topics in corporate governance.

Proposed rules

In July 2009, the Securities and Exchange Commission (SEC) took these responsibilities even further by proposing new disclosure rules regarding board oversight of ERM, which could impact how boards approach and manage risk in the future. The proposed amendments include newly mandated disclosures on the boards’ increasing involvement with ERM. If you thought directors of a public company had a tough enough job fulfilling traditional fiduciary and stewardship duties, imagine how those directors must feel knowing they could be held responsible for not accurately identifying and assessing all entity risks and for not properly planning a response for each one. If the SEC proposal passes, Christmas will come early and often to the plaintiff’s bar.

More responsibility?

The process of identifying and managing traditional and known risks is certainly doable for directors. But should they also be held accountable for the highly improbable “Black Swan”? According to Black Swan author Nassim Nicholas Taleb, “a Black Swan is a highly improbable event with three principal characteristics: It is unpredictable; it carries a massive impact; and, after the fact, we concoct an explanation that makes it appear less random, and more predictable, than it was.” He considers 9/11 the prime example of this phenomenon. Think about being responsible for identifying something that is unpredictable, something that has a huge negative impact, and after the fact, experts assert that you should have predicted it. That is one tough exercise for anyone. Boards need to be well equipped to deal with these increasing responsibilities, relying heavily on outside professional service providers to guide them through the labyrinth that is ERM. Whether or not the proposed SEC risk management oversight rules are enacted, ERM will become a recurring theme in boardrooms across America. In fact, it just moved to the top of the agenda.

by Spence Hoole

Reuters/NVCA Press release

Venture-Backed Exit Market Improves Marginally at Year End - IPO Market Shows Preliminary Signs of Life

New York, New York, January 4, 2009 – Venture-backed company exit activity showed promising signs of life during the fourth quarter of 2009 but fell far short of historical norms for the year, according to the Exit Poll report by Thomson Reuters and the National Venture Capital Association (NVCA). The year ended with 13 venture-backed Initial Public Offerings (IPOs) and 262 M&A transactions.

While there were five venture-backed IPOs in the fourth quarter, a slight uptick from the third quarter of 2009, the last two years have been the slowest consecutive years for US venture-backed IPO activity since 1974-1975. The tally of M&A exits as of the last day of the quarter was 67 with 36 disclosed deals averaging $215.9 million, the highest quarterly average since the fourth quarter of 2007.

“While 2009 was a year many venture capitalists and entrepreneurs would choose to soon forget, the fourth quarter offered signs of hope for the coming year in terms of improved exit activity,” said Mark Heesen, president of the NVCA. “Clearly, we have a long way to go towards a full recovery but we are encouraged by the increasing acquisition values and the number of companies that have filed a registration with the SEC to go public. We expect to see a gradual but marked improvement in 2010 and hope to have exponential improvements this time next year.”

IPO Activity Overview
There were five venture-backed IPOs valued at $649.3 million in the fourth quarter of 2009, a slight increase from the third quarter of 2009. With 13 venture-backed initial public offerings during full year 2009, the annual total more than doubles activity in seen 2008, by dollars raised and number of offerings. However, the last two years have been the slowest consecutive years for US venture-backed IPO activity since 1974-1975.

Two of the five IPO exits for the quarter were in the information technology sector, accounting for a total of $236.2 million. Within this sector, Sunnyvale, California-based, Fortinet, Inc, a developer of network protection systems, raised $156.3 million. Echo Global Logistics, a Chicago-based provider of transportation management solutions began trading on October 2nd and raised $79.8 million in the communications and media sector.

In the biggest IPO of the quarter, KAR Auction Services, an automotive services holding company based in Carmel, Indiana raised $300 million via a listing on the New York Stock Exchange.
There were no initial public offerings by US venture-backed companies on a foreign exchange in the third quarter.

Of the five IPOs in the third quarter, two were trading at or above their offering prices as of 12/30/2009. For the year, nine out of the thirteen IPOs were trading at or above their offering. Twenty-nine venture-backed companies are currently filed for an initial public offering with the SEC.

As a member of TechAssure, we help author and distribute a great newsletter designed for technology companies. I am “reprinting” an article from the most recent edition of the newsletter.

Contributed by Kirstin Simonson
Travelers Underwriting Director, Global Technology

As more and more adults embrace social media, the upside for business is a new way to get their message out. The downside, however, is an increased exposure to liability that many companies may be unaware of until it is too late.

Today, companies are discovering that YouTube, Twitter, Facebook and other sites have reached beyond their original teenage audiences and have become an at-work pastime for many employees. A recent survey conducted on behalf of Travelers found that close to half of the adult population uses social media. One out of eight respondents said they post work-related information on social media web sites, and 30 percent feel such postings are acceptable as long as they believe the information is true. In addition, 75 percent said they were “not at all” or “not very” concerned about online postings causing professional damage.

Unfortunately, the risks from cavalier use of social media are real. Already companies have had to defend themselves against defamation lawsuits from postings by employees, even when such activities were not within the scope of work and violated policies about personal use of company computers. One health care clinic was sued after an employee posted information from a medical chart about a patient’s treatment online.

How can insurance and risk consultants help companies mitigate the risks they face from their employees’ online activities? By encouraging them to follow a three-step plan:

1. Understand the potential exposures. Damages may result from legal liability for defamation, harassment and privacy violations. Or they may involve the leak of proprietary information and trade secrets that can undermine a company’s competitive position. A third area of risk is damage to the reputation of a company through false or disparaging postings.
2. Establish policies to manage exposures. Create policies and notify employees regarding expected conduct related to social media sites including blogs, email, instant messaging, tweets and other technology tools. The policies should include clearly described consequences for violating guidelines. Once in place, the policy should be enforced uniformly and consistently.
3. Prepare for the unexpected; seek advice on how to manage your risk from a cyber liability expert. Businesses should work closely with their insurance agent to evaluate their cyber risks and reputation management exposures. Development of a crisis management plan to handle incidents as they arise is recommended. For example, identification of strategies for managing negative publicity and removing false postings from social websites may be included in the plan.

By following a game plan of identifying risks, creating effective policies and planning in advance for problems, a company can create a culture of awareness about the drawbacks that come with the careless use of social media. Insurance and risk consultants can partner with businesses to help them embrace the upside opportunities of social media while protecting themselves from unexpected liabilities.

This article is only for the informational use of the reader. Information contained herein is not intended as, nor does it constitute, professional advice and it is not a representation that coverage does or does not exist for any particular claim or loss scenario.