The concept of risk management seems simple; perhaps that is why it is often overlooked. The unfortunate results of insufficient risk management are serious losses in dollars and management time. Risk management, crucial to all businesses, can be extremely complex.
In today's economy, parties are more litigious and businesses must understand and address issues that can lead to corporate as well as personal liability. Often risk can be limited or transferred through insurance, contract or proper documentation. The key is to track all contingencies and implement a comprehensive plan to monitor them. Missing one component could result in a catastrophic loss and make all other efforts futile. There is less room for error as businesses strive to survive in this economy.
Injury & Business Claims
Insurance is crucial to protecting a company against inevitable claims. The type of coverage needed varies by industry. Professional service companies such as law firms, accounting firms and medical practices will need professional liability coverage. Construction industries will need policies to cover site injuries and auto accidents. Retailers will need general liability insurance in addition to "umbrella policies" that covers a number of risks such as personal property, liability, fire, theft, and medical. Workers compensation insurance covers your employees, but not third parties, independent contractors or employees of others.
The implementation of policies and procedures designed to prevent accidents and insurance claims is as equally as important as maintaining insurance policies. Maintenance on work equipment, comprehensive safety procedures and rules can limit accidents. Implementing investigation and documentation procedures minimizes exposure and ensures accountability. Warnings and safety rules should be posted and included in employee handbooks. If procedures are implemented, they must be followed and enforced.
Business claims are expensive and, in most cases, a negotiated resolution is preferable to litigation. Contract, environmental, intentional torts and intellectual property claims may not be covered by insurance. Clear documentation of all agreements can help avoid confusion and limit future disputes.
Business Structure & Corporate Maintenance
A company should generally operate as an entity (Corporation, Limited Liability Company (LLC), Limited Liability Partnership, Limited Partnership) for asset protection of both the company and its owners. Many legal and tax benefits also exist. Selecting the proper entity and maintaining it are essential. Due to their combined tax and liability benefits, LLCs have been the entity of choice for those companies that qualify. Corporations must be properly maintained to shield their shareholders. Establish separate corporate bank accounts, keep minutes, prepare State filings, and authorize transactions in minutes. If corporate form is not followed, the "corporate veil" could be pierced. The rules vary for LLC's and other entities.
Other potential business structure problems exist such as mixing LLC's and corporations, unwittingly exposing a parent company to the financial troubles of a project subsidiary, dissolution issues and securities law issues.
Carefully analyze your insurance policies so you are aware of the scope to which you are insured. Are the limits of liability and deductibles appropriate for your business? Does you CGL policy exclude coverage for your "work product" or for damages that first manifested prior to inception? Are there contractually assumed liability exclusions? Be careful when renewing policies as new riders or exclusions may enter the contract. Time spent regularly reviewing all of your insurance policies is essential.
Contracts & Administration
Business contracts generally contain a promise by one party to defend and indemnify the other against claims of third parties. The extent of the indemnity obligation depends on the specific contract language. How the provisions are drafted is critical. Many indemnity agreements are too broad and, therefore, void and unenforceable. If shifting risk contractually, then the provisions must be specific.
Many contract provisions have a great impact if there is a dispute. Care in negotiating or drafting indemnity, warranty, attorney fee, and damage limitation provisions is essential. Courts routinely reject "boilerplate" provisions. All contracts should be kept available and reviewed. Dates or milestones in contracts should be calendared.
As an employer, you have obligations to your employees that can lead to liability if those obligations are not met. The establishment of clear and fair written company policies can be an invaluable tool in avoiding employee confusion and complaints. However, one of the worst mistakes an employer can make is to establish a policy and not follow it consistently. An employer can actually create liability for itself by establishing a policy and not abiding by it.
Appropriate investigation of employee complaints and adequate disciplinary action can shield an employer from liability even if a complaint is valid. Formal training and regular refresher courses for all "management" employees regarding their responsibilities to identify and resolve potentially inappropriate behavior are necessary. Again, consistent and thorough documentation is invaluable.
State and Federal regulations require employers to confirm citizenship and work eligibility for employees and submit I-9 forms to the appropriate agencies. Failure to comply can result in penalties as well as potentially forfeiting valid defenses to termination claims.
Typical employment-related lawsuits are generally not covered by a company's CGL policy. Because of the growing number of lawsuits, many insurance companies offer Employment Practices Liability coverage tailored to cover claims for wrongful termination, discrimination, and harassment.
Succession & Estate Planning
Succession planning is the transfer of business interests upon retirement, death or sale. All businesses need to ensure that ownership interests are transferred effectively, with minimal taxation. There are many planning tools available, such as buy-sell agreements, family limited partnerships, living trusts, life insurance, annuities and disability policies to fund a business upon sale or transfer. Failure to plan for orderly business succession can result in monetary loss. Estate taxes alone range from18 to 55%, frequently resulting in liquidation or additional debt.
All business has risk. Understanding the extent of risk, planning around it and minimizing it will ensure a smooth running business and help avoid catastrophic losses.
Gregory G. Brown, Certified Trial Specialist
Brown & Charbonneau, LLP