Tonya G. Newman and Sonya Rosenberg | January/February 2014 | 24 | 1
Strategies for protecting your business from exposure
One of the most important tools available to any successful business operation is the deliberate assessment and tackling of potential risk. Carefully conducted, a comprehensive risk assessment can aid in ensuring that the appropriate insurance, personnel, policies, and practices are in place—thus enabling organizations to mitigate some of the greatest legal risks they face.
What can supply chain and operations management professionals do to guard against legal problems before they arise? Following are specific steps to implement.
First, regularly evaluate whether your company’s programs meet business needs. An obvious starting point is insurance. Regular review of existing programs is essential—with one eye toward the past (to assess the most prevalent source of claims) and one to the future (to assess potential future exposures based on planned growth, new product lines, and legal developments). A periodic and comprehensive insurance audit should result in a more effective renewal process and insurance program. It also enables organization leaders to think more strategically about how legal developments might affect coverage. If possible, negotiate policy language to mitigate the risk of a dispute. Consider working with experienced counsel, who are more likely to be aware of policy enhancements trending in the marketplace and who can work with a broker to negotiate directly with underwriters.
When beginning an insurance audit, consider the following as a starting point for effective discussion with insurance brokers, counsel, or both:
- Claims history and risk assessment: To begin, management should review your company’s recent claims history, including claims based on employee relations issues. Identifying the areas of greatest legal risk will reveal exposure that might have been overlooked during previous insurance renewals.
- Current and future operations: What are the contours of your operations? Does the organization intend to expand? If plans include acquiring stock or assets of another business, due diligence should include insurance and indemnity issues. The acquiring company also must consider how any indemnity arrangements will work and whether they will be enforceable as a practical matter after the purchase. Managers should obtain and retain copies of the target’s insurance policies that may respond to any claim and also be sure to consider whether and how the policies being renewed will offer coverage for a newly acquired business.
- Doing business abroad: There are complex insurance issues when operating across borders that no organization can afford to overlook. It’s first important to evaluate whether a policy written in one country will provide adequate coverage in another. Keep in mind that many jurisdictions impose additional insurance requirements, such as procuring locally written and approved insurance from a local broker or a company licensed to write policies there. The penalties for failing to comply with some countries’ requirements can be quite severe.
- Named insureds: Make sure you know the intended insureds under each policy. If the company has subsidiaries or independent contractors, should they be covered? A thoughtful review of policy language can be very helpful here. In conducting this review, management should keep an eye out for any contracts that might require a third party to provide coverage. Remember: A certificate of insurance does not automatically mean an organization is an additional insured; insist on receiving a copy of the policy and endorsements to guarantee accuracy. Note the renewal dates and obtain copies of the new policy with each subsequent renewal.
- Duty to defend and retentions: Understand if your general liability policies require the insurer to defend the company against lawsuits. An insurer may be willing to permit the insured to control the defense, subject to certain conditions.
- Benchmarking: Setting appropriate liability limits ultimately depends on a number of factors, including your company’s appetite for risk. One simple tactic is to review the limits purchased by similar businesses based on revenues or asset size.
This analysis goes beyond the general consideration of the adequacy of policy limits, policy language, trigger issues, exclusions, product questions, and batch clause problems. Thoughtful deliberation over these types of questions should guide an effective evaluation of the entire insurance program and help you determine whether your system meets existing and anticipated needs.
The next endeavor is to review and revise employment policies and practices. An experienced manager knows just how damaging a high-stakes employment lawsuit can be—to both the pocketbook and company reputation. Often overlooked, these measures can play the deciding role in successfully preventing or, at a minimum, defending against a legal claim that otherwise could become the source of tremendous operational, financial, and public relations stressors. From an employee relations perspective, effective risk plans feature a thoughtful review and update of a company’s personnel policies and a working plan for effective implementation, training, and enforcement.
An employment audit should begin with a review of current policies contained in the company’s employee handbook—or, for some organizations, immediate implementation of an employee handbook. Though content will differ depending on culture, needs, and locations, every handbook should contain the following five basic policies. Business leaders and counsel must ensure these guidelines align with the company’s needs and comply with applicable law.
- At-will employment: An employee handbook should reflect that the employer or employee may terminate the employment relationship at any time, for any lawful reason, with or without notice.
- Equal employment opportunity/nondiscrimination: These policies also are a must-have for any handbook. Be aware of the common mistake of failing to include the appropriate protected categories or a mandatory complaint procedure for reporting related complaints and concerns.
- Anti-harassment: A harassment lawsuit, particularly sexual harassment, can lead to expensive litigation that takes a toll on employee morale and company reputation. An updated, compliant policy can help prevent harassment from occurring in the first place and—if necessary—mitigate its harmful effects through mandatory internal reporting, investigation, and remedial action procedures.
- Wage and hour: Often boilerplated or forgotten altogether, these policies are essential to establishing and enforcing compliant time management and pay practices and providing a defense to companies in lawsuits over the payment of wages and benefits. Because such claims are frequent contenders for class actions, it is imperative to ensure that wage and hour policies are in good shape.
- Technology systems and social media: Rapidly evolving technologies continue to transform how businesses and employees operate and communicate. Having in place updated technology systems and social media policies enables you to effectively communicate what employees can and cannot do and what they should expect relative to privacy and potential disciplinary ramifications when using company-provided computer systems.
Employee handbooks must be consistently and effectively communicated, enforced by leadership, introduced quickly to new employees, and reiterated during periodic training intervals. If executed well, this training should be informative and insightful and help all employees recognize and resolve workplace issues before they turn into legal problems.
If your business requires restrictive covenant agreements (a contract or written promise between two entities that frequently constitutes a pledge to either do or refrain from doing something), make sure you are proactive about the measures being taken to protect proprietary information, products, customers, and employees from the competition. Well-drafted, legally enforceable, restrictive covenant agreements are essential. When reviewing, updating, and tailoring restrictive covenant agreements to individual employees, keep in mind that restrictive covenant law is constantly evolving. Thus, a restriction that is certain to be upheld in one location may be deemed as overboard and unlawful in another.
Smart risk management means constant vigilance and proactive follow-up. Taking appropriate steps to ensure that your business is well protected via insurance coverage and effective employee-centered policies, practices, and agreements is vital to preventing and defending against legal claims.
Tonya Newman is a partner in the general litigation and insurance policyholder practice groups of Neal, Gerber, & Eisenberg. She devotes most of her practice to insurance coverage litigation for policyholders and product liability defense and insurance counseling. Newman may be contacted at email@example.com.
Sonya Rosenberg practices in Neal, Gerber, & Eisenberg’s labor and employment group, counseling and advising employers on employee relations issues and representing employers in discrimination and harassment claims at levels from administrative proceedings through state and federal appeals. She may be contacted at firstname.lastname@example.org.