"It (unawareness of potential risks) can be really damaging to a company," says William Failor, executive director of Marsh Inc.'s Columbus office.
He says one of the most damaging situations arises when a company doesn't have enough coverage or is uninsured against certain risks.
Companies conducting business outside the United States must consider the risks of doing business overseas and how to manage them, says Failor. For example, if your company purchases a factory in France and wants to cut costs by reducing or eliminating employee benefits, you could run into trouble.
"In France, you have to have the agreement of the employees to reduce benefits," says Failor.
Risk management consultants such as Marsh can reduce these risks because they have local offices around the world, and the employees who staff them are versed in the local employment laws and risks.
"If you think you can apply American business philosophies, you could be in error," Failor says.
There are no limits to who might sue your company, says Failor. It's not just shareholders who can instigate a lawsuit; in today's post-Enron environment, employees, customers or vendors could get involved in a class action suit against a company's directors and officers if they feel they misrepresented the company's financial picture.
Failor says that although directors and officers insurance premiums have risen substantially in the past five years, it is still a good investment.
Smart Business spoke with him about the risks companies face and how they can address them.
Which insurance products are most popular with businesses today?
Our principal business is risk management. We serve a consulting role. We analyze a company's exposures and determine its insurance needs, and we go to the marketplace to find carriers that meet the company's needs.
We serve as an intermediary between the client and the insurance marketplace. The consulting arrangement is successful for companies because of our size. We have leverage with the carriers to get things done and get better pricing than smaller companies could get on their own. And this service is also our most profitable.
We provide all kinds of services, like claim management, but risk analysis and management is our signature capability -- it is certainly our bread and butter and one of the things we're known for.
Many companies don't consider liability issues until it's too late. How damaging can it be for a business to neglect risk management?
Uninsured losses can be damaging. A company would have to have significant cash reserves on its books to cover a loss. If you don't pay attention to risk, it will hurt you.
The thing about Marsh is that our services grow with the size of the client. We have professionals that can take a company through its infancy and expand with it. As a company grows, its needs can be more significant than a smaller company.
If you're in a business of distributing products, there is more exposure to the producer's liability. Our relationship is like that of a CPA and lawyer's; we guide the company through the landmines so the company can do what it does best -- running the business.
Directors and officers liability issues have become more prominent, partially due to Sarbanes-Oxley. How has this impacted Marsh's business, and with how much understanding does your typical public client come to you?
It has had major impact. Enron has caused an upheaval, and more people are looking for solutions than ever before.
Most companies never thought they were susceptible to suits. The average claim against a company in 2001 was $7 million; now it is $23 million. Obvious causes are injury to a representative of the company.
Lawsuits put companies in a difficult position. They take the focus off running the company as it defends itself. Companies were aware of shareholder class action suits, but now know that employees, customers, vendors and regulatory firms can also get involved in directors and officers claims.
If a company overstates its earnings and then restates its financials, it opens a can of worms and the potential for a D&O suit. D&O coverage is grossly misunderstood. We do presentations to boards describing what it is and what it isn't, how to avoid the pitfalls and craft coverage that minimizes exposure.
Along with the size of claims, the cost of coverage has gone up. Publicly traded companies will have a substantial outlay of money for the premium. But that is starting to slow down a bit. The premium is still substantial but is less than the significant potential costs involved in a suit.
What can businesses do to better mitigate international risk?
As an international broker, we can provide a great deal of information in each domicile. We also put the company in touch with local officers for cultural concerns.
A client wanted to buy a company in France and determined he could cut its costs by reducing or changing employee benefits. He then discovered that, in France, a company has to have the agreement of its employees to reduce benefits, so the cost reduction was never going to occur.
We obtain accurate information from local governments and provide cultural resources.
How have your clients' needs changed over the past five years, and how have those changes affected your services and operations?
We have come through a very hard market the last three years. Prices have gone up, and availability of products and limits were reduced.
But the economy is getting better moving forward. Clients have been looking for better ways to manage risk over the last four years. Some larger companies have set up a number of captive insurance companies -- wholly owned subsidiaries that act as an internal insurance company. These captive companies take the burden of risk off the company in a more cost-stable way.
Have more companies initiated crisis plans since Sept. 11?
Yes, but we've also seen this as an outgrowth of Sarbanes-Oxley, changing management practices and how one company relates to another. Because of Sept. 11, we all learned that we need a better understanding of where our employees are and that we should develop a plan to get back in business after something horrible happens. How to reach: Marsh Inc., (614) 460-8152 or www.marsh.com