Private Company Directors & Officers
Personal Asset Loss Exposure
Seafood Bioterrorism Preparedness After 9/11
Shortly after the
Now, there is an emerging corporate governance and personal liability problem facing the officers and directors of the privately-held food business that can not be ignored—Bioterrorism Preparedness. The federal government, through the National Strategy for Homeland Security, has clearly placed the onus on private business to identify and protect our critical infrastructure and key assets, detect terrorist threats, and augment our defenses.
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“I can unequivocally state that any director or officer of a
privately held corporation who does not insist that the corporation
carry some form of D&O insurance is playing a dangerous game with
high stakes for him or her, his or her spouse, and his or her
estate.”
Michael A Rossi
Troop Meisinger
Steuber & Pasich,
LLP
Marrch 23, 1998
issue of Insurance Week
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The National Strategy sends a clear message to officers
and directors, “The private sector is essential to ensuring that existing
vulnerabilities to terrorism in our critical infrastructure are identified and
eliminated as quickly as possible. The
private sector should conduct risk assessments on their holdings and invest in
systems to protect key assets. The internalization of these costs is not only a
matter of sound corporate governance and good corporate citizenship but also an
essential safeguard of economic assets for shareholders, employees, and the
Nation.” D&Os
can not disregard the mandate to identify vulnerabilities
and prepare plans to eliminate those vulnerabilities, without great risk to
their personal assets and the assets of their companies. Essential Duties: What are the essential duties of D&Os of privately-held corporations? Basically, D & Os have a fiduciary duty of care, a requirement to make informed decisions, a requirement to perform in good faith, and they must act in the best interest of the company. A director or officer faces personal liability (exposes his or her personal assets to loss) for inaction if he or she was fully informed and attentive with regard to a particular risk, but failed to take appropriate action. |
However, few directors and officers of privately-held
corporations fully understand their personal liability exposure as interpreted
by the courts. Just because the
corporation is not publicly traded does not mean that
it is not subject to US security laws.
In fact, D&Os of privately-held
corporations owe the same duties to shareholders as do their counterparts at
publicly-held corporations. In short, D&Os have a fiduciary responsibility to manage the
company effectively.
How does this relate to bioterrorism? Most of the seafood industry provides
services to large numbers of people (hotels, restaurant chains, resorts,
casinos, supermarket chains, large wholesalers, etc.) and D&Os
have a special obligation to investigate, adopt adequate precautions, and
implement effective bioterrorism response plans. (See the accompanying D & O Claim example
for the details of what can happen to you.)
September 11 and the subsequent anthrax catastrophe
demonstrated that any company is susceptible to catastrophic emergencies, which
can have huge consequences to the private company and its employees, customers,
creditors, lenders, and shareholders, among others. D&Os have the
ultimate responsibility to prepare for and manage such emergencies.
With September 11 and the anthrax catastrophe, D&Os have a heightened obligation to anticipate and
prepare for this level of unprecedented exposure. D&Os are very much exposed along with their personal assets. Let us get it out of the way right now. Compliance with federal, state, and
local regulations regarding bioterrorism will not save you and it is a false
sense of security to believe otherwise.
Capacity to Incur Uninsured Loss: If you make up part of the seafood industry
average, your Gross Profit is about 8% and your Net Profit Before
Taxes is about 1%, annually. At $50
million of sales, Gross Profit and Net Profit Before
Taxes are $4,000,000 and $500,000, respectively. What happens if you have an uninsured loss of
$1,000,000? It is obvious that you won’t be making a profit for the next two years. And working capital
and retained earnings take a significant hit.
In many cases, working capital is impaired enough to cause a serious
reduction in the ability to purchase income-producing goods to continue making
sales at the existing level.
Bioterrorism Planning:
· Expect and
prepare for the unexpected.
·
Develop a plan that reflects the unique circumstances and exposures for
your company.
·
Attach a sense of urgency, importance, and thoroughness.
·
Use consultant specialists in business continuity planning.
·
Identify and use resources, such as the HACCP or FEMA guides.
·
Assemble a project team having a wide array of expertise and sufficient
internal and
external
resources and give them the highest authority to carry out the task.
·
The plan should be comprehensive, yet functional.
·
Address specific procedures for different types of bioterrorism.
·
Determine initial and ongoing training requirements
·
Every employee should know how to function in the face of chaos.
·
Emergency personnel should be trained in setting priorities,
coordination, and
communication
in emergency situations.
·
Test the plan often with realistic disaster drills and “hands-on”
training.
·
Establish security policies applying to all levels of the company
involving internal and
external
operations.
·
Work hand-in-hand with public warehouses in evaluating, establishing,
and testing
bio-security
practices where your income-producing goods are stored.
·
Fully inform all employees of all the potential risks or threats, implement bioterrorism
employee
safety procedures, and establish a high legal standard for screening the
backgrounds
of job applicants and current employees alike.
Insurance Considerations: Why risk your personal assets or those
of your spouse when there are affordable insurance products available that can
minimize the risk of having to personally pay for such
a loss?
Even if you
decide to purchase D&O insurance to protect you and your fellow officers
and directors, there are additional insurance and uninsured risk issues relating
to D&O duties that must be addressed.
·
D&Os are responsible for purchasing
readily available insurance (including D&O insurance)
to
conserve corporate assets.
·
Bioterrorism exposures require private companies to re-examine numerous
aspects of their
entire
insurance program, since a bioterrorism incident can potentially involve
virtually
every
policy in a company’s portfolio.
·
The financial security of each insurer should be
assessed.
·
Analyze general liability and directors and officers
liability policies for adequacy of coverage
and
limits. Assess the impacts of coverage
exclusions in both policies. For
example, there
may not
be coverage in the D&O policy for failure to obtain and maintain insurance,
such as
contamination
or terrorism coverage.
September 11
changed the world in many ways. Bad
corporate governance has also exacerbated the corporate and legal climate for D&Os. These
events have created a laser focus on the responsibilities of privately-held
company D&Os that is unprecedented.
Those private
companies that respond to this new threat and enhanced legal
volatility with informed,
quality
initiatives will likely fare quite well.
The D&Os who do not give these new threats
proper
attention and urgency run the increased risk of causing themselves, their
company, their creditors,
their
lenders, and their customers horrendous and perhaps avoidable financial and
human loss.
Bioterrorism
is only one aspect of Business Continuity and Emergency Preparedness. All companies should prepare a comprehensive
Business Continuity Plan, including bioterrorism risks.
D&O
insurance is available and affordable. Contact
Capitol Risk Concepts,
Ltd. Tel: