8/22/2013. Presented by: Erike Young, MPPA, CSP, ARM. Chapter 7. Management Liability

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1 Presented by: Erike Young, MPPA, CSP, ARM 1 Chapter 7 Management Liability 1

2 Director and Officers Liability Loss Exposures Volunteer or paid participation on a board can expose individuals to being sued In order to protect board members, risk managers must understand role of directors and types of suits they may be exposed Risk control is key aspect management of risk exposure 2

3 Corporations and Role of Directors and Officers Corporations are owned by stockholders, but controlled by board of directors Directors are elected by stockholders to: establish corporate policy Makes major business and financial decisions Appoints corporation s executive officers to manage daily operations Other entities Public entities, non-profits, trusts, limited liability companies have similar duties and exposures Major Fiduciary Duty is the most important aspect when analyzing D&O exposure. Fiduciary duty is the duty to act in the best interests of another. 3

4 Major Responsibilities and Duties of Directors and Officers Major Responsibilities and Duties of Directors and Officers Duty of Care Standards Act in good faith and in a manner they reasonably believe to be in the corporation s best interests Discharge their responsibilities with informed judgment and a degree of care that a person in a similar position would believe to be reasonable under similar circumstances Business Judgment Rule A legal rule that provides that a director will not be personally liable for a decision involving business judgment, provided the director made an informed decision and acted in good faith Must demonstrate good faith by attending meetings, reviewing financial information, making decisions in their own interest. 4

5 Types of Suits Made Against Directors and Officers Derivative Suits Lawsuit brought by one or more shareholders in the name of the corporation Damages go directly to corporation, not shareholders Plaintiff can be awarded expenses incurred Must prove that defendants violated business judgment rule Nonderivative suits Suits not brought in name of shareholders (customers, employees, creditors, govt. entities) Stockholders can bring nonderivative suits in their own name as opposed to suing in corporation s name Plaintiff must show that an injury or injustice resulted from wrongful acts or omissions of directors and/or officers Types of Suits Made Against Directors and Officers Nonderivative suit examples Providing false or inadequate disclosure in connection with stock issuance Making/permitting false entries in corporate books and records Preparing and signing false documents with regulatory authorities Failing to correct inaccurate statements within a prospectus issued by the corporation Failing to review annual financial statements and monitor corporate affairs Missing an opportunity for expansion, acquisition, or sale of the corporation 5

6 Types of Suits Made Against Directors and Officers Class Action Lawsuit in which on person or a small group of people represents the interests of an entire class of people in litigation For D&O claims, typically based on wrongful acts related to securities. Common allegations Corporate public statements/reports contain material misrepresentation or omissions Alleged misrepresentations/omissions artificially inflate stock price While inflated, insiders sold personal holdings for a profit and following insider sales, stock price dropped sharply Indemnification of Directors and Officers Indemnification allows directors and officers to be reimbursed in the event that individual board members are sued and prevail Some case have not allowed indemnification due to Ultra vires (an act of a corporation that exceeds its chartered powers). Several states have passed laws granting indemnification to D&Os, while other states require it For most states, for indemnification to be allowed, corporation must adopt contractual provisions that set guidelines for reimbursement Important to remember that indemnification is retrospective or occurs after case has concluded D&Os may need advances to cover expenses before settlement concludes Advances subject to agreement that money will be returned if found not to be entitled to indemnification Agreements to refund may be difficult to enforce Sarbanes-Oxley prohibits loans in most cases 6

7 Controlling D&O Liability Loss Exposures D&O Insurance only transfers financial risk, does not restore corporation s reputation Employment Practices Liability (EPL) Loss Exposures Legislation is primary source of employment related claims Civil Rights Act of 1964 first significant law which prohibited discrimination by employers EPL insurance specifically excludes violations of certain laws Major types of EPL Claims (claims may involve more than one type) Discrimination Wrongful termination claims Sexual harassment claims Retaliation claims Other types of EPL claims 7

8 Discrimination Claims Discrimination does not have to be intentional to be unlawful Types of discrimination Overt discrimination (intentional discrimination) is a specific observable action that discriminates against a person or class of persons Disparate treatment is unfavorable or unfair treatment of someone in comparison to how others are treated Disparate impact is application of personnel policies to applicants or employees that have effect of denying employment or advancement of protected classes 8

9 Wrongful Termination Wrongful termination accounts for majority of EPL cases Many wrongful termination claims involve charges of discrimination Even in At Will states, courts have held that there is an implied contract that employees will be terminated for just cause Sexual Harassment Claims Sexual harassment claims emerged after EEOC defined sexual harassment as unwelcome sexual advances when submission to such conduct is made either explicitly or implicitly a term or condition of employment. Some claims can be based upon an hostile work environment, which is when an employee is subject to sexual harassment that is so severe or pervasive that it alters the working conditions. Employee must prove the following for hostile work environment Employee is a member of a protected class Employee was subjected to unwelcome harassment based on the protected characteristic The harassment affected a term or condition of employment The employee knew or should have know about the harassment and failed to take prompt remedial action Hostile work environment can now be claimed for Race, disability, religion, etc.. 9

10 Retaliation Claims Retaliation claims are usually brought by employees who Filed workers compensation claims Testified against the employer Whistleblower 10

11 Other Types of EPL Claims EPL Claims that do not fall within context of discrimination, wrongful termination, sexual harassment or retaliation WARN ACT passed in 1988 Worker Adjustment and Retraining Notification Act passed to mitigate effects of mass lay offs If you layoff more than 50 employees, must provide certain notice and compensation Time Reporting and Mandatory Breaks Several class action lawsuits for not allowing or requiring employees to take mandatory lunch break Fiduciary Liability Loss Exposures Loss exposure that arises mainly out of employee benefit plans Claims made against plan officials (fiduciaries) for breach of fiduciary duties Claims can be made based on investment practices or unfunded liabilities Acts and topics related to fiduciary responsibility Employee Retirement Income Security Act (ERISA) Meant to address underfunding of benefit plans Health Insurance Portability and Accountability Act (HIPAA) Sets standards for health insurance portablity Limits exclusions for preexisting conditions Prohibits discrimination in enrollment and premiums based on healthrelated factors Improves disclosure about group health plans Duties and liabilities of employee plan fiduciaries 11

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13 Human Resource Potential Organization s Human resource potential is the collective capacity of an organization to produce goods or services of value by using existing skills and knowledge or the skills and knowledge developed in the future. Factors affecting human resource potential Health and education of general population Good hiring pool with good schools Proper personnel selection procedures Hiring the right person the first time, passing probation period Preservation of employees existing productive capabilities Wellness and injury prevention on and off the job Rehabilitation of injured or ill employees Returning employees to productive capacity Retention of productive employees Good wages and benefits, resignation or retirement of productive employee is risk to organization 13

14 Types of Personnel Losses Common personnel causes of loss Work-related injury and illness Retirement and resignation Work-related violence Work-Related Injury and Illness Injury vs Illness Injuries usually acute, caused by external physical force that result in laceration, fracture, contusion, etc Illness develops slowly over time and can be due to exposure to substance over time or repeated use of body parts 14

15 Work-Related Injury and Illness Injury Causes of Loss Machinery and equipment use Materials handling Vehicle fleet operations Physical conditions of premises Not in book Employee behavior not following safety rules or bypassing safety devices Work-Related Injury and Illness Illness Causes of Loss Long-term chemical exposure Noise levels Ergonomic stress Radiation Temperature extremes Poor air quality 15

16 Retirement and Resignation When employee retires or resigns, loss to organization is the future value that the individual would have provided the organization Organizations must monitor for increase in employee departures and determine cause Problems may be identified with an exit interview with the departing employee. The issue may be with just one manager, or may be pervasive throughout the department or the company Example: TPA headhunting Work-Related Violence Two types of work-related violence Workplace violence includes any type of violence or threat of violence that occurs in the work environment, including verbal assaults, threats, coercion, and intimidation Identify jobs that are at higher risk, such as convenience store clerks at night A violent workplace may cause employees to be fearful or depressed, resulting in reduced productivity and increased rates of absenteeism, disability, and resignation. Employees who handle money and/or deal directly with the public are particularly vulnerable to violence Workplace violence may also cause disability losses, sick days, workers' compensation disability claim, or even lawsuits against the employer Kidnap and Ransom is loss exposure that organizations are likely to face if they operate in high-risk overseas locations (or in Mexico) Key personnel at higher risk for K&R Prevention techniques include Unmarked vehicles Locating personnel in safer locations Instructing employees on risks 16

17 Assessing Personnel Loss Exposures Methods to assess personnel loss exposures Risk assessment questionnaire Industry specific questionnaires to understand operations and exposures Loss histories Analyze past workplace injury data Other records and documents BLS comparisons and other public data Flowcharts and organizational charts Help identify key personnel and need for succession planning Identify concentration of employee operations and work performed Personal inspections Identify equipment and operations that could lead to injury Expertise within and beyond the organization Interview employees with knowledge of operations or consultants Avoidance Risk Treatment for Work-Related Injuries Not performing work or contracting out work Loss Prevention Loss Reduction Separation and Duplication 17

18 Risk Treatment for Work-Related Injuries Loss Prevention Safety Engineering Physical Controls Guarding Ventilation Housekeeping, etc Procedural Controls Education and Training Rotation SOPs Workplace Design (Ergonomics) Manual Materials Handling Cumulative Trauma Disorders (CTD s) Physical Layout of Work Stations Displays and Controls Fatigue Americans with Disabilities Act (ADA) Human Factors Engineering Process that applies knowledge of human behavior to design equipment people use on and off the job Biomechanics process that views people at work as special kinds of machines functioning within environments filled with other machines Loss Reduction Post injury management/rehabilitation When prevention fails, the goal is to reduce losses by restoring the health and productivity of those temporarily disabled by injury or illness Rehabilitation management is an effective loss reduction measure because it reduces the severity of disability or employee income losses. It helps to limit the financial costs of incurred claims by doing the following: Avoiding litigation Providing quality medical care Ensuring a prompt return to work Providing vocational rehabilitation 18

19 Loss Reduction Post injury management/rehabilitation Three types: Physical Rehabilitation restores motor skills impaired by injury or illness. Psychological Rehabilitation returns a person to the healthy mental condition the person enjoyed before becoming disabled. Vocational Rehabilitation enables a person to return to previous work tasks and other activities. Loss Reduction Post injury management/rehabilitation Variables that influence rehabilitation potential include: Characteristic of the impairment, functional limitations, residual capacity, and prognosis of disabled person Perception of situation by disabled person Environmental conditions, perception of situation by family, healthcare professionals, and co-workers Relationships that influence rehabilitation potential Employer and injured employee Physician and patient Claimant and insurer Injured employee and family Disabled person and rehab specialist Injured employee and attorney 19

20 Loss Reduction Post injury management/rehabilitation First response to injury the most important Need to provide immediate medical attention Should see designated medical facility to manage care as allowed by law Determination made if medical only claim or lost time incident (indemnity claim) Documenting injury and circumstances (accident investigation) First line of defense in controlling rehab process Determine other physical problems not related to injury Loss Reduction Post injury management/rehabilitation Circumstances that limit effectiveness of rehab program and must be managed: Extended hospitalization Uncoordinated medical treatment Extensive medication Lack of clear diagnosis Lack of clear prognosis Round the clock nursing care Non-goal oriented physical therapy Lack of discharge planning Lack of specific date for returning to work 20

21 Separation and Duplication Separation involves arranging activities and resources so that no single event can cause simultaneous losses to all of them, such as when an organization prohibits key personnel from traveling together. Duplication involves creating backups to be used only if the primary activity or asset suffers a loss, such as cross, training employees, so that each has a variety of skills. Cross-training can also reduce the employee's exposure to financial loss from injury or illness Risk Treatment for Work-Related Violence Workplace violence is often thought to occur only between co-workers, but it may also involve a customer, someone who has a personal relationship with the employee, or a complete stranger. 21

22 Workplace Violence Risk control measures can be used for workplace violence from coworkers in the following areas: Hiring process - one of the most effective methods of preventing workplace violence can be comprehensive screening of potential employees. Supervisor training - supervisors at all levels should receive training in recognizing, avoiding, and reporting potential violence. Written policies - the employer should provide all employees with a written policy clearly indicating which types of conduct are unacceptable and the consequences of unacceptable conduct. Procedural safeguards - should establish uniform employment procedures and should put measures into place to ensure that they are followed by all employees and supervisors. Termination process - terminations must be handled carefully, and procedures should be established and followed. Termination meeting, escort out of building, return of security badges 22

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24 Kidnap and Ransom The most effective way to control a kidnap and ransom loss is to prevent it. Prevention may not mean doing business in a dangerous location. Organizations that must operate high-risk area should employ various protection measures, which often include Maintaining a low profile No logos on vehicles, clothing, major events Employing bodyguards Housing employees in walled/secured compounds Using armored vehicles and providing bullet-proof vests Training employees to recognize potential kidnap situation Varying routine A risk manager should be alert to changes in the political and economic environment that might change the organization's exposure to kidnapping. Kidnap and Ransom If payment is deemed appropriate, arrangements have to be made with the organization's bankers and other sources of funds, and the payment marked so that the funds and kidnapper can be identified. Except for cases of politically, motivated kidnapping, most kidnappings involve ransom demands. Companies with a kidnap and ransom loss exposure generally purchase kidnap, ransom, and extortion insurance Using experts, whether provided by an insurance company or hired directly, can prevent communication errors, negative publicity, and a disastrous outcome. 24

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