Personnel insurances related to business continuity planning

by John Sloan

When any corporate business continuity plan is formulated, the insurance of personnel is usually given minimal attention as it is assumed that the basic insurance policies for accidental death or injury are in place.

But large companies can be exposed if they lose many employees in the one disaster, such as the World Trade Center, or a small organisation can even go out of business if a key person is incapacitated for a lengthy period or dies.

As with the preceding articles in this series (1), this section concentrates on the personnel insurances organisations should have in place before any type of disaster strikes.

It is recognised that most countries have legislation to automatically provide employees with protection for accidental death or bodily injury arising out of workplace accidents. Consequently, such standard coverages provide protection for employees who are injured at the time of a disaster or incident, irrespective of its magnitude.

However, it is not as simple as that, as large or small organisations have exposures to additional personnel risks warranting appropriate insurance coverage.

Areas that need considering include:

Additional insurance for accidental death or disablement
This type of policy can supplement any statutory workers' compensation/employer's liability cover by providing an additional benefit, particularly for accidental death or disablement. The policies can be arranged to cover all or specific employees for specified amounts with lump sums or multiples of salaries being typical coverages.

Selecting just who is covered by such additional personal accident policies can be a problem as status and worth to the organisation come into the selection decision. Such policies can also be arranged for directors.

High-risk occupations
Some organisations arrange additional personal accident cover for employees in high-risk jobs, such as helicopter pilots or other hazardous activities, or higher risk exposures.

Limit any one conveyance
Many group personal accident insurances or travel policies can limit the amount the insurer will pay in event of multiple claims arising out of the one conveyance, particularly aeroplanes or buses. This limitation also discourages a large number of people travelling on the same conveyance.

The same ‘accumulation’ risk can apply to superannuation schemes which can be exposed to multiple death or permanent disablement claims.

Overseas travel
The key executives of many organisations travel overseas, and their death or illness can severely impact on the employer. Thus comprehensive travel insurance is a must with provision for repatriation or even rescuing from hostile territories. Becoming ill overseas can result in horrendous medical costs, and if there is no travel insurance in place to cover these it can be financially devastating for the employer if they have to pick up costs literally in the hundreds of thousands of dollars or more.

‘Corporates’ require specialised, customised travel insurance and not ones supplied by travel agents which can be both costly and limited.

In addition to travel insurance, separate coverages are available for kidnap and ransom, if employees are seconded to or travel to the world's ‘hot spots’.

Key person insurance
This has long been recognised as a major exposure for organisations, irrespective of their size or operation. The classic textbook ‘Risk Management in the Business Enterprise’ by Mehr and Hedges accurately summarized the key questions with the only amendment being to change "key man" to "key person".

These key men can adversely affect the net earnings of the business. The question the risk manager must answer is: How much will earnings be affected? Usually, the answer is largely arbitrary, but several factors can be considered and weighed in reaching an ‘educated guess’. Judgment will play the principal role in determining the maximum loss potential resulting from the loss of key person – and good judgment frequently is a product of experience.

"The factors to consider in arriving at the maximum key person loss potential are those which help to measure how termination of the key person's services will affect business income and expenses now and in the future. The following is a list of questions for which the risk manager must find reasonable or acceptable answers if he is to determine the loss potential in this area.

1. What portion of the company's income is traceable to the superior ability of the key person?

2. How long will it take to find a replacement for the key person?

3. What will it cost to find a replacement for the key person?

4. How much salary and other benefits will be necessary to attract a suitable replacement for the key person?

5. How much will it cost to train the replacement?

6. What will be the cost of the mistakes made by the replacement during the adjustment period?

7. How long will it take to bring the replacement up to his or her maximum efficiency?

8. When operating at maximum efficiency, how will the replacement compare with the key person?

9. How will the productivity of the replacement compare with that of the key person during the orientation period?

10. How much investment (in research, for example) would be lost if the key person's services were terminated?

"The answers to many of these questions often cannot be found, not even by those as intimately familiar with the business as the risk manager is or ought to be. Who, for example, can say with any degree of confidence, except in the most obvious cases, how much of a company's profit is attributable to the superior ability of a key person. Furthermore, who can say with any authority what the cost of mistakes will be during the replacement's adjustment period, or how the productivity of the replacement will compare with that of the key person, or even how long it will take the replacement to reach his maximum efficiency? Yet these and the other questions have to be answered if the maximum key person loss potential is to be measured accurately."

Key person insurance is rarely arranged by governmental/local authority/municipalities or multinationals but comes into its own with smaller entities or those who are extremely reliant on one or two key personnel.

Many organisations can be reliant on key persons in their research and development or marketing arms, triggering the need for specialist insurance protection. This recognises that the death or disablement of such individuals can be financially devastating to the organisation.

Disablement by illness
As employees can be equally disabled by illness, this risk is insurable, particularly by smaller organisations. Some companies have separate ‘salary continuance’ policies on employees, but that is more in the nature of an employee benefit rather than to guarantee business continuity after any disaster.

Pandemics
The spectre of a ‘flu pandemic has already been addressed by insurers. In some instances, insurance may apply for those individually affected, but it appears that if tens of thousands of people are quarantined or laid off work, separate employer-provided insurance to pay wages and salaries is highly unlikely.

Multiple insurances triggered by one incident
The World Trade Center has become a classic example of how various personnel-related insurances are involved as substantial claims were made under the following types of policies:

* Workers' compensation
* Personal accident
* Travel
* Key person
* Salary continuance
* Superannuation, especially death benefit coverage.

Payment of wages to employees after a disaster
This cost is insurable by a business interruption policy, which was covered in an earlier article.

Personnel insurances required after a disaster
These arise where employees:

* Have to stay in the disaster zone
* Help with the salvage
* Have to get home as soon as possible, i.e. repatriation

In any event, the insurance cover should already be in place, but some specialist covers may have to be immediately arranged to protect both the employees and employer.

Fraud risks
This is often classified as a personnel risk, and if anybody asks what fraud has got to do with business continuity, the answer is "Barings Bank", which went under following Nick Leeson's massive frauds.

Major frauds have also been responsible for the demise of other organisations and insurance, even if arranged, has not been sufficient to ‘save’ or resurrect them.

Special insurances are available and come under a variety of titles, such as banker's bond/fiduciary insurance/employee dishonesty/crime manager or other terms. These policies provide a degree of protection for employee dishonesty which needs to be reviewed with property, consequential losses, liability and people risks.

The classic problems encountered arranging any employee dishonesty insurance are:

* What is the maximum sum insured for any one claim?
* What is the annual limit for all claims?

These are the two key issues, followed by:

* Does the policy cover all staff?
* Does the policy cover selected and named staff or defined positions?
* Are audit costs covered?
* How far ‘back’ can claims be made for? - a standard limit is 18 months.
* Does the policy extend to other people who might commit fraud?
* Does the policy cover special risks arising from electronic funds transfer and other exposures to embezzlement and fraud issues?

Conclusion
As employees are regarded as the lifeblood of any organisation, obviously the appropriate insurance has to be in place before any disaster occurs, irrespective of its cause, magnitude or location.

John Sloan is a New Zealand based Insurance Risk Consultant, contactable at sloanrisk@xtra.co.nz

(1) Previous articles in this series:

Business interruption insurance and its relation to business continuity planning

Property insurance as it relates to business continuity planning

•Date: 16th October 2007• Region: Australia/World •Type: Article •Topic: BC general
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