Insurance Is Not A Company’s Primary Line of Defense in a Crisis

By and George R. Speckart | May 21, 2020

Imagine your company having a Halloween party: Employees show up wearing costumes mocking your customers, says the chief executive of a New York commercial insurance brokerage we recently interviewed. “Now imagine what happens when pictures of the party go public.”

That happened to a New York law firm, Steven J. Baum P.C., which handled foreclosure-related legal work. After The New York Times published the Halloween photos with a story, Freddie Mac and Fannie Mae forbade servicers of their mortgages from using the firm. Soon after, it went out of business, costing 89 people their jobs.

The lesson, according to the commercial insurance brokerage executive we spoke with: “Instituting and following good business and hiring practices and talking to and educating your employees is the best risk management. Insurance is secondary. A business owner should never say, ‘I can rely on insurance as my primary line of defense.'”

These days, all companies are in a state of pre-crisis. That’s because they’re under intense scrutiny from customers, regulators and others, who have a ready platform to air their grievances through social media. Consider how social media mobs move from one platform to another — posting, texting, messaging and blogging multiple times a day.

Compounding the challenge of any crisis for business owners is the public’s lack of empathy for executives and corporations. Trust in institutions is at an all-time low and the reasons and results abound. For example, Wells Fargo opened millions of fake customer accounts, resulting in fines, lawsuits and a significantly damaged reputation. A California jury awarded $29 million in damages to a woman last year who claimed the asbestos in Johnson & Johnson talcum powder gave her cancer. WeWork’s IPO blew up last fall, in part over concerns about corporate governance and former CEO Adam Neuman’s business practices, including a provision in the original S-1 stating that if he died, his wife would appoint his successor. Before its anticipated IPO, WeWork’s valuation was $50 billion. After shelving the IPO, the company’s largest investor, SoftBank, valued the company at $7.8 billion.

Regardless of company size, corporate officers have a responsibility to shareholders, customers and employees related to crisis preparedness, which is an essential risk management function. Many crises lead to lawsuits or regulatory action, which require additional resources to manage and can threaten a company’s reputation over the long-term as the litigation unfolds and potentially damaging information is revealed over time. Brokers can add value by encouraging their clients to prepare for a crisis in order to protect their reputation, brand and valuation. After all, a client who invests in crisis preparedness also becomes easier to insure.

Kicking Off Crisis Conversations

Brokers and agents don’t have to be the experts or give guidance on how to manage a crisis. Rather, they can be the catalyst for a client to seek out experts in risk management and crisis communications. Here’s how to kickstart the discussion with clients:

Relate your experience. “Tell them the war stories,” advises one commercial insurance agent. “If a client says, ‘We have crisis and risk covered,’ I tell them without divulging specifics and names what happened in a crisis with a client of mine who thought the same and didn’t prepare; I tell them they’re the beneficiary of this lesson.”

Ask questions. Brokers and agents can link how the outcome of a mismanaged crisis can negatively affect a company’s valuation and reputation. Once a business owner expresses interest, ask questions to test their level of preparedness:

  • If a crisis, like a data breach, were to occur at your business, what preparations has your company made to communicate with important stakeholders, including customers, employees and shareholders?
  • Who would speak for your company and does that person come across as authentic and able to connect with your stakeholders? While there are cyber liability policies that include the services of public relations and security teams to help a policyholder, the business owner still needs someone in the organization who can manage and lead the crisis response. Sometimes that’s the CEO; sometimes not.
  • Have you established unassailable operating standards that are in sync with current social values? In a crisis, people want to know what you stand for and how you reinforce those standards.
  • Have you thought through potential crisis scenarios and prepared preliminary materials so that you’re in a better position to respond if an event occurs?

Provide a checklist. Insurance professionals can also encourage clients to construct a crisis response checklist, to include:

  • Establish a crisis team: Designate a crisis leader and team that represents key operational areas to undertake the planning and response. The team should include spokespeople who are properly trained, know the business and are cogent, concise communicators.
  • Conduct crisis planning: Brainstorm specific crisis scenarios that could affect your business and, for each, construct a compelling response. Crises typically elicit emotional or even irrational responses from those affected. The right narrative breaks through all of the noise while addressing the needs of key stakeholders and delivers on their desire for a just outcome.
  • Practice the company’s crisis response: Particularly in today’s social media environment, an organization’s first response will determine the course of the crisis. Companies that don’t practice their crisis response can find themselves in chaos, trying to gather facts, assemble the right team and figure out a response without any guidance whatsoever. Whether it’s through table top exercises or role-playing drills, conduct simulations and rehearse at least once per year.

The underlying message for all insureds is that preparation is key because the narrative a company communicates in a crisis will determine its fate. Many companies get it wrong by either not talking or giving a “common sense” response that explains their viewpoint and seeks validation. A more effective approach is to listen and address the real concerns of stakeholders. The online mobs that typically fuel a crisis are seeking justice. A company’s response must show how it will address the root of the issue and the tangible steps it is taking to ensure it won’t happen again.

About Sean Murphy

Murphy co-leads the crisis and litigation communications practice for Texas-based Courtroom Sciences Inc. More from Sean Murphy

About George R. Speckart

Speckart is Texas-based Courtroom Sciences Inc. Director of Research and Consulting.

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