IRMI Update—Issue #134
An E-mail Newsletter for Risk and Insurance Professionals
ISSN: 1530-7948
April 5, 2006
In This Issue
Colleague,
Business Insurance magazine recently
carried a Reuters report in which PricewaterhouseCoopers' Chief Executive Samuel
DiPiazza called for a cap on the liability exposure of directors. He discussed
the ease with which D&O suits can be instigated and the difficulties in recruiting
directors that corporations are beginning to face as a result.
I think that Mr. DiPiazza has a point, at least for outside directors. Executives
who spent their careers managing other companies can provide a wealth of knowledge,
experience, and insight on a board of directors. Why, however, would a successful
businessperson want to risk his/her entire life savings to serve on a corporate
board? The compensation would rarely be adequate to cover the risk. As an example,
one of my best friends was CEO for a billion dollar service business until he
retired. While he could contribute greatly to any corporate board, he is unwilling
to take the risk.
On the other hand, our legal liability system does provide needed checks
and balances that motivate people to perform their duties responsibly. The pendulum
swings back and forth, as we saw with WorldCom and Enron, but our system depends
on the liability risk to "keep people honest."
Regardless, I think some type of cap on the liability of outside directors
makes sense. Since D&O insurance is available, it could be a high number, perhaps
$1 million or more. It might also have an exception or two, such as instances
where illegal acts or financial self-dealing are proven against the director.
It also might not apply to corporate officers and inside directors. A system
such as this should make it much easier to recruit high quality people to corporate
boards. The only question is whether removing the threat will also significantly
reduce the diligence of their oversight. I don't think it would.
What do you think? Have you seen situations where the current liability situation
has made it difficult to recruit quality board members? Would it make sense
to cap director liability? If so, should it apply only to outside directors?
[See reader responses.]
We've recently updated our popular
Glossary of Insurance and Risk Management
Terms. The tenth edition interprets more than 2,800 terms and nearly
900 abbreviations for risk professionals and their assistants. To learn more
or purchase copies for your clients or staff visit this site.
Thank you for subscribing to IRMI Update and for recommending it to your
friends and colleagues.
Have a great day.
Jack
Jack P. Gibson, CPCU, CRIS, ARM
President
IRMI
Don't Let Environmental Liability Claims Become Bottomless
Money Pits—Pay-for-performance contracting for environmentally impacted
properties is an ideal way to minimize spending; to cap the total claim payout;
and to assure cleanup cost controls are built into your contracts. If you answer
"no" to four or more of the questions below, you should consider pay-for-performance
contracting:
- Is there a firm commitment by the cleanup contractor to reach liability
closure by a specific date?
- Is there a firm commitment by the cleanup contractor to reach liability
closure within an established maximum budget?
- Will your cleanup contractor or consultant "put their money on the table"
by tying your claim closure to them receiving full payment?
- Will your consultant or contractor agree to a "not to stop" approach
to cleanup by committing resources and effort until regulatory closure is
achieved?
- Can your consultant or contractor provide examples and references for
specific projects that have reached regulatory closure?
- Does your services contract align your goals and the goals of the contractors
and consultants ("pay-for-performance"), or do contractors get paid more
the longer it takes to complete your project ("time and materials")?
- Is the extent of the environmental liability fully defined?
- Have the regulatory cleanup goals been identified?
- Have you hired consultants to perform more than one "site investigation"?
- Are the prices you are quoted an "all-inclusive" price, or are some
necessary tasks excluded, only to be added on later (cost-modification)?
- Has your consultant or contractor considered financing and accounting
options that match your annual claims paid or cash flow goals?
- Will you realize a return on investment (ROI) or are you overspending
on noncleanup tasks and costs?
By: Ron Adams, P.E., Sr. VP Client Services
Environmental Remediation and Financial Services, LLC
Sea Girt, NJ
radams@erfs.com
www.erfs.com
Suggest a Risk Tip. Send us a practical tip (less than 300 words) for identifying and managing risks,
buying insurance, managing claims, or filling gaps in insurance coverages. Submit your tips. We'll
acknowledge your contribution as we did for Ron.
We have recently updated a number of the reference manuals in the IRMI library
and published new issues of The Risk Report and Captive Insurance Company Reports.
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Glossary of Insurance and Risk Management
Terms will give you quick answers to questions involving unfamiliar
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Larry Schiffer writes the Reinsurance Law column for IRMI.com and has contributed
25 articles since March 2000. He is a partner with LeBoeuf, Lamb, Greene & MacRae,
L.L.P., in New York City and practices in the areas of commercial, insurance,
and reinsurance litigation, arbitration, mediation, and regulation. He also
serves as a mediator for the mandatory commercial mediation program of the U.S.
District Court for the Southern District of NY and for the NY Supreme Court
Commercial Division, Alternative Dispute Resolution Program. He is a popular
speaker and author on reinsurance litigation and other insurance topics. See
a list of his IRMI.com articles,
including his most recent March 2006 commentary.
To learn more about Mr. Schiffer and his practice, see his full biography.
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