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OAMPS on cover

JULY 2009


F E AT U R E S

MANAGING RISK

Directors Responsibilities in the Spotlight

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OAMPS on cover Directors Responsibilities in the Spotlight

A number of high profile court rulings have created a renewed

s The WA Supreme Court findings in the long running Bell

focus on directors’ responsibilities, and the measure of

Group vs Westpac case have also increased focus on the

protection afforded to them under their directors & officers

obligations of directors during harsh economic conditions,

liability insurance policy.

both in respect to solvency and continuous disclosure

The NSW Supreme Court has recently ruled that 7 former non

obligations to stakeholders.

executive directors and 3 former executives of James Hardie

Both recent court rulings and the continued financial difficulties

breached the Corporations Act when they approved a press

faced by organisations of all sizes across Australia will

release containing misleading and deceptive comments

continue to expose directors and companies to potential

relating to the viability of the asbestos victims’ compensation

litigation. Examples of securities related class actions taken by

fund.

stakeholders include ABC Learning, Allco, Aristocrat, Babcock

Hailed as a landmark decision in Australia on corporate governance, ASIC have subsequently issued “important

and Brown, Centro, Downer EDI, GPT, MFS, Multiplex, OZ Minerals and Sons of Gwalia.

guidance and direction” notes for Australian companies

Failure to comply with continuous exposure obligations can

following the Supreme Court decision. The ASIC guidance

expose companies and the Board, with increased exposure

addresses both:

when solvency has been called into question.

s The duties of executives when taking important matters to

It is obviously not just high profile listed companies that need

the Board and disclosing those matters to the market, and

to assess their risks carefully. Organisations of all sizes and risk

The responsibilities of non executive directors in making

profiles face litigation by a variety of stakeholders, including

statements to the market, with the need for companies to

actions by ASIC and other regulatory authorities (see king civil

carefully assess and check the veracity of those statements.

penalties and director disqualifications).

F E AT U R E S


JULY 2009 An aspect of this risk assessment is to consider how the organisations’ Directors and Officers Liability policy will respond. Important points include: s What level of coverage is provided for civil or pecuniary penalties - are these included to the extent permitted by law s What are the severability provisions under the policy - is there an ability for each insured person to be covered for their own individual interest s The extent and level of coverage provided in defending proceedings of alleged insolvency - are legal costs reimbursed until an individual is found to be liable for such a penalty s What are insurers obligations under the policy for conduct prior to the insolvency s What is the extent and level of coverage provided for securities actions against the company s Where securities coverage is provided for the organisation, what is the potential to reduce or exhaust the cover available to individual directors – i.e. is stand alone coverage available for the directors s What mechanisms are stipulated for the allocation of defence costs where an action is only partly covered by insurance, or made against both the entity and the directors s In the event of insolvency is there any stipulated position on the order in which payments must be made under the policy – are directors actions dealt with before actions against the entity s The D & O insurance contract needs to be scrutinised carefully to ensure adequate protection against the risk exposures which are being brought into sharp focus in today’s economic and regulatory environment.


OAMPS on cover Influenza Outbreak - Another Reminder for Business Continuity

The current outbreak of A/H1N1 (known more commonly in

s Testing capacity in your operations for remote working

the media as swine flu), has served as a timely reminder

arrangements for a large percentage of the workforce

that your organisationâ&#x20AC;&#x2122;s business continuity planning needs

and over extended periods (IT capability, transfer of data,

to consider a broad range of exposures that may impact on

workflow monitoring etc)

the business.

s Identifying critical processes, key skills / resource

Many businesses have studied the experiences of other

limitations and available short term alternatives / cross

entities across the region during the previous Avian Flu

training or multi-skilling opportunities

pandemic and SARS crisis to improve their preparedness and response to an outbreak involving communicable diseases. Some of the considerations for businesses both large and small include: s Limitations on non essential travel / banning of travel to high risk areas s Introduction of screening, workplace separation and return to work restrictions for travelling employees to minimise potential spread of illness in the workplace

MANAGING RISK

s Effectiveness of communication to brief all stakeholders of preparedness, the organisationâ&#x20AC;&#x2122;s ongoing response and advice provided by public authorities s Workplace health and hygiene policies and procedures in place (hand sanitising protocols, use of masks, access to medication)


JULY 2009


OAMPS on cover Planning for Key People Risks in Your Business In our last edition of the OAMPS On Cover, we provided some

dependent on only one or two key staff to maintain profitability

commentary on the need for organisations to consider the

and solvency.

potential impact on their operations from natural disasters and other man made risks. Another important element in the assessment of risks to the business is the impact that a loss of a key individual may have. Business continuity plans should encapsulate how the business would respond to the loss of one or more key individuals, and how replacement strategies would be funded and implemented. According to Australian Bureau of Statistics Data: s There are 1.88 million small businesses (an entity which employees less than 20 people), representing 30% of Australiaâ&#x20AC;&#x2122;s economic activity. s Small businesses are responsible for generating 3.6 million jobs, or 47% of private sector, non agricultural employment. Small businesses make a major contribution to our economy and communities. Based on the figures above it is easy to appreciate that many small businesses will be highly

MANAGING RISK

How do you ensure the financial well-being of your business in the event that you or one of your key people is temporarily or permanently unable to work due to health reasons? The financial risk to your business in the event of a major health issue occurring to you or one of your key people can be considered in three parts: s The length of time that a key person will be unable to work s The contingency plan that you would follow depending on this time frame; and s The financial implications to your business of implementing the contingency plan. Consider the impact on your business, should an unforeseen health event occur to a keyperson on: s Cash flow/Revenues. s Meeting additional costs incurred for recruiting, relocating and training replacement personnel.


JULY 2009 s The businesses ability to service ongoing fixed costs such as rent, utilities and staff salaries. s Interest servicing and meeting taxation obligations. s Hire purchases and lease costs. s Additional consulting fees, legal and accounting costsâ&#x20AC;Śetc. Business continuity planning not only looks at what the business impact will be but will also details exactly how these contingencies should be funded. Key Person insurance incorporates sums payable to your business, based on the identified funding requirements within a risk contingency plan, should a key person: s Die s Become Totally and Permanently Disabled s Suffer a Major Trauma s Be Temporarily Disabled A combination of these insurance benefits could ensure that your business is protected should a key person be incapacitated in the short medium or longer term.


OAMPS on cover National Approach to Occupational Health & Safety on the Horizon

State and Federal workplace relations ministers have finally endorsed a harmonised national framework for occupational health and safety laws. National consistency has been at the top of corporate Australia’s wish list for many years. Workplace Relations Minister Julia Gillard has been pushing for reform as part of the Rudd government’s drive to reduce to reduce red tape in Australia. If successfully introduced as legislation this year, the national approach would result in a significant reduction in compliance and administration costs for businesses that work across states. It would also eliminate some of the confusion around rehabilitation requirements. OAMPS Insurance Brokers have issued a statement applauding the Federal Government’s move towards a national Occupational Health and Safety system. We have also cautioned employers however that they need to

MANAGING RISK

make sure they keep their eye on the ball with regard to workplace safety. Brett Millar, OAMPS’ Employment Risk Solutions Manager stated “Regardless of the system, employers need to continue to put workers’ safety at the top of their agenda. A strong risk management and insurance program is critical to ensure the ongoing protection of all stakeholders. Sound risk management practices can lead to a reduction in workers’ compensation premium costs in the long term.” “At the same time, business owners need to recognise that they have direct control over the costs associated with employee safety and managing WorkCover premiums,” Mr Millar added. Mr Millar said there were often misconceptions about WorkCover being a tax but in reality, it is a controllable financial expense. “WorkCover premiums are based on the prior history of claims made, so every dollar spent on claim


JULY 2009 costs count. Employers have direct control in making their workplaces safe and therefore managing these costs,” he said. “A national system won’t help you or keep costs down if there are unsafe work practices occurring”. Additionally, simply making sure businesses have the correct industry classification for workers’ compensation premium calculation can sometimes lead to a substantial reduction in their insurance payments. These reviews of WorkCover classifications are done on a case by case basis and take into account the specific circumstances of each business. Your OAMPS broker has access to a broad range of resources to assist you with both Occupational Health & Safety and Workcover issues across Australia.


OAMPS on cover Managing Trade Credit Risks in Turbulent Economic Conditions

The current economic conditions present challenges

Leading global trade credit insurers Coface and Atradius

to businesses of all sizes, including those who have

are both reporting an environment of global insolvencies

operations or sell products and services outside of

and buyer payment defaults, which they expect to

Australia.

continue to rise for the remainder of 2009.

In previous editions of OAMPS On Cover we have looked

Coface recently performed downgrades and negative

at trade credit insurance as a mechanism to protect

watches for 47 countries after observing a decline in the

the debtor assets of an organisation. Ironically, there is

average financial strength of companies operating in

greater interest in insurance protection for week debtors

these territories.

but at the same time there is shrinking appetite / capacity coupled with increased restrictions on the insurance of debtors.

Trade Credit insurers will continue to become more selective in their appetite for risks, increasing premiums and reducing their support for more speculative

This is mainly due to an increase in companies filing

exposures, an approach they want to see mirrored in the

for bankruptcy. Industries that have been affected by a

transactions of those clients who they support.

tightening market include automotive, property, textiles, electronics and retailers.

OAMPS Insurance Brokers work closely with clients to ensure that they satisfy the more stringent underwriting guidelines that are required at this time in order to secure trade credit insurance.

MANAGING RISK


JULY 2009


OAMPS on cover OAMPS Supports Industry Campaign on Insurance Taxes

OAMPS has thrown its support behind an industry campaign urging businesses to contact their MP about the impact of government taxes on their insurance premiums.

the highest taxed locality when it comes to insurance. When considering a property / business insurance policy in Victoria, the full extent of taxation can be double the actual cost of the insurance.

Insurance is being taxed in a number of states and territories at levels the same or even higher than the so called “sin taxes” – gambling, tobacco and alcohol.

State governments continue to exploit insurance as a convenient and low profile way to extract revenue from individuals and businesses, diligently looking to protect their assets.

As a policyholder you are subject to a number of taxes on your insurance premiums depending upon where your exposures are located. These can include: s Fire services levy in Victoria, New South Wales and Tasmania varying from 28% to 68% of premium s GST payable on premiums and fire services levy s Stamp duty with rates varying from 5% to 11% (payable on premium, FSL, and GST) Victoria and New South Wales are the highest taxed states in Australia, with Victoria leads the world as

MARKET DEVELOPMENTS

This tax regime acts as a major disincentive to people and businesses to insure their property at prudent levels, or indeed to insure them at all. The disastrous February 2009 bushfires in Victoria have revealed that as many as 30% of those who lost their homes had no insurance at all. Affordability is predicted to be a major factor in people’s decision not to insure. Tax reform is desperately needed and the industry is working to ensure that the community understands the problem and demands that changes are made.


JULY 2009


OAMPS on cover Salmonella Recall Forces Closure of Food Manufacturer

Peanut Corporation of America - the US manufacturer at the centre of last year’s salmonella outbreak, has sought protection by filing for Chapter 7 bankruptcy. The impact of the widespread peanut butter recall is still being felt, and is predicted to cost America’s peanut producers in excess of $1Bn in lost production and sales. The company supplied peanut butter to schools, nursing homes, hospitals and other food manufacturers for use in products such as ice creams, cakes, biscuits and pet food. Companies have recalled more than 2,000 products containing peanut paste sourced from Peanut Corp. A reported 9 deaths have been attributed to the outbreak, and more than 680 people in 46 US states have suffered illness. At this stage there has been no commentary on whether Peanut Corp had in force product recall insurance to compensate for either its own recall costs, or those

PRODUCTS AND SERVICES

downstream manufacturers to whom it supplied product. Whilst product liability insurance is intended to cover the costs of injury or damage to third parties, the costs of recalling or replacing products would not be covered. Product recall / contaminated products insurance policies have evolved to provide comprehensive protection from these exposures. Today a broad range of businesses use this coverage as a risk financing tool. Losses have occurred across a wide range of industry not just in the food and beverage sector. Other sectors that consider product recall insurance include automotive, agricultural, cleaning products, cosmetics, construction equipment, household appliances, industrial tools, pharmaceuticals, recreational equipment, toys and children’s products.


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s Error in the design, manufacture, production, processing, preparation, assembly, blending, mixing, packaging or storage of a product; s Error in the labelling of a product including mislabelling, and misprinting of ingredients or instructions; s Accidental omission of a component or substance; s Accidental introduction or substitution of a component or substance; s Actual or threatened intentional and malicious alteration or adulteration of a product by a third party and / or employee; s Creation of adverse publicity so as to give the public the impression that the products have been or are likely to be rendered dangerous or unfit for use.


One insurance broker

stands out from the crowd


JULY 2009

The OAMPS approach, from one to ten.

1

We believe insurance is not always simple, but its management can be.

2

We identify risks you may not have considered and design a total risk management solution.

3

We make it our business to understand your business, so we can protect it from every angle.

4

We shop the world for insurance cover that fits your specific risks.

5

We make sure the fine print is on your side.

6

If we canâ&#x20AC;&#x2122;t find a policy off the shelf, we can negotiate specific terms to cover your risk.

7

We keep up to date with the constantly changing global business landscape and newly evolving risks and exposures.

8

We stay abreast of legislation and compliance matters.

9

We deliver the best possible value for money.

10

We champion your cause if you need to make a claim to ensure your business keeps running with minimal disruption.


Š 2009 Copyright OAMPS Insurance Brokers Ltd. 176 Wellington Parade, East Melbourne Victoria 3002 A.B.N. 34 005 543 920 Any advice does not take into account your personal needs and financial circumstances and you should consider whether it is appropriate for you.


July Issue: OAMPS On Cover