In this installment of Insurance Thought Leadership’s interview of Ty Sagalow, President of Innovation Insurance Group, Mr. Sagalow is asked to comment on the importance of reputation to corporations of all sizes and what, if any, the insurance industry is doing to help them manage the risk.

In Insurance Thought Leadership’s interview of Ty Sagalow, President of Innovation Insurance Group, Mr. Sagalow is asked to comment on the importance of reputation to corporations of all sizes and what, if any, the insurance industry is doing to help them manage the risk.

What Is Reputation Risk?

A company’s reputation, which is core to its profitability and long-term competitiveness, faces new challenges as information speeds blindly through online media and social networks. 

Lanny Davis, former assistant to President Clinton on crisis management and principal in Lanny J. Davis & Associates, recently noted that, “in the age of the Internet, you never get a second chance to change a first impression. Once your reputation is smeared and your character unfairly attacked, the eternal misinformation echo chamber of the search engine allows the harm to continue eternally, unless you fight back — early, with all the facts, often yourself — until the truth gets in the way of the search engine lies.”

When a corporate reputation is tarnished, a company can lose its trust factor; investor confidence is weakened; and a company’s share price can be reduced.  In extreme cases, a damaged reputation can lead to a company’s downfall. “Hackgate,” “Rupertgate,” or “Murdochgate” -– names given by the press to the News International phone-hacking scandal – led to the demise of News of the World newspaper.

WHAT ARE SOME OF THE HISTORICAL TRIGGERS FOR A REPUTATION CRISIS?

• Unethical behavior such as Sears’ management team’s unrealistic performance quotas for its car repair business, which led to over-billing and created a scandal in the 1990s).
• Financial irregularities, such as those that led to Enron’s bankruptcy.
• Executive misconduct, such as the conviction tied to insider trading that led to Martha Stewart’s resignation.
• Environmental violations, such as Nike’s exploitation of workers in sweatshops, failure to provide work environments that are safe and contact with cotton factories using slave labor—issues that dogged Nike through the 1990s and beyond.
• Safety & health product recalls, such as followed allegations of “unintended acceleration” in Toyota cars.
• Security breaches, such as the recent one at Target in which tens of millions of people had credit-card data stolen.

In other words, much as Murphy’s Law says:  “Anything that can go wrong will go wrong.”

WHAT CAN A CORPORATION DO TO PROTECT ITS REPUTATION?

• Use your CEO: Fred Smith, FedEx’s legendary founder, is a good example.  A good CEO embodies and reiterates a company’s values, code of ethics and vision.  Your CEO regularly communicates honesty and transparency and is trusted with your corporate reputation.
• Perform an S.W.O.T. analysis: Identify your company’s strengths, weaknesses, opportunities and threats.
• Develop a corporate reputation strategy:  Johnson & Johnson is still reaping reputation benefits more than 30 years after its swift and sweeping recall of Tylenol and institution of tamper-proof packaging after some maniac laced some pills with cyanide and put them in bottles on store shelves, killing seven people.
   
• Monitor your reputation online.  Constantly check social media sites and your own website. No company can afford to be reputation-blind, and no suit of armor is impenetrable.
• Be honest, factual and open with the media.
• Create a plan to manage an unexpected crisis.  Execution is the cornerstone. Train everyone on identifying the crisis, what to do and who gets contacted.   Preparation is essential to managing potential and actual crises in a timely fashion.  Communication is no longer one-way; it’s now two-way.
• Evaluate the purchase of corporate reputation insurance.

WHAT IS REPUTATION INSURANCE?

For 20 years, the insurance industry has known that how a company manages a reputation crisis will have a dramatic impact on the cost of civil litigation arising out of that crisis.  For this reason, insurance purchased for the risk of shareholder lawsuits, directors and officers insurance, has from time to time included an option to purchase, or included automatically, “crisis management” insurance. This reimburses the company for the cost of crisis management expert fees up to a set amount, usually $50,000 to $200,000.

However, since 2010, there has been an outbreak of “new and improved” reputation insurance policies from named-brand insurance carriers like Zurich (Brand Assurance), AIG (Reputation Guard), Munich Re (Reputation Insurance) and a number of Lloyd’s syndicates, including a standalone reputation policy produced by Steel City Re.  Some carriers emphasize reimbursement of crisis management expenses while others are more geared toward reimbursing a company for lost profits.  Finding the right one, or right combination, can be challenging, but there worthwhile.

Innovation Insurance Group, LLC

Innovation Insurance Group can assist companies, insurers, and brokers in evaluating their insurance options and developing customized solutions for reputation and brand risks.