Risk Insider: Nir Kossovsky

Directors and Officers Now Face Personal Risk

By: | December 16, 2016 • 3 min read
Nir Kossovsky is the Chief Executive Officer of Steel City Re. He has been developing solutions for measuring, managing, monetizing, and transferring risks to intangible assets since 1997. He is also a published author, and can be reached at [email protected]

If you asked the typical public company director, in the early 1980s, about Directors & Officers Liability Insurance, he might have scoffed, feeling secure in the knowledge that he did nothing that put him personally at risk of a lawsuit.

By the late 1980s, the number of lawsuits against directors and officers exploded, D&Os discovered that one needn’t be liable to be damaged, and D&O insurance became commonplace.

Advertisement




Today, we are at a similar inflection point as social media, public anger at large institutions and outsized expectations by stakeholders push reputational risk to corporations and their boards to unprecedented levels.

New research from Steel City Re shows that the level of generalized anger in our society, which we all recognize intuitively, is on an upward trend in recent years.

That anger requires outlets and there is no shortage of players, ranging from bloggers purveying “news” that may or may not be accurate to elected officials in Washington, D.C., who are willing to exploit the public’s outrage and direct it toward certain targets.

Add to the mix a President-elect who seems more than willing to criticize corporate actions and publicly shame individuals; and an overall environment of heightened expectations for corporate performance, often fueled by share buy-backs, and every prominent company and executive in America needs to be concerned.

Social media has become weaponized as a result of its speed and penetration, combined with the heightened level of generalized societal anger seeking outlets on which to vent.

Directors and officers finding themselves in the crosshairs are discovering that they are largely unprotected. D&O insurance covers legal liability, but not the very tangible and significant financial losses they can suffer as a result of reputational damage.

The average director, for example, earns approximately $250,000 a year to serve on a corporate board and he or she usually serves on multiple boards.

If he or she is forced to resign as a result of reputational attacks related to the board’s oversight of the company – and if he or she becomes less desirable as a member of other corporate boards, that could represent a loss of millions of dollars over the course of a career.

And yet, despite the dramatically increased risk, many directors and officers are asking a new variation of the question they asked themselves in the early 1980s: “If I’ve done nothing to cause damage to my personal reputation, why do I need protection?”

The data we’ve analyzed (here), explains why directors and officers needn’t be culpable to be damaged. It includes 60 million data points for 7,500 public companies over the five-year period between 2011 and 2016 and it demonstrates what companies and their officers and directors are up against:

  • Losses linked to reputational damage at public companies have increased by 461 percent over the past five years.
  • Losses experienced due to reputational issues directly correlate to increases in generalized public anger as demonstrated by angry posts on social media.
  • Social media has become weaponized as a result of its speed and penetration, combined with the heightened level of generalized societal anger seeking outlets on which to vent.
  • Outsized expectations by investors about corporate performance, often exacerbated by stock buy-backs that raise stock prices short-term, have created increased vulnerability and potential for losses when companies are attacked.

In this environment, companies and members of their leadership need defenses for a different kind of battle – a battle in the court of public opinion, where, unlike in courts of law, there are no rules of evidence.

Advertisement




Success on this battlefield requires a preemptive strategy – using reputation warranties, financially backed reputation attestations, and other cutting edge crisis mitigation tools to build reputation resilience before attacks occur.

With much of the public unable to distinguish between false news and real news, with increasing numbers of people receiving information through social media rather than traditional media, with elected officials eager to channel the public’s discontent through public hearings and investigations, and with high expectations driven by stock buy-backs expected to continue at a steady pace, companies need to explore and deploy new strategies to deal with new realities.

And they need to bring reputational issues into the board room as a strategic priority for the future of the enterprise and for themselves.

More from Risk & Insurance

More from Risk & Insurance

Robotics Risk

Rise of the Cobots

Collaborative robots, known as cobots, are rapidly expanding in the workforce due to their versatility. But they bring with them liability concerns.
By: | May 2, 2017 • 5 min read

When the Stanford Shopping Center in Palo Alto hired mobile collaborative robots to bolster security patrols, the goal was to improve costs and safety.

Once the autonomous robotic guards took up their beats — bedecked with alarms, motion sensors, live video streaming and forensics capabilities — no one imagined what would happen next.

Advertisement




For some reason,  a cobots’ sensors didn’t pick up the movement of a toddler on the sidewalk who was trying to play with the 5-foot-tall, egg-shaped figure.

The 300-pound robot was programmed to stop for shoppers, but it knocked down the child and then ran over his feet while his parents helplessly watched.

Engaged to help, this cobot instead did harm, yet the use of cobots is growing rapidly.

Cobots are the fastest growing segment of the robotics industry, which is projected to hit $135.4 billion in 2019, according to tech research firm IDC.

“Robots are embedding themselves more and more into our lives every day,” said Morgan Kyte, a senior vice president at Marsh.

“Collaborative robots have taken the robotics industry by storm over the past several years,” said Bob Doyle, director of communications at the Robotic Industries Association (RIA).

When traditional robots joined the U.S. workforce in the 1960s, they were often assigned one specific task and put to work safely away from humans in a fenced area.

Today, they are rapidly being deployed in the automotive, plastics, electronics assembly, machine tooling and health care industries due to their ability to function in tandem with human co-workers.

More than 24,000 robots valued at $1.3 billion were ordered from North American companies last year, according to the RIA.

Cobots Rapidly Gain Popularity

Cobots are cheaper, more versatile and lighter, and often have a faster return on investment compared to traditional robots. Some cobots even employ artificial intelligence (AI) so they can adapt to their environment, learn new tasks and improve on their skills.

Bob Doyle, director of communications, Robotic Industry Association

Their software is simple to program, so companies don’t need a computer programmer, called a robotic integrator, to come on site to tweak duties. Most employees can learn how to program them.

While the introduction of cobots into the workplace can bring great productivity gains, it also introduces risk mitigation challenges.

“Where does the problem lie when accidents happen and which insurance covers it?” asked attorney Garry Mathiason, co-chair of the robotics, AI and automation industry group at the law firm Littler Mendelson PC in San Francisco.

“Cobots are still machines and things can go awry in many ways,” Marsh’s Kyte said.

“The robot can fail. A subcomponent can fail. It can draw the wrong conclusions.”

If something goes amiss, exposure may fall to many different parties:  the manufacturer of the cobot, the software developer and/or the purchaser of the cobot, to name a few.

Is it a product defect? Was it an issue in the base code or in the design? Was something done in the cobot’s training? Was it user error?

“Cobots are still machines and things can go awry in many ways.” — Morgan Kyte, senior vice president, Marsh

Is it a workers’ compensation case or a liability issue?

“If you get injured in the workplace, there’s no debate as to liability,” Mathiason said.

But if the employee attributes the injury to a poorly designed or programmed machine and sues the manufacturer of the equipment, that’s not limited by workers’ comp, he added.

Garry Mathiason, co-chair, robotics, AI and automation industry group, Littler Mendelson PC

In the case of a worker killed by a cobot in Grand Rapids, Mich., in 2015, the worker’s spouse filed suit against five of the companies responsible for manufacturing the machine.

“It’s going to be unique each time,” Kyte said.

“The issue that keeps me awake at night is that people are so impressed with what a cobot can do, and so they ask it to do a task that it wasn’t meant to perform,” Mathiason said.

Privacy is another consideration.

If the cobot records what is happening around it, takes pictures of its environment and the people in it, an employee or customer might claim a privacy violation.

A public sign disclosing the cobot’s ability to record video or take pictures may be a simple solution. And yet, it is often overlooked, Mathiason said.

Growing Pains in the Industry

There are going to be growing pains as the industry blossoms in advance of any legal and regulatory systems, Mathiason said.

He suggests companies take several mitigation steps before introducing cobots to the workplace.

First, conduct a safety audit that specifically covers robotics. Make sure to properly investigate the use of the technology and consider all options. Run a pilot program to test it out.

Most importantly, he said, assign someone in the organization to get up to speed on the technology and then continuously follow it for updates and new uses.

The Robotics Industry Association has been working with the government to set up safety standards. One employee can join a cobot member association to receive the latest information on regulations.

“I think there’s a lot of confusion about this technology and people see so many things that could go wrong,” Mathiason said.

Advertisement




“But if you handle it properly with the safety audit, the robotics audit, and pay attention to what the standards are, it’s going to be the opposite; there will be fewer problems.

“And you might even see in your experience rating that you are going to [get] a better price to the policy,” he added.

Without forethought, coverage may slip through the cracks. General liability, E&O, business interruption, personal injury, cyber and privacy claims can all be involved.

AIG’s Lexington Insurance introduced an insurance product in 2015 to address the gray areas cobots and robots create. The coverage brings together general and products liability, robotics errors and omissions, and risk management services, all three of which are tailored for the robotics industry. Minimum premium is $25,000.

Insurers are using lessons learned from the creation of cyber liability policies and are applying it to robotics coverage, Kyte said.

“The robotics industry has been very safe for the last 30 years,” RIA’s Doyle said. “It really does have a good track record and we want that to continue.” &

Juliann Walsh is a staff writer at Risk & Insurance. She can be reached at [email protected]