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2018 Most Dangerous Emerging Risks

Social Media Acts as Reputation’s Existential Threat

Social media — the very tool used to connect people in an instant — can threaten a business’s reputation just as quickly.
By: | April 9, 2018 • 8 min read

Weinstein. Spacey. O’Reilly. Lauer.

We don’t need to consult Google to know who these men are or what they’ve allegedly done. Now stitched into the very fabric of our society, the entertainment industry “elite” accused of sexual misconduct are part of the mantra of a movement to end harassment and call out others who violate trust. Their reputations are ruined.

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But reputation exists outside the person; the Weinstein Company, for example, filed for bankruptcy four months after the story broke that the man in charge allegedly sexually harassed or assaulted more than 80 women during his career.

“Threats to reputation always involve anger or disappointment from stakeholders triggered by a failure to live up to expectations,” said Nir Kossovsky, CEO, Steel City Re.

Stakeholders, he said, expect companies to have systems in place that act as deterrents for bad behavior, like sexual harassment in Weinstein’s case.

The value of reputation-related claims is on the rise, too.

“Because of #MeToo and the gymnastics scandals, there is a concern that employment claim values could go up,” said Larry Reback, managing principal and leader, policy response unit, Integro Insurance Brokers, referencing the former USA Gymnastics doctor Larry Nassar, who has been convicted of serial child molestation.

Reputation risk isn’t new. But the way a business’s reputation is threatened has entered a new realm of uncertainty because of how fast information can travel. The #MeToo movement is just one example of how hundreds of thousands of people can band together globally. It acts as a reminder of just how fast a reputation can fall: reputation is now an existential risk.

The Speed of Social Media

Companies big and small can be ruined with a tweet, a like or a share.

“Reputation risk is, in part, a function of culture-linked expectations. Social media is a channel in which culture is spread. New expectations can be global in minutes. In a way, the internet has been weaponized,” said Kossovsky.

Nir Kossovsky, co-founder and chief executive officer, Steel City Re

“Look at the headlines,” said Natalie Douglass, senior managing director, management liability practice, Gallagher, in regard to #MeToo.

“The Weinstein Company tried to sell its assets to avoid bankruptcy. A year ago, it was the most successful entertainment company in the world. Social media is playing the largest role. It moves fast and reaches more people in an instant.”

But with the way #MeToo has swept the country by storm, are businesses approaching reputation coverages differently?

“It’s too early to tell,” said Douglass. She added that the movement does hold the possibility to change how reputation cover is handled over time, but that would need to be monitored moving forward.

“There’s a notion that reputation risk spread through social media can descend like a tornado; one does not prepare for the tornado as it’s descending.” — Nir Kossovsky, CEO, Steel City Re

What #MeToo did do, however, was show just how fast a reputation can be put at risk. What may start off as a disgruntled post on social media can turn into hundreds of thousands of voices ringing out against someone and their business.

“#MeToo isn’t necessarily a watershed moment,” said Kossovsky. “But it forced the leadership of companies to appreciate the speed at which reputation can be threatened.”

Reputational risk has always been there, said Sandy Crystal, executive vice president, Crystal & Company, whether it be a cyber event or a product recall or #MeToo.

“In the age of social media, things happen more quickly. Social media exacerbates reputational risk,” he added.

In the last few years alone, a number of companies faced the wrath of social sharing:

After a doctor was dragged off a United Airlines flight at Chicago O’Hare International Airport, one bystander’s video of the incident surpassed four million views on YouTube. It led a number of Twitter users to spread the hashtag #BoycottUnited. Within days, the hashtag had more than 3.5 million impressions.

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The modern-age taxi service Uber faced a bevy of crises in February 2017, from allegations of workplace sexual harassment to a leaked video of the company’s CEO berating an Uber driver. A survey showed that some 57 percent of rideshare users held the company in a negative light following the allegations. That same survey also showed 56 percent of users between September 2016 and March 2017 stopped using Uber because of the negative news associated with it.

Another big name affected by the speed of the internet? Wells Fargo. One scandal on top of another, from opening unauthorized credit card accounts to failing to issue refunds on policies where people paid auto loans off early, the bank is still working to rebuild its reputation.

#MeToo and these similar events placed reputation in the spotlight with a whole new force. It’s become a risk that moves so fast, it’s hard to be certain where it’s headed next.

Difficult to Cover

As an existential risk, underwriters find reputation difficult to price because of the wildly different outcomes that could arise. Defining how to put value to a company’s brand is equally as challenging. Many are hesitant to even write the risk at all.

Larry Reback, managing principal and leader, policy response unit, Integro Insurance Brokers

“Underwriters need to model losses to underwrite a risk,” said Reback. He used Chipotle as an example. After numerous health-related outbreaks, including norovirus, salmonella and E. coli, the food chain suffered significant financial losses and a drop in its consumer base.

“How do you measure an organization’s reputation? Each company is different, but the consequences of a reputational event can be catastrophic. It would also likely require the participation of the worldwide insurance market for meaningful risk transfer and, right now, there aren’t a lot of markets willing to provide protection for financial loss.”

“Only a handful of insurers have been willing to cover reputation as a stand-alone policy,” said Douglass. “I don’t see that changing.”

Though some insurance products — from cyber to D&O to liability — include aspects of reputation to fill in the gaps, the lack of stand-alone policies poses an interesting challenge for risk managers to implement practices to prevent damage from spreading.

With social media, reported Forbes, it’s actually worse for a business to ignore a negative post online.

Even a simple response acknowledging a customer’s complaint is better than leaving it unanswered. A RightNow Customer Experience Impact Report found that 89 percent of consumers begin doing business with a competitor following a poor customer experience.

The same report found that half of the people surveyed only give businesses about a week to respond before they stop doing business with them. And once the social media storm begins, the stakeholders hold the power. What tends to bring a company to a grinding halt is how its stakeholders perceive a blow to reputation.

“Is it a rogue employee in a well-governed business who stepped out of line? Or is it deeper than that? Is the behavior of the person a symptom of something more systemic?” asked Kossovsky.

Waiting until a sexual harassment claim is filed or a misguided employee acts up won’t cut it; risk managers have to prepare for the worst before the worst can happen. When an issue is deeply rooted in the culture of the company, fast action to expel the behavior and the person or people behind the behavior is quickly taken.

Take Volkswagen for example. After the Environmental Protection Agency found that VW diesel engines were rigged to pass carbon dioxide emissions tests when they were not street legal, the company’s chief executive resigned within a week of the scandal coming to light.

VW also endured a company-wide internal inquiry and suffered a quarterly loss of more than $3 billion.

“This is an opportunity for risk managers to show their value to an organization. They can get involved with the board and the C-suite.” — Larry Reback, managing principal and leader, policy response unit, Integro Insurance Brokers

“The topic [of reputation] is getting a lot of attention from the C-suite and board levels,” said Reback. Despite reputation not typically being an insured risk, those in higher positions are not taking reputation risk lightly.

“The board and CEOs recognize that business reputation risk can become personal reputation risk,” said Kossovsky.

Stakeholders expect quick action to expel those in charge of a company blunder. In Weinstein’s case, a zero-tolerance policy was just one tactic used to soothe its stakeholders. But it was too little too late due to the magnitude of the allegations and how deep the behavior went.

“This is an opportunity for risk managers to show their value to an organization. They can get involved with the board and the C-suite,” said Reback.

Mitigating Reputation Risk

“A lot of the conversation surrounding reputation happens narrowly, product by product,” said Crystal. “The conversation needs to be broader.”

With the growing force that is social media, companies are cognizant of how easily their brands can fall. There are some key ways businesses mitigate reputation risk today, like company-wide training or investing in liability or D&O coverage to fill in the gaps, but this risk requires a proactive approach. Not reactive.

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“There’s a notion that reputation risk spread through social media can descend like a tornado,” Kossovsky said. “One does not prepare for the tornado as it’s descending; they have to build defenses to prepare for it from the get-go.”

“#MeToo is a wake-up call to employers and risk managers. While, unfortunately, the underlying conduct is not new, it is an opportunity to review corporate culture and training,” said Reback.

“Some organizations use a captive to help fund some of these losses,” he added. “But it’s still a growing exposure.”

The best outcomes come when risk managers are aligned with human resources, IT and other departments, said Douglass.

She added: “Reputation needs to be a part of the culture of a company. From top-down, there needs to be a focus on protecting the brand.” &

Autumn Heisler is the digital producer and a staff writer at Risk & Insurance®. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Risk Focus: Workers' Comp

Do You Have Employees or Gig Workers?

The number of gig economy workers is growing in the U.S. But their classification as contractors leaves many without workers’ comp, unemployment protection or other benefits.
By: and | July 30, 2018 • 5 min read

A growing number of Americans earn their living in the gig economy without employer-provided benefits and protections such as workers’ compensation.

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With the proliferation of on-demand services powered by digital platforms, questions surrounding who does and does not actually work in the gig economy continue to vex stakeholders. Courts and legislators are being asked to decide what constitutes an employee and what constitutes an independent contractor, or gig worker.

The issues are how the worker is paid and who controls the work process, said Bobby Bollinger, a North Carolina attorney specializing in workers’ compensation law with a client roster in the trucking industry.

The common law test, he said, the same one the IRS uses, considers “whose tools and whose materials are used. Whether the employer is telling the worker how to do the job on a minute-to-minute basis. Whether the worker is paid by the hour or by the job. Whether he’s free to work for someone else.”

Legal challenges have occurred, starting with lawsuits against transportation network companies (TNCs) like Uber and Lyft. Several court cases in recent years have come down on the side of allowing such companies to continue classifying drivers as independent contractors.

Those decisions are significant for TNCs, because the gig model relies on the lower labor cost of independent contractors. Classification as an employee adds at least 30 percent to labor costs.

The issues lie with how a worker is paid and who controls the work process. — Bobby Bollinger, a North Carolina attorney

However, a March 2018 California Supreme Court ruling in a case involving delivery drivers for Dynamex went the other way. The Dynamex decision places heavy emphasis on whether the worker is performing a core function of the business.

Under the Dynamex court’s standard, an electrician called to fix a wiring problem at an Uber office would be considered a general contractor. But a driver providing rides to customers would be part of the company’s central mission and therefore an employee.

Despite the California ruling, a Philadelphia court a month later declined to follow suit, ruling that Uber’s limousine drivers are independent contractors, not employees. So a definitive answer remains elusive.

A Legislative Movement

Misclassification of workers as independent contractors introduces risks to both employers and workers, said Matt Zender, vice president, workers’ compensation product manager, AmTrust.

“My concern is for individuals who believe they’re covered under workers’ compensation, have an injury, try to file a claim and find they’re not covered.”

Misclassifying workers opens a “Pandora’s box” for employers, said Richard R. Meneghello, partner, Fisher Phillips.

Issues include tax liabilities, claims for minimum wage and overtime violations, workers’ comp benefits, civil labor law rights and wrongful termination suits.

The motive for companies seeking the contractor definition is clear: They don’t have to pay for benefits, said Meneghello. “But from a legal perspective, it’s not so easy to turn the workforce into contractors.”

“My concern is for individuals who believe they’re covered under workers’ compensation, have an injury, try to file a claim and find they’re not covered in the eyes of the state.” — Matt Zender, vice president, workers’ compensation product manager, AmTrust

It’s about to get easier, however. In 2016, Handy — which is being sued in five states for misclassification of workers — drafted a N.Y. bill to establish a program where gig-economy companies would pay 2.5 percent of workers’ income into individual health savings accounts, yet would classify them as independent contractors.

Unions and worker advocacy groups argue the program would rob workers of rights and protections. So Handy moved on to eight other states where it would be more likely to win.

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So far, the Handy bills have passed one house of the legislature in Georgia and Colorado; passed both houses in Iowa and Tennessee; and been signed into law in Kentucky, Utah and Indiana. A similar bill was also introduced in Alabama.

The bills’ language says all workers who find jobs through a website or mobile app are independent contractors, as long as the company running the digital platform does not control schedules, prohibit them from working elsewhere and meets other criteria. Two bills exclude transportation network companies such as Uber.

These laws could have far-reaching consequences. Traditional service companies will struggle to compete with start-ups paying minimal labor costs.

Opponents warn that the Handy bills are so broad that a service company need only launch an app for customers to contract services, and they’d be free to re-classify their employees as independent contractors — leaving workers without social security, health insurance or the protections of unemployment insurance or workers’ comp.

That could destabilize social safety nets as well as shrink available workers’ comp premiums.

A New Classification

Independent contractors need to buy their own insurance, including workers’ compensation. But many don’t, said Hart Brown, executive vice president, COO, Firestorm. They may not realize that in the case of an accident, their personal car and health insurance won’t engage, Brown said.

Matt Zender, vice president, workers’ compensation product manager, AmTrust

Workers’ compensation for gig workers can be hard to find. Some state-sponsored funds provide self-employed contractors’ coverage.  Policies can be expensive though in some high-risk occupations, such as roofing, said Bollinger.

The gig system, where a worker does several different jobs for several different companies, breaks down without portable benefits, said Brown. Portable benefits would follow workers from one workplace engagement to another.

What a portable benefits program would look like is unclear, he said, but some combination of employers, independent contractors and intermediaries (such as a digital platform business or staffing agency) would contribute to the program based on a percentage of each transaction.

There is movement toward portable benefits legislation. The Aspen Institute proposed portable benefits where companies contribute to workers’ benefits based on how much an employee works for them. Uber and SEI together proposed a portable benefits bill to the Washington State Legislature.

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Senator Mark Warner (D. VA) introduced the Portable Benefits for Independent Workers Pilot Program Act for the study of portable benefits, and Congresswoman Suzan DelBene (D. WA) introduced a House companion bill.

Meneghello is skeptical of portable benefits as a long-term solution. “They’re a good first step,” he said, “but they paper over the problem. We need a new category of workers.”

A portable benefits model would open opportunities for the growing Insurtech market. Brad Smith, CEO, Intuit, estimates the gig economy to be about 34 percent of the workforce in 2018, growing to 43 percent by 2020.

The insurance industry reinvented itself from a risk transfer mechanism to a risk management mechanism, Brown said, and now it’s reinventing itself again as risk educator to a new hybrid market. &

Susannah Levine writes about health care, education and technology. She can be reached at [email protected] Michelle Kerr is associate editor of Risk & Insurance. She can be reached at [email protected]