Industries Insurance

Insuring your good name

Reputational risk emerges a top concern among businesses

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Print this page by Joan Tupponce
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Bill Bolling, managing director of Virginia operations
for RCM&D. Photo by Rick DeBerry

AT&T, Accenture and Gillette dropped their sponsorships with pro golfer Tiger Woods after his string of extramarital affairs was revealed in 2009 and 2010. Around the same time, Toyota recalled up to 10 million cars because of problems with “unintended acceleration.”

Those events might seem very different, but both reflect the fallout that can take place when a brand’s reputation is tarnished. Over time companies can suffer significant financial damage when people or products connected to their brand go awry. That’s one reason an increasing number of companies are searching for ways to mitigate reputational risk.

Last year, reputational risk landed on the Allianz Risk Barometer’s list of the 10 biggest risk concerns in the U.S. It’s one of the “top risks that worry corporate risk managers” the most, says Bill Bolling, a former Virginia lieutenant governor who is managing director of Virginia operations for Baltimore-based RCM&D. “Ten years ago people weren’t talking about it. Now it’s a hot topic in 2015.”

In March, the Risk & Insurance Study Center at Virginia Commonwealth University sponsored a conference taking an in-depth look at reputational risk. “We pick a different topic each year, and we try to pick something in the way of an emerging risk, something that is new that insurance companies are responding to,” says Tim Cook, the center’s director. More than 200 people registered for the event, making it “one of the most attended conferences we have had,” Cook says.

Bad publicity’s cost
Bad publicity can hurt a company’s bottom line and its share price. For example, Tiger Woods’ affairs cost eight of his sponsors about $12 billion in shareholder value, according to a study by researchers at University of California, Davis.  After Toyota’s recalls, its sales dropped 20 percent and its stock price fell about the same percentage.

Events like these tarnish a company’s brand as well as its reputation. “A brand is who you are and what you have established in the marketplace. It’s very important,” says Cook. “You have to have a brand before you have a reputation.”

Once a brand is established, a company has to rely on its reputation to keep the brand intact, he says. Threats to a company’s reputation can be the result of events ranging from data breaches and product recalls to the behavior of spokespeople and class-action lawsuits.

Social media can add fuel to the fire. “That can blow everything out of proportion,” says Roy Bucher, president of Chas. Lunsford Sons & Associates Inc., an insurance brokerage based in Roanoke. “Just about everybody is a candidate for this because of the way social media works.”

An embarrassing cyberattack at Sony Pictures Entertainment last year disclosed on social media employees’ salaries and disparaging email comments about some of the studio’s biggest movie stars. “That was about as dramatic as I have seen,” says David Schaefer, president and CEO of Leesburg-based AHT Insurance. “The damage to Sony is incalculable. They are still dealing with the fallout from the bad press, and they continue to see information released months after it happened.”

Coverage hard to find
Companies looking for insurance that specifically covers reputational risk may have a difficult time finding it. Cyber liability, employment practices liability and directors and officers liability coverage, however, can include crisis-response components that are “designed to aid in the reconstruction of a company’s reputation,” Schaefer says. “Crisis management support can help a company manage its message and minimize the effects of the negative event.”

Few insurance products are solely focused on reputational risk partly because “it’s hard to quantify what that reputational value is and what that means in terms of coverage,” says Chandra Seymour, senior vice president with Marsh Risk Consulting in Washington, D.C. “When we look at reputation, you have to ask the question: What is the basis of your reputation?”

A company’s brand is an intangible asset but “a very important asset,” says Schaefer. “We trade on our good name every day. If your name is damaged in a way that causes people to lose faith in a product or the organization, that can be a category killer for you in terms of implications for the business. Over time companies have become more sensitive about protecting and defending their brand.”

A company’s reputation can be based on many things, including its products or social responsibility or the vision of its leadership. “When we talk with clients, we take a look at the organization and try to identify what it’s built on and make sure the company can protect those things as best they can,” Seymour says.

A company doesn’t have to be a multimillion dollar corporation to have its reputation damaged. Any size company can be affected. The cost of handling a crisis can run from up to a half  million dollars to hundreds of millions of dollars, depending on the size of the company and the scope of the incident.

“No matter what, it’s going to have a cost impact on the company,” says Jeanmarie Giordano, chief underwriting officer for professional liability at AIG in New York. A hit to a company’s reputation can be catastrophic “particularly to a small company that could lose its customer base, or it could result in layoffs of employees. It can bring regulatory scrutiny or loss of public trust.”

Help during a crisis
AIG is one of the few insurance companies that offer a product — ReputationGuard — specifically targeting reputational risk. If there is a crisis, the insured company can reach out to one of two crisis management firms that can help manage the event. “They have access to all their services such as crisis preparedness and media coaching. They can help make sure there is a plan in place,” Giordano says. “It’s designed to address the events you never expect to happen.”

Other insurance companies also are designing products that can provide “longer-term management and public relations support management to a business,” Bolling says. “I see that becoming more and more standard.”

Premiums for this type of coverage depend on a number of factors, including the type of industry, and can start at $2,500. “It’s a very wide range,” says Giordano.

There isn’t any coverage available that can fix a company’s reputation, however. “There is no amount of money that can do that or any magic bullet that can put you back to where you were before your loss,” Schaefer says. “But it can help you mitigate and attenuate the damage.”

Perhaps Warren Buffett summed it up best: “It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.”

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