RM 357 (2) PDF - Corporate Fraud & Lax Governance

Corporate Fraud & Lax (Deficient) Corporate Governance 5 Steps to Improve Corporate Governance 1. Increase Diversity (diverse experience in the owners) 2. Appoint Competent Directors to the Board of Director 3. Ensure Timely Information Flow and Appropriate Distribution 4. Priori...

Corporate Fraud & Lax (Deficient) Corporate Governance 5 Steps to Improve Corporate Governance 1. Increase Diversity (diverse experience in the owners) 2. Appoint Competent Directors to the Board of Director 3. Ensure Timely Information Flow and Appropriate Distribution 4. Prioritize Risk Management Activities within Organization 5. Evaluate Board and Senior Executives Performance Example: Michael Dell story of bringing in someone else with more experience to help him grow his company. Basic Requirements for an Enforceable (Legally Binding) Contract Offer and Acceptance - “Meeting of the Minds” Consideration - Actual payment either monetary, goods or services, something of value has to be exchanged Competent Parties - Individually (after 18 you can get in a binding contract) and as a business ( Legal Purpose - illegal purposes not enforceable – not in society’s interest Writing Required - Parol Evidence Rule; if not in writing, not enforceable. - “4 Corners” Rule - Look only at the contract itself not any other documents - “8 Corners” Rule – Look only at Contract and then the insurance policy Insurance Policies; The Basics Unique / Special Characteristics of an Insurance Contract Insurance is Aleatory Contract – Unequal Value; if you pay a premium but you don’t necessarily will always have a claim, or the deductible is less from what you paid. Professor disagrees because insurance companies take the risk away. Insurance is Unilateral Contract – Only One Party has Right to Enforce, Insurance can’t make you pay if you stop paying, but they can’t cut your insurance Insurance is Conditional Contract – Must Satisfy Certain Conditions to be Effective Insurance is Personal Contract – No Right to Transfer (you can’t give your insurance to someone else that’s not you) Insurance is Contract of Adhesion – One Party Effectively in Control, insurance company controls the defense Result of these characteristics – Doctrine of “Reasonable Expectations”; what did the person who bought the insurance reasonably expect - Look at what the policyholder reasonable expected “The tie goes to the policyholder” Jimmy lube pouring oil in the grass and causing sickness- the courts ruled this could be “accidental” so insurance companies had to pay. Doctrines of Waiver and Estoppel 1. Waiver — a voluntary relinquishment of a known right (e.g. Venue (where you can sue) / designate if there is a lawsuit it will be filed in a specific court 2. Estoppel — representation of a fact by one party to another party that is reasonably relied upon by that other party to the extent that it would be unfair to allow the first party to deny the fact / fairness, not letting people lie to the other party Acceptance of late premium payments may result in insurance company being estopped from future late payments - the legal principle of "estoppel," which can prevent an insurance company from denying coverage based on late premium payments if they have a history of accepting such payments in the past. 3. Practical significance of these legal doctrines to insurance carriers is... it may pay claims that they did not expect (i.e., and therefore did not price in the premium) Basic Parts of an Insurance Contract Declaration Page Who is insured ? What ? When -time frame for policy ? Where is covered? Definitions “You” “We” “It” etc. Why - readability; easier to understand “WE insure YOU for this” easier to understand Insuring Agreement Exclusions Important to understand what is covered and what is not covered – e.g., flood in homeowner policy; the federal government can afford to take on those high-risks. Conditions Failure to comply will result in denial of claim 1. Notice of Loss - extremely important clause – timely notice critical in investigation of the loss; because insurance companies will do an investigation and the closer to the time of accident, the more accurate the information. 2. Proof of Loss - puts policyholder / claimant on their oath (studies show if you make someone raise their right hand, less chance of fraud and lies) 3. Preserve & Protect the Property - mitigate (i.e., minimize) loss 4. Assist insurance company in defense of claim - extremely important - policy covers policyholder Coinsurance Purpose of Coinsurance – designed to ensure that property owners purchase an adequate amount of insurance This is a condition often overlooked by policyholder… can thus result in passive retention Formula - (Actual Amount of Insurance Coverage) divided by (Amount of Insurance Required) multiplied by the (Amount of the Actual Loss) COINSURANCE EXAMPLE Example - Assume building is worth $5,000,000 - (Capital Budgeting Process Example) Amount of purchased insurance coverage: $3,500,000 Policy Coinsurance Condition (PCC) Clause (typical): 80% Loss - $3,000,000 Recovery - ($3,500,000 / ($5,000,000 x PCC) )x ($3,000,000) Recovery - (0.875) x ($3,000,000) Recovery - $2,625,000 Actual recovery is what % of Actual Loss due to the property being underinsured … 87.5% The Insurance Industry I. Types of Insurers (not governed) A. Private Insurers Stock Insurance 1. Ownership and governance – Stockholders / Board of Directors 2. Status of the policy owner – Customer 3. Historically dominant in the property and casualty industry Mutual Insurers; statefarm, nationwide are both mutual. 1. Ownership and governance – Policyholders / Board of Directors 2. Historically dominant in the field of life industry 3. Types include assessment, advance premium, and fraternal Note: Changing corporate structure of mutual insurers because of mergers, demutualization, and formation of mutual holding companies Private examples: Risk Retention Groups : groups of typically similar types of businesses who by contract agree to share losses - Become their own mutuals - Consider companies - x,y, z from LOLN example - Larges risk retention groups - USAA Risk Purchasing Groups: groups of typically similar types of businesses which by contract collectively purchase insurance - Group of contractors, work together to get 1 policy Captives: insurance companies owned by typically, non-insurance businesses … e.g., Exxon Mobile / Walmart - Only for Walmart, cannot give Target Insurance - For cost-savings, pay expenses not taxes - auto-mobile Lloyd’s of London - not insurance, physical building, Harry Potter place? a. Provides a meeting place – individual syndicates do the insuring b. Has great financial strength c. Major lines of business are ocean marine, reinsurance, and surplus lines (big stuff, too big of risk for regular insurance company) D. names - the actual risk takers - historically individuals but today include corporations. Ex: John Linnen 100% liability - Policy, if you turn the page you would put your name as who took the risk. If you want to insure a physical part, you go to Lloyd’s. Such a basketball player insuring his legs. B. Government Examples – National Flood Insurance Plan (NFIP) / Texas Windstorm Insurance Association (TWIA) II. Distribution Systems – Agents and Brokers A. Legal Status of an Agent – Retail Agents / Wholesale (General) Agents 1. Authorized agent can bind the principal to a contract 2. Sources of authority - express; it’s written down - implied; we put every single thing in the contract - Apparent; legal concept that gives an agent the power to act on behalf of a principal, even if the principal did not explicitly grant that authority. It occurs when a third party reasonably believes that the principal has given the agent the authority to act. If in writing it becomes express. B. Brokers 1. Represent insureds, representing you personally. 2. Marketing Systems – provide services such as risk management, loss control, and knowledge where insurance can be best placed. III. Claim Settlement A. Basic Objectives 1. Verification that a covered loss has occurred - “Who, what’, when and where” 2. Fair & prompt payment of covered claims - The quicker, the less you have to pay - Just by the fact that the person gets a lawyer, the insurance doubles up the claim - Incentive to act promptly 3. Provide personal assistance to the claimant - Reinsurance Key Definitions: - Reinsurance – insurance for insurance companies - Ceding Company – insurance company who transfers risk to the reinsurer - Reinsurer – the insurance company which accepts the risk from the ceding company - Net retention – amount of risk retained by the ceding company - Retrocession – reinsurance for reinsurers Reasons for Reinsurance 1. Increase underwriting capacity - gains reinsurer’s expertise / permits focus on particular lines / can handle larger risks 2. Stabilize profits - No volatility if big losses 3. Avoid large catastrophic (CAT) loss Types of Reinsurance 1. Facultative reinsurance – reinsurance on a case-by-case situation 2. Treaty reinsurance – pre-negotiated reinsurance between insurance carriers Types of Reinsurance: 1. Quota share: a fixed percentage of every risk / insurance policy - 100% of quota share, then reinsurance take all 100% of risk 2. Surplus share: reinsurance when the policyholder surplus of the ceding carrier is reached - We transfer the risk to someone else 3. Excess of loss: reinsurance tied to a predetermined amount of loss 4. Reinsurance pool: a group of reinsurers combine efforts in order to reinsurer larger risks - Companies that can’t take that much, they get together to sell very large risks. One other approach to Catastrophe Losses Catastrophe bonds: is a high-yield debt instrument designed to raise money for companies in the insurance industry in the event of a natural disaster. - Higher interest rate - Suspend your obligation, not forever, but timely Reasons for Insurance Regulation: 1. Maintaining Insurer Solvency: - Contract for future delivery - Possible financial insecurity if insurers fail; fear and worry away 2. Inadequate Consumer Knowledge: - Complex product - Difficult to compare and determine monetary value - Protection needed against unethical agents 3. Ensuring Reasonable Rates - Not necessarily cheapest possible, just reasonable. 4. Making Insurance Available Historical Development of Insurance Regulation Early Efforts - State-chartered companies – NY was the 1 st state to charter – i.e., regulate insurance companies - State insurance commissions – the state governmental agency empowered to handle the oversight of insurance companies Paul v. Virginia (1869) - Supreme court ruled that insurance was not interstate commerce = federal government can’t regulate it - Defeated a challenge to state regulation South-Eastern Underwriters Association Case (1944) - Reversed the Paul decision – court ruled that: insurance was interstate commerce - Cast doubt on the powers of the state to regulate and tax the insurance industry; power to regulate means power to tax Public Law 15 – McCarran-Ferguson Act (1945) - Reaffirmed states’ responsibility to regulate and tax the insurance industry - “The fed government have the authority, but they will defer, and let the state do it” - Conditionally exempted the insurance industry from federal antitrust laws Current Issues in Insurance Regulation - Convergence of Financial Services - Increase in Mergers and Acquisitions  - Growth of the technology - E-Commerce - Insolvency of Insurers - Quality of Insurance Regulation - Deregulation of Commercial Lines - The historic part is interesting here, in 1869 people didn't trust the gov, they wanted everything to the states, then 1944 was years of WW2, in Roosevelt, and he had a different vision so no surprise he overturned the decision Areas That Are Regulated (state law) - Formation and Licensing of Insurers - Financial Regulation – Investments / Bank Accounts, how we invest is regulated / limits in concentration - Rate Regulation - Texas Commissioner of Insurance Cassie Brown has denied Texas Windstorm Insurance Association's (TWIA) proposed 10% increase in residential and commercial rates for 2025, reason? Political - Policy Forms - contracts - Sales Practices and Consumer Protection - Insurance have 5 days to pay your claim, otherwise they gain interest rates, in TX. State versus Federal Regulation - Advantages of Federal Regulation; none in here because McCarran-Ferguson Act (1945) - Advantages of State Regulation: not federal, knowing the commissioners Ciber events they need to notify secret service An overview of the most commonly used insurance coverage for the typical risks faced by a commercial enterprise. Commercial Package Policy... Overview of Commercial Package Policy - 2 parts – commercial property coverage & commercial general liability coverage - Why ?... easier for the consumer i.e., the business... 1 set of definitions / 1 set of conditions Commercial (Building and Personal) Property Coverage Form A. Covered Property 1. Building 2. Building personal property 3. Personal property of others Additional coverages (debris removal, preservation of property, fire department service charge, pollutant cleanup and removal, increased cost of construction, and electronic data) Extensions of coverage (newly acquired property, personal effects and property of others, valuable papers and records, property off the premises and outdoor property) Example: GEICO - They stopped insuring cybertruck people were going crazy on social media.  - They made an announcement saying they will continue insuring the truck but as commercial vehicle, not private passenger vehicles. B. Business Income from Dependent Properties 1. Contributing Location 2. Recipient Location 3. Manufacturing Location 4. Leader Location; Samson new multi-billion dollar location Other Commercial Property Coverage A. Builders Risk Insurance – losses during construction B. Equipment Breakdown Insurance -- fka Boiler and Machinery Coverage C. Difference in Conditions (DIC) Insurance – (i) filling in gaps; and (ii) insuring unusual and catastrophic exposures Transportation Insurance A. Ocean Marine Insurance – Particular Average vs General Average 1. Interests insured: hull / cargo / liability 2. Implied warranties: seaworthy vessel / legal purpose / no deviation 3. Perils covered: fire / perils of the sea / enemies / piracy / thieves / jettison; throw things off the vessel for potential issues 4. Exclusions—losses due to: delay / war / strikes / riot / civil commotion Particular Average – Loss falls on specified party rather than shared by all owners of cargo on the vessel. General Average – Loss falls on all owners of cargo on the vessel. - General Average Requirements – Necessary / Voluntary / Successful / Claimant Non-Involvement *Policies may also be written on an “all risks” basis B. Inland Marine Insurance Why called “Inland Marine” ? same principle, except is over land Common coverage – transportation risk (non-auto related) Example: power transportation (electric & gas lines), equipment (ie. cargo) But also “catch all” category – e.g., jewelry coverage, artwork, important documents, software. Businessowners Policy (BOP) A. Eligible Firms: small to medium size entities B. BOP Coverages: 1. Buildings 2. Business personal property 3. Covered causes of loss 4. Business liability insurance Commercial Umbrella Policy Excess liability insurance, goes over multiple policies - Required underlying coverages (typically, CGL - $1M /Business Auto - $1M / Employers Liability - $500K But, people can terminate their coverage. The umbrella doesn’t go down. so: Self Insured Retention (SIR) for losses not covered by any underlying insurance but is covered by the umbrella policy are retained by What General Liability Exposures are Businesses Exposed to: A. Premises and Operations 1. Liability because of unsafe workplace 2. Liability because of unsafe actions of company or its employees B. Products Liability Defective Manufacturing Defective Design Defective Notice (Warning) C. Completed Operations 1. Typical Insureds: Repair companies 2. Provides coverage for losses that occur after the “work” is finished; warranty for your work Commercial General Liability (CGL) Policy - Insurance that protects companies from common lawsuits arising out of everyday business activities Overview of the CGL Occurrence Policy Key insurance coverage for businesses, designed to protect them from claims of bodily injury, property damage, and personal injury arising from their operations, products, or premises. Occurrence – defined as an accident, including continuous or repeated exposure to substantially the same general harmful conditions. Occurrences that happen during the policy period, Covers incidents even after policy expiration. Coverages: - Coverage A— bodily injury (physical harm) and property damage liability - Coverage B— personal and advertising injury (broader range of injury, including emotional distress) - Coverage C— medical payments - Supplementary payments – coverages A and B – covers items such as bail bonds but, more importantly, pre and post judgment interest; The supplementary payments for pre- and post-judgment interest help ensure that Alex can cover the total amount owed, which includes not just the original damages but also the accrued interest. Overview of CGL Claims-Made Policy Before: If the occurrence keeps happening, then the insurance keeps paying until they can prove that. Ex: exposure to chemicals. It became a hard market because these insurance couldn’t afford this coverage. So they created: Meaning of “Claims Made” - policy only covers claims made during the policy term and occurring after the retroactive date. Rationale for Claims-Made Policies (“long-tail” problem) - exposure to insurer never ends Retroactive Date – critical date – an agreed upon date for losses to have occurred on or after. - Occurrence had to happened on or after that date. Extended Reporting Periods – basically two reporting periods – if occurrence is reported during policy term, then up to 5 years. If not so reported, up to 90 days after the expiration of the policy. Why ? Same Coverages as Occurrence Policy 2 Questions: 1. Was the Notice of Loss made during the Policy Period ? 2. If yes, did the Loss occur on or after the Retroactive Date ? Workers Compensation and Employers Liability Insurance One of the principal areas of liability for a business is that arising from its employees. This liability regarding employees is not for what employees do but for injuries to the employees. Employee injuries account for in excess of 25,000 deaths … 6,000,000 injuries $120,000,000,000 = cost to businesses in the United States. When we discussed Automobile Liability – the risk arises from action by an insured. – You hit another vehicle. Same with Commercial Auto – Your employee hits another vehicle. Employers Liability typically arises from the employer’s inaction => Failure to provide a safe workplace. Key = safe workplace, not accident free, just SAFE. Therefore – issue is what is a safe workplace under the given circumstances => i.e. what’s required to have a safe coffee shop is different than what it takes to make a safe metal fabrication shop. History Courts dramatically changed the legal relationship and therefore the legal responsibility of employers. 3 Basic Rules Protected Employers 1. Follow the Servant 2. Contributory Negligence 3. Assumption of Risk Eventually, society realized that the pendulum had swung too far. Courts and legislatures acted: By enacting safety laws and applying more stringent tests before letting employers escape liability (50%+ comparative negligence rather than contributory negligence. Workers compensation liability insurance covers employees regardless of fault / liability… unlike any other type of insurance. Employers give up the right to reject claims (assuming injury during the course & scope of employment) and employees give up the right to sue employers – both sides gain something and give up a right. Why ? 1.To provide an incentive for employers to buy insurance 2.To effect/establish a system for quick payments to injured employees (avoid delay in the legal process). Effect – move from theory of occupational risk to least societal cost - Compensation set by statute, different with everything - Mississippi has the lowest workers compensation rates Workers’ Compensation Policy: Part one—workers’ compensation insurance; pays for it Part two—employers’ liability insurance; provides insurance to the business, covers the extra cost that worker’s compensation insurance doesn’t cover. Ex: Uber can use this if a driver sues them, even if the person suing them is not an employee. Part three—other states insurance … Why ? Every state has its own workers’ compensation system. - If someone is traveling for work and sustains an injury in another state, they may be eligible to claim workers' compensation based on the laws of that state - You get to use the highest state. Ex: new york and mississippi, you use the highest: NY