Nearly every business has been tested by a major financial stress, whether it’s illiquidity, being top-heavy with debt or suddenly losing revenues due to drastic changes in market conditions.
It doesn’t matter what problems are involved: financial stress makes complex risk issues only more perilous.
When a financially distressed company comes under new management, the complex risk involved can become seemingly impossible to tackle. Such enterprises typically have cash flow problems and are chiefly concerned with making payroll, paying bills, cutting costs, negotiating debt and maintaining revenue. Insurance renewal is not top of mind.
But for leaders of companies under financial stress, insurance and the complex risks involved need to be a priority.
The stress of an unforeseen event
The COVID-19 pandemic placed thousands of organizations under financial stress for the first time since the financial crisis of 2008 and 2009. Fully 110 public companies — with a combined value of $297.7 billion — filed for bankruptcy protection in 2020, the highest number in a decade. That same year, 11,375 commercial businesses filed for bankruptcy.1
There’s no single answer for financially distressed companies to manage their complex risk and insurance issues. But whether an enterprise has filed for bankruptcy protection, is trying to renegotiate loan terms or is otherwise restructuring, there are several things leaders can do to ensure the enterprise is properly insured.
Here are six actions for business leaders:
- Stay calm. Financially distressed organizations often operate in survival mode, juggling multiple issues that could permanently change the company’s long-term outlook. These issues represent complex risks that can affect insurability: It’s unlikely that an underwriter will simply renew policies with current terms and premiums for a company in financial distress. The C-suite needs to make the company as appealing as possible to insurers without panicking or accepting the first coverage quote.
- Set expectations. A financially distressed company is unlikely to obtain highly favorable terms from underwriters — and may not be considered for coverage at all. Stakeholders need to have realistic expectations about their insurability. For example, on paper a hospitality company may need $50 million in excess liability coverage for its properties but can only afford half that amount. Executives may need to grit their teeth and buy $25 million in excess cover for a short time and improve risk management to avoid claims exceeding it.
- Align risk among stakeholders. When a distressed company is being led by new management, a new board of directors or new owners, the complexity of risk increases exponentially. Management, equity investors and the board of directors may take divergent outlooks on how to address risk. Before going to market, stakeholders need to align risks and come to a consensus on their insurance approach, even if it means compromises between parties.
- Lead with analysis. Any company that sees its revenues fall 50% or more in a year due to a pandemic or another unforeseen event will be thrust into financial distress. That scenario requires hard conversations between the C-suite and the organization’s insurance broker about what’s realistic at renewal. It’s important that companies rely on data analytics, especially if an organization is under new managers who don’t have relationships with carriers or insurance brokers. An analysis of the company’s current conditions and data showing how corporate leaders are improving the situation will help put underwriters at ease.
- Be flexible. Single carriers are unlikely to offer financially distressed operations the amount of coverage they need at a price they can afford. Businesses need to be flexible, allow enough time to evaluate their options and seek assistance finding multiple insurers to cover smaller portions of the risk or layering coverage. The drawback is that multiple insurers mean dealing with multiple parties on claims.
- Purchase “tail” D&O coverage. During a financial restructuring, claims are often filed against directors and officers, and when Chapter 11 of the federal bankruptcy code is involved, the complex risks multiply. Directors and Officers (D&O) coverage may not cover claims after a restructuring is complete. Runoff or “tail” D&O insurance will cover directors and officers against claims and legal costs after the original D&O policy has expired.
HUB International can help any organization in any financial situation thrive in a world of complex risk.
1 Jones Day, “The Year in Bankruptcy: 2021,” January 2020.
