Captive Insurance: Mitigating #MeToo-Related Reputational Risk

We've heard the names—Weinstein, Spacey, Rose, and Lauer. These and hundreds of other celebrities and captains of industry were accused of varying levels of sexual misconduct. They are big names that contended with even bigger blows to their reputations. But what about those names that weren't so well known? What of the midmarket business owners who've been in the crosshairs of the #MeToo movement, subjected to the backlash of accusations and the court of public opinion? The facts indicate that the #MeToo movement is not relegated to celebrities with high profiles—reputational risk extends to business owners and other decision makers working behind the scenes to make their companies run.

The #MeToo movement is, no doubt, an important step for many of the affected, having opened the door for those who were taken advantage of to come forward to tell their individual stories. It has allowed them to overcome fear, shame, and other roadblocks to obtain, what they believe, is some level of justice. But the financial cost of an accusation (even without a conviction) has proved to be far reaching, producing a crippling domino effect across organizations. However, captive insurance planning has the potential to help mitigate reputational risk as the burgeoning #MeToo movement continues to spread and more people are implicated. It is a tailored approach that could mean the difference between financial ruin and resilience.

The Inherent Domino Effect of Reputational Risk

When the Harvey Weinstein story broke, many individuals felt emboldened to share their own stories, coming forward with allegations of sexual misconduct against their employers, colleagues, and others. It was coined the "Weinstein Ripple Effect," and it invoked a feeling of compassion and acceptance toward alleged victims. (Source: CNBC.) Even as a well-known Hollywood mogul and millionaire, Mr. Weinstein could not escape the whirlwind and aftermath of several hundred harassment allegations and the eventual financial downfall of a multibillion-dollar company.

Seven months after the initial person came forward, the Weinstein Company filed for bankruptcy and experienced a downward spiral. The film studio that Mr. Weinstein cofounded with his brother in 2005 would eventually be sold off. The studio, deeply in debt and facing an array of lawsuits, was in turmoil. Organizations such as the Producers Guild of America, Academy of Motion Picture Arts and Sciences, and BAFTA (British Academy of Film and Television Arts) all moved to distance themselves from Mr. Weinstein and his empire.

Without a doubt, this was a high-profile case that garnered attention across the globe. All eyes were on Mr. Weinstein, his alleged victims, and Hollywood overall—how business would be conducted moving forward in a new, more cognizant working environment.

The series of events stemming from this case and others demonstrate the inherent domino effect of reputational risk—situations that can begin as rumor and then mushroom into a downward spiral for a business's profitability. An accusation can lead to employee turnover, a sharp decrease in patronage from customers, shareholder abandonment, loss of key vendors, and irrevocable damage to the bottom line.

Once a public accusation is made, business leaders often allocate tens of thousands of dollars or more to damage control, which can include expenditures for public relations services, attorneys, publishing firms, and media outlets. There may be a need to issue a public announcement or TV commercial, condemning any untrue accusations with an added layer of reaffirmation of the company's value proposition; there may be a need to utilize all available resources to restore the public trust.

The Weinstein Ripple Effect could happen within any organization. Business owners in the midmarket, whether or not they themselves have been accused of misconduct, are at risk. Whole leadership teams can come under unabashed scrutiny subjected to accusations of turning a blind eye to impropriety within their organizations.

But a captive insurance company—a company that's specifically formed to insure the risks of an affiliated company—may offset the financial costs associated with reputational risks related to #MeToo.

Captive Insurance Coverages for Reputational Risk

Once an allegation turns into an indictment, legal representation can become a critical component to proving innocence and dissuading guilt. Under a captive insurance arrangement, legal expense reimbursement coverage can be underwritten to cover defense expenses that have been exhausted, challenge the primary insurer's failure to defend a claim, cover a judgment, or fill in when there is no underlying insurance to provide defense. Lost case development cost coverage can also be underwritten—these are funds allocated as reimbursement when a case cannot be litigated successfully due to an unexpected event. This can include the death of a key witness or a fire that destroys key evidence.

Other coverages may include the following.

1. Loss of a Major B2B Relationship. This covers the insured against the ensuing business interruption and extra expense that would result from a loss of a major business-to-business relationship while a suitable replacement to resume normal business operations is being established.
2. Employment Practices Liability. This coverage protects the insured against a broad set of employment-related risk exposures including, but not limited to, sexual harassment, wrongful termination, breach of employment contracts, wrongful discipline, failure to provide a safe work environment free of workplace violence, and civil rights violations.
3. Directors and Officers Liability. This insures loss exposures related to alleged executive liability and indemnification of risks arising from wrongful acts, which may include breach of duty, neglect, error, misstatements, misleading statements, omissions, or other action wrongfully taken or attempted.

The problem is that there is no one commercial insurance policy that provides a broad-spectrum coverage for reputational risk. Long-term effects of a loss event are difficult to quantify. Forming a captive insurance company ensures that coverages are comprehensive and broad; they will fill in where a conventional policy stops short or is too expensive to purchase. Ancillary financial benefits may also be available, such as a 0 percent federal income tax rate on the captive's underwriting profits, which helps the insured business remain operational despite reputational threats or occurrences.

What Midmarket Businesses Can Learn from Hollywood

#MeToo cast a light on celebrities with otherwise stellar reputations. Seemingly "innocent" men and women were taken off of their proverbial pedestals and made to account for any misdeeds. The reputations of our favorite actors, comedians, and industry moguls were tarnished.

Overall, Hollywood is teaching the business community that no one person nor one company is immune to accountability in the age of #MeToo or to reputational risk. Even when it seems that a company's culture and values are sound, one rogue person may bring the entire business down. An accusation has the ability to destroy people's trust and the business's ability to stay financially afloat. It's business interruption that comes abruptly and painfully; it affects people's lives in very profound ways. Having a comprehensive backup plan ensures that while the work is being done to restore trust, the business is sustained. Captive insurance planning is an alternative risk mitigation strategy proven to hold an organization together when it seems to be unraveling.