In this Issue

	If the Chain Breaks...
	D&O Loss Control: An Easy Way to Avoid the Nightmare of Insider Trading Allegations

Quick Facts

Backlash Hits Medical Technology
Claims data associated with the Medical Technology industry reveals that 65% of claims against medical product manufacturers also name the treating physican(s), hospital and/or hospital staff. Medical Malpractice reforms, which place liability caps on medical providers, frequently have a negative effect on the exposure and claim payment of the product manufacturer whose liability is not capped under these laws. (Source: Travelers Insurance Companies)

Skyrocketing Building Costs
The cost of raw materials has recently increased tremendously because of the demand by countries with growing economies, and geographic regions rebuilding from catastrophes. Over the last 2 years alone, the cost of lumber has risen 21%; drywall 29%; copper pipe 27%; structural steel 53%; and, steel studs 78%. (Source: Marshall & Swift/ Boeck courtesy of Chubb Insurance)

Exponential Growth
In 2002, the world computer industry shipped its one billionth computer. It is estimated that it will only take until the end of 2008 for the industry to reach two billion computers shipped. (Source: Gartner Dataquest courtesy of Travelers Insurance Companies)

If the Chain Breaks...

In today’s highly competitive global economy, successfully managing the company’s supply chain has become an essential element of bottom-line profit or loss.  Hardware manufacturers take months to pre-qualify subcontractors in Asia, Europe and the United States, but in an instant, an explosion or earthquake could completely shut down a subcontractor, breaking the chain and severely impacting revenue.  How much analysis has your company done on associated insurance and risk management issues?

Before technology flattened the world, most companies owned and managed their own manufacturing facilities.  Insurance was relatively straightforward and mainly involved insuring the company’s own locations for direct physical damage through property coverage and business income (Business Interruption) insurance to protect corporate cash flow.  A standard Business Interruption worksheet provided a realistic estimate of proper limits and insurance coverage. 

Manufacturing and shipping profiles in the 21st century require a more complex analysis, often involving worldwide subcontractors for each step in the manufacturing process.  Raw materials, WIP and finished goods must be shipped several times before the product reaches the final customer, exposing the product to more opportunities for damage and theft during transit.

The company designing the product no longer controls the manufacturing process or, in the event of a loss, the premises to facilitate adjustment of an insurance claim.  As a result, many insurers avoid providing coverage for subcontractors’ premises, aside from incidental limits.

Even if traditional property and business income insurance is purchased, it will not cover all risks of loss, and along the Pacific Rim, earthquake insurance, where available, is virtually unaffordable.  War cover is included in cargo policies and provides terrorism coverage while goods are in transit worldwide, but warehoused finished goods or WIP cannot be covered for war -- a standard exclusion on property policies.  TRIA (Terrorism Recovery Insurance Act) coverage for terrorism applies only in the United States for acts of terrorism committed by foreign terrorists and certified by the federal government.  Consideration should be given to buying Non-certified Terrorism coverage, specialized worldwide insurance that also covers terrorist acts committed by domestic terrorists in the U.S.

Insurance solutions do exist.  A Global Stock-throughput policy can free up contingent business income capacity while simultaneously providing broad coverage for WIP and finished goods.  Many of these policies include earthquake and flood coverage, and non-certified terrorism can be added.  Proper valuation of finished goods at selling price compensates for the lack of business income, though valuation of WIP can be more challenging.

With limited or, sometimes, costly insurance options, risk management alternatives are needed.  While the just-in-time supply chain rules out extra raw materials and inventory, a three-month supply of -- for example, wafers—could save an entire quarter of revenue.  Having pre-qualified secondary sources becomes an essential risk management approach and protects cash flow.  Creating contracts with subcontractors to address who takes title and insures WIP and goods, and under which conditions, can result in a significant transfer of financial risk. 

D&O Loss Control: An Easy Way to Avoid the Nightmare of Insider Trading Allegations

Martha Stewart. Joseph Naccio at Qwest. An ex-V.P. at Oracle. Dow Jones.  Seems like insider trading is the common thread in more and more recent business scandals.

For corporate executives who receive a significant portion of their compensation in the form of company stock and options, the fear of potential investigations or suits, coupled with limited periods during which they can sell, often leaves them with a concentrated equity position and unbalanced portfolio.  Even when executed properly, stock sales by corporate outsiders and key employees tend to be negatively perceived by the market and can be the target of excessive scrutiny.

Blackout periods, intended to provide protection from federal insider trading liability, can severely limit an executive’s ability to sell stock.  Already narrow selling windows are frequently and unpredictably “closed” as the executives come into possession of material non-public information.

A 10b5-1 Trading Plan, or Preset Diversification Program, takes advantage of SEC rules and provides an affirmative defense against potential claims of insider trading.  The program is set up with a broker-dealer and one or more executives.  It provides for the future sale of shares in a preset and orderly manner.  It can be customized to the individual risk tolerance and investment objectives of each participant.

Executives who take advantage of this strategy will not only be avoiding potential costly litigation and reputational damage, but also often significantly furthering their individual financial goals!