Insuring the indispensable

The unexpected death of McDonald’s chairman and CEO Jim Cantalupo following a heart attack in 2004 took the company by surprise. Widely-respected, Cantalupo had been credited for turning the business around and posting its highest profit in 30 years.

When he died, shareholders and employees were worried it would have a dramatic impact on the company’s share price and fortunes going forward. But a successor – Charlie Bell – was quickly announced, providing immediate reassurance that a strong leader was in place to provide continuity.

It is a sad fact that in the workplace, organisations must continue to function despite the death or illness of a colleague.

But the loss of a highly influential individual needs to be treated with great care, particularly when they are considered to be critical to the success and direction of the company.

Key-man insurance is one way companies can protect themselves against a drop in revenue when they lose a senior person – either temporarily or permanently.

Big fish, small pond

It is smaller firms – not necessarily the large international brands – that have most to lose, explains Tim Prifti, active underwriter for accident and health at Kiln Syndicate 510, who heads up the key-man practice.

“Bigger multinational corporations are likely to have better succession planning and are less likely to buy specific key man insurance,” he explains.

The announcement that Apple founder and CEO Steve Jobs will be taking his third leave of absence for medical reasons has been met with widespread sympathy. It has also led some to ponder what impact that will have on the company.

“With Apple it has gone beyond the individual – it’s about the brand and it’s bigger than the individual – but this story does highlight the potential impact one key executive can have over the running success and profitability of a company,” Says Prifti.

“Often in smaller companies the individual contribution of one person is the key asset of the company,” he continues.

There is a wide spectrum of examples where one key person could affect the future success of a company were they to fall ill or die.

Classic city firms likely to seek key-man cover are investment houses and law firms. Hedge funds often have one star manager who attracts the majority of investors by virtue of his or her reputation and track record. Such an individual could have an insured value of $100m, fetching a premium in excess of $750,000.

Similarly, small to medium-sized law firms typically rely on the repute of one or two key partners.

Such individuals could be responsible for bringing in up to 20% of the company’s revenue, explains Prifti. “Even if you’re not dealing with Mr Clifford or Mr Chance – which these days you’re not – the chances are that in smaller partnerships one person is the absolute known expert in that field – they have a unique skill and knowledge base that other people won’t have.”

In the movies

There are plenty of other industries and business types where key-man insurance could be important. The death or disability of renowned surgeons, premier league footballers or movie stars could have a big impact on the hospital, team or production they are associated with.

When Australian movie star Heath Ledger tragically died in January 2008 during the editing of The Dark Knight it cast a shadow over the $180m production.

He was also half way through filming a starring role in The Imaginarium of Doctor Parnassus, causing the production to be temporarily suspended before filming continued with actors Johnny Depp, Jude Law and Colin Farrell taking over Ledger’s role.

Other actors to die mid-production include Brandon Lee and Oliver Reed. When Lee died during the filming of The Crow the film was eventually completed using special effects and a stunt double.

Many other actors have fallen ill during filming, bringing multi-million dollar movie productions to a halt. This can have a huge impact on a film’s budget or schedule, hence why most take-out key-man cover as part of their film production insurance.

Growing demand

Trying to calculate the value of a key person to their company is a science in itself, explains Prifti.

“Sometimes their value is a multiple of the profits they generate through their client base or their contacts or their unique skill, it could be a multiple of their salary but it could be you have to get an accountant in to go through the books of the company to try to forensically audit the books.”

Demand for key-man cover is highest in the US, where awareness of the risk of executive disability is more heightened than in the UK or Europe. High grossing players in sports such as baseball and American football also lend themselves to such cover.

Awareness is growing outside the US where, for publicly-listed companies in particular, insuring a key individual is increasingly considered good corporate responsibility.

Shareholders want to be reassured the company is doing everything it can to protect future revenue streams, explains Prifti.

“Over the last few years there’s been a greater awareness of the need to protect the assets of the company and in many of these companies the assets are the people.”

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