Business Insurances – Human Capital Protection
Under the 1993 Companies Act Directors have the following duties and responsibilities
- Identify all reasonably apparent risks
- Quantify those risks and assess the effect of the risk on Creditors, shareholders as well as other parties.
- Not allow the Company to be put passively at risk.
- Ensure that the Company remains solvent at all times.
- Reduce, avoid or eliminate any risk that can be prudently dealt with
- Disclose any unmanageable risks to any party potentially at risk
- Constantly review this process.
Critical risk factors to be considered for any business would be the possible death or disablement of key people:
- Key people
- Specific people could be key to the success of your business, and in the event of their loss would need to be replaced.
- Loss of Revenue
There could be a significant reduction in revenue to the business upon the loss of specific key people.
On the loss of a key person provision for the removal of debt is important, as this will provide security to those the company does business with and allow personal guarantees to be restructured
Create Capital Reserve
On the loss of a key person who is critical to future business growth, a capital injection may be required to ensure the business could continue with it’s development objectives. This would enable the Company to retain its competitive edge within the industry it operates.
- Funding the cost of replacing key people.
- Replacement of crucial revenue streams.
- Elimination of debt
- Creation of Capital for continued growth and stability.
- Protection against contractual penalties.
- Costs of winding up the business in the event that the loss of a key person results in the inability to trade on
Share purchase Insurance
If an owner is lost to the business through death, disability or major illness there are usually two issues to address:
Control of the business for the remaining owners, and
Certainty for the departing owner (or their estate) for the sale of their shareholding.
The remaining owners need to retain control; the departing owner needs to be certain of the value they will get for their share in the company. I recommend effecting suitable insurance covers to provide adequate funding for a properly constituted Buy - Sell agreement amongst the Shareholders.
The Buy - Sell agreement should include the following provisions:
An agreed value for the shares to be transferred fully funded by insurance. The agreement ensures a certain and predictable outcome and a “win - win” solution for all parties.
We prefer to see the use of “Agreed value” clauses within buy - sell agreements. This “agreed value” can be set annually when the accounts are completed. This method alleviates a lot of potential arguments over the “correct” value of the shares, in the event of a tragedy.
A mandatory rather than optional agreement to buy the shares triggered by death, total & permanent disability or major trauma.
- The preferred ownership for such policies is by an independent Trustee or Trustees.