Picking Up the Pieces

A company's reputation may be intangible, but when it's damaged, the losses are real. Can insurance bridge the gap?

When Martha Stewart was denied a new trial last month, shares of Martha Stewart Living Omnimedia Inc. took another dip, further illustrating the particular peril faced by companies closely identified with a “brand name.” As many have learned lately, corporate reputations polished for decades to a high luster can be instantly tarnished by ineptitude, malfeasance, or plain bad luck. It may be a show-biz truism that there is no such thing as bad publicity, but employees and shareholders of companies as diverse as Royal Dutch/Shell Group, Carnival Cruise Lines, and Bridgestone/Firestone know too well that when the corporate name is sullied, the damage can be devastating.

“All you have to do is read the papers every day to see the challenges companies have had in this regard,” says Bradley Wood, senior vice president of risk management at Washington, D.C.-based Marriott International Inc. “The exposure to reputational loss is greater than ever, and there’s no insurance product to cover it.”

Not yet, anyway. The insurance industry has been interested in offering such coverage for many years, but the difficulty in determining the value of a brand or reputation, and the cost of restoring same, has proven extremely challenging. Whatever the source of bad publicity — be it genuine tragedies that cost lives, the peccadilloes of management, or a host of things in between — the result can affect stock price, sales, and every other barometer of success.

For many years, insurers have offered piecemeal approaches that address certain facets of reputational damage but don’t begin to approach comprehensive coverage. Liability insurance can pay for a legal defense, and additional coverage may address costs associated with a product recall or business interruption. Beyond that, about the only help toward restoring reputation or brand value comes in the form of limited crisis-communication coverage, a relatively new offering that covers some of the costs associated with public relations and advertising campaigns.

Wood is among a number of executives who have been pressing insurance companies to do more. He wants to see the industry design a product that would tie reputational coverage to corporate value lost in a crisis. Marriott’s brands, including Ritz-Carlton and Ramada, are, he says, “among our most important assets, and protecting our reputation is a natural extension of our brand-management strategy.”

The terrorist attacks of 2001 stalled nascent efforts to develop such coverage, but recently research has been conducted in both the United States and Europe into how to place some insurable value on brands and aid companies facing reputational damage. “I’ve been working on this for four or five years, and now we’re at the stage of trying to get the pricing to work,” says John Bugalla, San Francisco­ based managing director of the Aon Risk Services unit of risk-management giant Aon Corp. A product is probably still more than a year away, “but the market is opening up,” according to Bugalla, as large companies express more interest in protecting against a catastrophic decline in shareholder value wrought by a damaged corporate reputation — including the potential impact of Sarbanes-Oxley violations.

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