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FC&S D&O is designed to help readers gain understanding and insight into D&O insurance policies. No discussion of D&O insurance would be complete, however, without first placing it in perspective with the overall management of risk. The term risk management has been variously defined as:

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  • An approach of management concerned with the preservation of the assets and earning power of a business against risks of accidental loss, as stated by J. M. Rosenberg, Ph.D. in Dictionary of Business and Management, published by John Wiley & Sons, 1988.
  • A process that includes the four functions of planning, organizing, leading and controlling the activities of the organization in order to minimize the adverse effects of accidental losses on that organization at reasonable cost, according to G. L. Head and Stephen Horn, Essentials of Risk Management, Volume 1, from the Insurance Institute of America, 1991.

 Because the risks of loss to directors and officers is so varied, it is often difficult for the board of directors, one department or one person to know about all the exposures that directors and officers face.

For example, although a corporation's directors and officers are primarily responsible for the affairs of the organization, it is others within the organization that manage the day-to-day administration of the organization's policies and procedures. This requires the various functional departments of the organization, individual managers and supervisors as well as legal counsel to be cognizant of a complex variety and frequently changing body of laws.

Many organizations are aware of the potential benefits of risk management. They know that adopting and implementing a risk management program can substantially reduce the company's liability as well as the personal liability of its officers, directors and others. However, attempts to formally manage the D&O exposure often suffer from a lack of understanding of the basic concepts of risk management or from improper implementation of those concepts. The fragmentation of responsibilities and decentralized management of the D&O exposure also can complicate the coordinated management of risk.

The Risk-Management Process

The primary goals of managing the D&O exposure are to reduce or control the personal liability of directors and officers and to protect the organization against the potentially catastrophic financial loss resulting from indemnification requirements or direct lawsuits against the corporation. The generally accepted sequence of risk management activities designed to achieve these goals is to:

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  1. Identify and measure the risk of loss.
  2. Eliminate or control the risk of loss through loss-prevention and loss-reduction techniques.
  3. Assume without insurance (i.e., retain) some or all of the D&O exposure as a budgeted cost.
  4. As a last resort, insure potential D&O losses that cannot otherwise be treated in the above fashion.

 Who Does It?

Although one department or one person may sometimes oversee or have executive responsibility for day-to-day risk-management functions, such centralization is not always believed to be desirable or practical by senior management. As respects the potential liability of corporate directors and officers, the board itself should be aware of, and active in, the risk management process. However, there may be confusion over whom or which departments are responsible for which risk-management functions. Applying the risk- management process to the D&O exposure usually necessitates assigning responsibility for each element of the risk management program to one or more functional departments. Such assignment of responsibility may vary by the type and size of organization.

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