Continuity Planning Concerns All Stakeholders

With such dire consequences at stake for so many interested parties, constructing a sound continuity plan is a legitimate concern not only for a contractor, but also for its insurers.

By extension, in guaranteeing a client's ability to perform all of the bonded work they undertake, an insurer also attests to the client's general skills and competency, its performance on even nonbonded work, its financial capacity to initiate capital and sustain the financial demands of all work on hand through completion, and its integrity in holding public funds in trust and allocating them properly.

When those guarantees prove false in the wake of a client's failure to adequately insulate itself against an owner's sudden departure, the insurer incurs a great potential to suffer real loss.

Yet in the face of so much risk and despite the industrywide acceptance of continuity planning's importance that has made it a popular buzzword, many bonded contractors either have no plan in place at all, or an outdated one at best, and very few insurers take a hard stance in requiring one of their insureds.

Part of this double-standard comes from ambiguity surrounding exactly what a good continuity plan entails and what the process is for constructing one. Attorneys lay out certain criteria, accountants tout a different set of guidelines, and insurers make still different demands.

In truth, the definition is a fluid one that morphs to fit the client's changing situation and goals for the future. It is the responsibility of the client's professional advisors–particularly their insurance/surety agents–to recognize that and communicate about it with the client and the other advisors.

Another part of the dichotomy arises from fears that insurers and other financial institutions harbor against enforcement. Even if one insurer or bank wants to stand firm about clients meeting continuity plan specifications, if their competitors are waiving them, the risk of losing accounts to their own financial detriment may weaken their resolve.

The onus of responsibility clearly rests on the insurers and creditors to hold firm to the standards that they set.

Finally, putting together a comprehensive continuity plan that really takes all stakeholders into account–including owners and their families, key employees, insurers, and creditors like banks and other financial institutions–is an ambitious undertaking, and one that is very tempting to put off, sometimes until it is too late.

Fortunately, though, there are a number of best practices that clients and their agents can use to meet insurers' and creditors' demands that owners form solid continuity plans to keep their businesses from collapsing in the event that they are suddenly unable to lead them.

Retaining key employees after an owner's demise is vital to maintaining a company's momentum and can be encouraged through an offer of ownership facilitated by an attorney-prepared buy-and-sell agreement.

A second alternative is to make provisions for additional compensation if key employees continue to run the company. The amount of compensation can be directly tied to the company's profitability and continued success.

Giving employees a "stay bonus" for remaining with the company can provide an additional incentive, and can be funded through insurance and accessed in case of the owner's death.

A capable life insurance professional should be consulted to ensure that the necessary insurance is properly held by the owner, his/her estate, or the company, and secured with adequate limits of liability.

In addition to the inherent loss of knowledge and experience that goes along with losing an owner, the fact that one or more key employees might leave despite even the best efforts to retain them makes the transfer of knowledge an often overlooked but essential element in good continuity planning.

Entrepreneurs typically view themselves and certain key individuals as indispensable, but when it comes to planning against the unexpected, building a framework of strong internal processes that speaks to the owner's vision for the company's success and translating it into action are crucial steps in ensuring continuity of the organization.

Good processes carry forward the original owner's legacy and provide a road map for his/her successor.

Insurers and financial institutions need to know about an owner's succession plans, and it is appropriate for an insurance/surety agent to act as an owner's coordinator among all involved parties.

Communicating about expectations before implementation, and then meeting to discuss the arrangements–and showing proof that the insurance necessary to carry out those plans is in place–goes a long way toward ensuring that all interested parties can feel comfortable with the strategy and rest assured that their interests will remain protected.