VW to be accused of criminal conduct in Justice Department investigation

VW to be accused of criminal conduct in Justice Department investigation

VW to be accused of criminal conduct in Justice Department investigation News that the Justice Department has found evidence of criminal misconduct by automaker Volkswagen in the handling of its recent diesel-emissions fiasco should forcibly remind insurance producers of a common but dangerous coverage gap: reputational risk.

The DOJ’s conclusions were made public in a Wall Street Journal report Tuesday, in which sources said prosecutors are in settlement talks with VW over as yet unspecified criminal charges. Both parties hope to close the case by the end of the year.

The popular automaker admitted in 2015 that it rigged 475,000, two-liter diesel engine cars in the US with software that allowed them to pollute up to 40 times the permitted levels undetected. According to Justice Department accusations, VW also fitted 85,000 vehicles with three-liter engines with the so-called “defeat devices.”

VW agreed to a $14.7-billion civil settlement with the Environmental Protection Agency and California Air Resources Board in June, paying up to $10,000 to VW owners and agreeing to buybacks for the vehicles. It still faces lawsuits from individual states such as New York, however, as well as the criminal federal probe.

While Volkswagen has issued a statement saying it is “committed to earning back the trust of our customers, dealers, regulators and the American public,” actually doing so – and doing so with finances in tact – presents a tremendous challenge emblematic of a growing and tough-to-insure risk, says Nir Kossovsky, chief executive with Pittsburgh-based managing general agent Steel City Re.

“Most people have historically viewed reputational risk as negative publicity, but that’s really just the tip of the iceberg,” said Kossovsky, whose company specializes in corporate reputation risk management and transfer. “It’s really the risk that when the expectations of your stakeholders – your customers, employees or investors – change, they behave in a way that creates financial damage. It’s behavioral economics.”

Steel City Re, which underwrites accounts using a complex index of reputational indicators, divides such risk into six areas: ethics, innovation, safety, security, sustainability and quality. The case of the VW emissions scandal hits on several of those areas, Kossovsky said.

“With something like Volkswagen, you’re looking at a brand consumers choose because they think it’s environmentally friendly, so there’s a sustainability issue right away,” he told Insurance Business America. “You’ve also now got an ethical risk, in which the behavior of management hasn’t met the expectations of shareholders, regulators and a number of others.”

The consequences could be numerous and widespread. VW shares plunged 23% after management admitted to the cheat, and though some progress has been made toward recovery, the latest news could send them again spiraling downward.

Individual lawsuits against company directors are also expected, which could irreparably paint company leadership as dishonest or incompetent.

Such reputational risk has proven difficult to insure against historically. Loss of reputation or brand value ranked seventh in Allianz’s list of Top 10 Global Commercial Risks for 2016, and actuarial firm KPMG has said the ways any loss could be tied back to reputational damage are “almost uncountable.”

As such, most insurance products provide coverage only for crisis management and public relations costs. For true loss of income or net profit stemming from reputational damage, a much more limited market exists.

In this highly specialized space, where companies like Steel City Re operate, the client base is also specific. Products are best suited to large, public corporations with boards of directors as well as larger privately held companies and the captives of bigger companies.

Smaller businesses would be better served by a self-insured, captive solution, said Kossovsky.

“The captive instrument can be triggered not on an index, but on a bespoke indicator like lost revenue or other observable measures,” he said. “You can build into the captive a loss absorption capacity and additional funds for crisis communications.”

Some producers may be able to advise on its creation, but Kossovsky said managing reputational risk is a unique skillset and professionals “outside the brokerage world” may be best suited to that role.
 
1 Comments
  • Overtaxed 8/17/2016 2:26:23 PM
    Hillary Clinton not a criminal ?? VW is?? Guess VW didn't give enough to the Clinton Foundation. What a joke this administration has made of the American justice system.
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