Risk Profiles: Reputational Risks

For any business, reputation remains the key cornerstone for building a customer base and serves an integral part of both garnering repeat business from your clients, and bringing in new one’s.  Reputation is a broad umbrella that encompasses many facets of a how well a business serves their client base, the quality of the products that are produced, and other intangibles that all form consumer views about your organization.It’s also important to understand that reputation reaches beyond your client base, where consumers who have never used your products or services might still have views about your reputation based on discussions with your customers, or what public information they’ve read or seen (ie. business in the media).  The reputation of a business is a critical, and risks associated with the loss of that reputation must be aggressively managed.

Widespread use of social media has propelled loss of reputation risks to new levels for business owners.  One viral video may be all it takes to bring an organization to a grinding halt, particularly if the response is ineffective or inept.  Combating loss of reputation can cost hundreds of thousand of dollars.

Consider this story out of Hawaii, where a couple teenagers decided it would be funny to cook a rat on the grill at the restaurant they worked at, and being teenagers of course they were going to video this harmless prank.   Undoubtedly the owners of the business didn’t share in their humor and both were fired, but what did it really cost this restaurant?

“We are horrified a former employee would create something like this trying to destroy our reputation without regard for our 20-plus years of quality and aloha,” he said.

Would be future customers might never eat here and repeat customers may very well find a new location for their burger.  Nevermind that the kitchen has been sanitized, and may very well be cleaner then many of the other places you eat, the fact remains that a rat was cooked on the grill and anyone aware of that may simply lose their appetite for such a place.

What recourse does the business owner have?  He can pursue legal action against the former employees for damage to his reputation, but that comes with its own challenges, namely trying to recover damages from a teenager with no assets, and tying up emotional and financial capital litigating the case.

Terminating the employees and having the kitchen sanitized are appropriate actions, but much more will need to be done by this business to survive, and almost all of those additional steps will need to be funded, impacting the balance sheet for the foreseeable future.  This type of reputational loss is but one of many kinds of ways this risk manifests itself, and in some instances you may be able to transfer some of that risk through insurance coverage.

Reputation damage coverage is written on different policy forms, and will often be included as a sublimit within a liability package.  It’s important to review the coverage forms with your broker to understand what is and isn’t covered.  The coverage will often include reputation damage response and consultation to deal with the media and new coverage, assistance with public statements and other reputation managing activities, and may cover loss of income.

For a company like Chipotle, the damage can be irreversible.  After a food safety crisis in 2015, the restaurant continues to struggle to this day.

“Chipotle is a case study in what happens when a brand loses the trust of its consumers,” David Henkes, principal at Technomic, told CNBC via email. “The market is too competitive right now, and consumers have so many choices, that once that bond is broken, it’s hard to get consumers back.”

Business owners must evaluate the risk levels their business faces.  If you are in the food, health or financial service industries then your risks are elevated by simple consumer dynamics and trust thresholds, but even the small contractor has to be concerned if they have a bad reputation in the community they serve.  In today’s day and age, with social media and technology in the hands of everyone, the potential of an incident that could prove catastrophic is heightened.

Business Insurance Associates has several recommendations that business owners consider to proactively manage this risk:

  • Never compromise on safety – Whether your products, services or people, it’s paramount to prevent injury to other parties
  • Vigilant hiring – One of the most important measures taken is the hiring process.  Human resource professionals believe a lot of incidents (ie. work comp claims, lawsuits, accidents, willful & harmful behavior, etc) can be proactively avoided by hiring the right people from the beginning, then training them.
  • Have a plan – Spend some time identifying risk, specifically cases where your reputation can be damages or destroyed and have response plans prepared ahead of time in the event one of those circumstances manifests itself.
  • Social Media – Manage access to your company accounts carefully, and consider policies for  guiding the online behavior of your employees.  The last thing your business needs is an internal social media post going viral.

For more information or to speak with one of our risk management professionals, contact our office at (907) 274-4142 or email [email protected]