In these volatile economic times, companies find themselves making difficult decisions with respect to their staff and leadership. With ever greater frequency, board terminations and mergers drive corporate benefit managers in search of unique insurance solutions to fulfill corporate post-termination obligations to their top officers. It is at this point that well educated and prepared insurance advisors can add considerable value to their already stressed clients.
The typical problem
Issues often arise when an attorney drafts otherwise well-written employment, change of control and severance agreements. The problem generally occurs when the attorney does not feel the need, or does not have the ability, to consult the corporate insurance advisor relative to post-termination benefits obligations.
Most commonly, we will see language in such agreements that stipulate the following: “In the event Mr. CEO is terminated for any reason other than Cause, he shall be entitled to receive all benefits consistent with the Company’s policy for a period of XX months following termination.” When you start breaking down the components of Mr. CEO’s benefits package, problems start to emerge.
Case study no. 1
To illustrate, consider Middle Market Bank, of which CEO and CFO both execute employment agreements, including “change of control” provisions that obligate the bank to maintain equivalent benefits as afforded to the severed executives prior to termination, for a one-year period post-employment. Both senior executives are terminated due to the bank being acquired by a larger competitor.
The health insurance is easy to manage via COBRA. And the modest life insurance obligation is fulfilled by converting the group life plan and having the corporation fund the premium. Then group long-term disability income insurance is addressed– and the first major problem emerges.
Prior to termination, both senior executives enjoyed a group long-term disability plan that provided 60% of their compensation to a maximum of $20,000 per month. Unfortunately, but for good reason, group long-term disability contracts do not have conversion features to help manage such a situation. Further, the simple fact that both executives are currently or soon to be “unemployed” makes it impossible for traditional individual disability income (IDI) underwriters to even consider the risk.
Fortunately, underwriters in the specialty insurance space offer niche programs to manage these exposures and provide some relief to corporations stuck with a potential multi-million dollar uninsured loss. Here is an example of how the program works:
? Pre-termination group long-term disability benefit equals 60% of annual compensation to a maximum of $20,000 per month payable to age 65. Coverage terminates on severance date.
? Prior compensation of Mr. CEO, age 51, equals $600,000.
? Prior compensation of Mrs. CFO, age 47, equals $425,000.