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Disaster recovery and building continuity in business

Some time ago, I wrote an article on about the importance of insuring key people in a company and I thought that it would be useful to revisit this in more detail.

It is a fact that any business is at risk if it is dependent on the continued services, creativity or intellectual product of a few identifiable key individuals. The participation of key individuals in the business can end for a number of reasons, perhaps most predictably the following:

• Lost to the competition or leaving for another commercial reason
• Insolvency
• Death, illness, incapacity or other personal reasons

If these individuals are owners of the relevant business or there are special arrangements for them, it may be that there are legal agreements making provision for the foreseeable risks.

Shareholders agreements and joint venture agreements are relatively common and can be a good investment in the long-term. There are also mandatory provisions of law, including those in the Czech Republic, which cannot be displaced by contract. It is prudent to take qualified professional legal advice on these and to keep the various documents up to date.

On the other hand, even if such agreements do exist, and even if there are adequate legal mechanisms to protect the continuity of the business, it is not likely that they will go the whole way:

Legal agreements cannot always address factual scenarios that are inconsistent with what they provide;

• Legal agreements alone cannot force a person to continue working at 100%, being creative, etc, if the person is not otherwise disposed to do this;
• They cannot force a person to transfer shares or ownership interests unless the transfer is fully secured;
• Irrespective of the express provisions and requirements of legal agreements, they do not automatically lead to compensation being paid to the correct recipient unless the compensation is secured by other means. Even then, there could be a long and expensive legal process in order to obtain compensation.

These factors, and many more, are insurable risks. In our view, given the potentially disastrous consequences to businesses of losing their key individuals, there is a low cost and effective way to mitigate such risks today.

Shareholder protection and key man insurance

Every business insures its assets: the buildings, the stock, the cars and the equipment. All of these assets are replaceable.

Very few businesses insure their “Key Assets”, the shareholders and the people that generate the profits even though some of them may not be replaceable. More importantly, cover for this is available in the insurance market. Given the relatively low cost of insurance cover, this is perhaps surprising.

Take the following real life example

• National food distribution business, estimated net value EUR 1 million.
• Two owners, both critical to the business.
• 50/50 ownership, both executive directors of the company.
• Shareholders agreement provides that in the event of death, the survivor has the right to buy shares from the deceased shareholder’s widow.

The problem

• Neither shareholder has EUR 500,000 cash to pay for this (the company’s own assets cannot be used.)
• Neither shareholder wants to be in business with the widow of the deceased shareholder, nor to take the risk that the widow paralyses the company decision-making pending settlement of any dispute.
• A bank will not typically lend this.
• There is also a possible scenario where both shareholders die and the business will halt completely pending settlement between the two widows. This would destroy the business investment for both families.

The solution

• Two life insurance policies covering each shareholder for up to EUR 500,000, payable to the surviving shareholder, who then has the funds to buy the shares.
• In this case, this was considered sufficient to protect the family of the deceased shareholder and the business.


• The directors are 36 and 46 years old and they need EUR 500,000 life insurance cover.
• Total insurance cost for both policies is EUR 3,600 p.a.
• To put this into perspective, insurance for the two directors’ cars costs EUR 4,300 p.a.

Which insurance is more important to the business?


About the Author: Christopher Lean is a consultant at Square Mile Financial Services ( ) and an Associate of the Personal Finance Society (Chartered Insurance Institute).