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Corporate Apologies: Balancing Crisis Management, Liability Defense and Insurance Recovery Considerations

iStock-534131753-corporate-apologies-300x200It’s time-proven advice: Never underestimate the power of an apology. This is true even in a legal context, and especially during a corporate crisis—an event with the potential to materially harm a company’s reputation or bottom line due to alleged negligence, malfeasance or other liability-driven factors. But even when an apology is a sound crisis and liability management tool, insurance and legal defense considerations can complicate its use. Policyholders are well-advised to proceed with care—and should neither automatically rule out an apology to relevant stakeholders and victims, nor issue apologies without fulsome consideration of the potential insurance and legal defense implications.

The Power of Saying “I’m Sorry”
Not only can a well-timed apology de-escalate a tense situation, it can also improve liability risks. For example, medical professionals traditionally have been advised not to apologize for mistakes, lest they invite a medical malpractice lawsuit. However, research reveals that when medical professionals are allowed to apologize for their mistakes, the likelihood of litigation is reduced. And in matters that were litigated, settlement values declined by $32,000 on average where the providers had apologized to the plaintiffs.

Corporate apologies can introduce compassion and humanize the crisis response, potentially transforming negative feelings. But bad apologies, no matter how well-intentioned, can make matters much worse, and unfortunately, are far more common than good ones. It’s critical to get the apology right. Here’s how:

  1. Follow the formula. Research indicates that the most effective apology (1) identifies the victim, (2) expresses remorse and (3) if possible, offers restitution.
  2. Don’t apologize for what people “thought.” Avoid saying, “I’m sorry you misunderstood me.” Your apology should address—not diminish—others’ perceptions of the event.
  3. Don’t give exculpatory context. Avoid giving context or justification of the harmful action (e.g., “I was under a lot of stress”; “Our contractor didn’t disclose that operating issue”). The why is much less important than showing remorse at this stage.
  4. Avoid the non-apology apology. While “I’m sorry you feel that way” uses the word “sorry,” it’s usually received as a failure to take responsibility and victim-blaming. An effective apology should instead express accountability and remorse.
  5. Commit to change. The follow-through is just as critical as the apology itself. An apology should include a commitment to ensuring that the mistake or incident was a one-off event and that the company will do everything in its power to prevent it from ever happening again.
  6. Don’t over use. Talk can be cheap. Use discretion in determining what matters justify an apology, because a string of apologies quickly loses credibility and impact.

To Apologize or Not to Apologize?
From the perspective of a potential litigation defendant, an apology can be scary. What if the apology is construed as an admission of guilt? The decision to apologize can present tension with the need to preserve potential legal defenses. Further, when CGL, D&O, E&O or other liability insurance is involved, the insurer has an important say in defending the matter and may argue that an apology given without its consent violates the policy’s cooperation clause or other policy conditions. Certainly, the good an apology can do should be assessed in light of its potential impact on future legal defenses or insurance recovery, but such considerations shouldn’t necessarily trump. Often, the mere specter of these implications results in decision paralysis or, worse, a non-apology “apology.” There should never be a default bias against an apology because a careful, situation-specific evaluation of the company’s overall exposure profile in light of the company’s corporate culture and goals will often militate in favor of a genuine, thoughtful and specific apology.

Not coincidentally, in some jurisdictions, both in the United States and elsewhere, statutes prohibit the use of certain apologies as evidence of liability. But such legislation is usually limited. While such statutes may privilege “partial” apologies (i.e., expressions of empathy or regret), they usually don’t protect “full” apologies (admissions of fault). They may extend only to certain types of claims (like medical malpractice). Legislation that bars insurers from denying claims because of an apology exists, but is exceedingly rare. Therefore, policyholders should proceed with caution, and be sure to take legal advice before proceeding.

The uncertain legal framework and the need to obtain insurer buy-in—which can be time-consuming—is at odds with key ingredients of an effective apology: timeliness and ownership of culpability. We suggest some “best practices” that offer possible resolutions to this dilemma:

  1. Craft your core team for effective crisis management. The management of a crisis and associated exposures should be led by an empowered and effective core crisis management team, guided by the company’s goals for the crisis and its corporate culture. That team should be small but diverse and vested with significant authority. Generally, it should be made up of a couple of designated management personnel, including risk management, in-house counsel, outside crisis counsel, and either an internal or external crisis coordinator. The core team should be supported by as-needed specialists who can supply critical knowledge, expertise and information to inform decision-making. Insurance and litigation defense counsel can assist in assessing the coverage or defense implications of an apology, which can be integrated into the team’s analysis of the potential value of giving the apology.
  2. Negotiate apology standards with your insurers in advance. In negotiating to place or renew liability coverage, policyholders should consider seeking terms to create leeway to issue timely apologies on the advice of counsel. This could include, for example, a provision in which insurers agree to respond substantively within a short, pre-agreed time period to requests, made on the recommendation of counsel, for permission to make such an apology. Even in the absence of such a provision, give notice to insurers under all potentially applicable programs and raise the possibility of an apology as soon as possible to increase the chances of getting consent to make a timely apology.
  3. Create industry support. Because apologies are often the right thing to do from the perspectives of ethics, corporate culture, crisis management, and liability mitigation, it is in the best interest of industry to be open to a paradigm shift in which apologies are allowed or even encouraged. It is, indeed, usually in the best interests of insurers to participate in and encourage such a shift. Acceptance of this paradigm should be encouraged.

There is power in a well-executed apology. When properly performed, apologies can improve a company’s position with its constituents, both internal and external—reputationally and legally. Existing liability regimes and insurance paradigms often limit a company’s ability to apologize effectively. Companies should put a core crisis response team in place who are empowered in a crisis to act quickly to, among other things, evaluate the value of an apology while properly weighing insurance recovery and litigation defense considerations. Moreover, policyholders should seek to negotiate terms with their insurers to facilitate prompt, decisive and effective action—especially in the context of managing a crisis when early actions will have a disproportionate effect on overall outcomes.

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