Sunday, September 27, 2009

Insurance 101: Understanding the Basics of Liability Insurance, Part 4

By John L. Watkins and Guest Contributor Henry Shurling

In our last post, we covered placing the insurer on notice in the event of an occurrence or a claim. Assuming that the insurer is on notice, this post will cover some of the things that may happen in the handling of the claim.

1. The Insurer Should Provide Written Acknowledgment of the Claim. An insurer should assign a claims professional and provide written acknowledgment of a claim very shortly after receiving notice. The claims professional is the person to whom communication regarding the claim should be directed. The acknowledgment will also include a claim number. It is important to reference the claim number in all future correspondence.

2. The Insurer Typically Must Provide a "Defense." Under most insurance policies, the insurer has two primary obligations: to defend and indemnify. As a practical matter, the obligation to defend means that the insurer must hire and pay for a lawyer to defend any lawsuit on your behalf.

Most policies allow the insurer to pick the lawyer. Sometimes, an insurance company will agree to use a lawyer proposed by the insured, particularly if the lawyer has some unique background knowledge or experience that will be helpful in defending the claim. The obligation of the insurance company to pay for the defense is often as important as the obligation to pay for any settlement or judgment, as legal fees can often be substantial.

There is one thing that is important for an insured to understand: Although the insurer may hire and pay for the lawyer providing the defense, the lawyer is the insured’s lawyer and owes primary professional responsibility to the insured and not the insurance company. Sometimes, "insurance defense" lawyers may forget this and will keep the insurer fully informed, but not the insured. If this happens, an insured should not be hesitant to remind the lawyer that the insured is the client. This is not to imply that insurance defense lawyers are not competent; in fact, many are excellent trial lawyers.

3. The Insurer May Make a "Reservation of Rights." Insurers will sometimes send the insured a "reservation of rights" letter. The purpose of a reservation of rights letter is to notify the insured of potential policy defenses or limitations to coverage. A reservation of rights letter typically says, in effect, that the insurer will provide a defense for the time being, but that it reserves the right to disclaim coverage in whole or in part at a later date. The insurer may also reserve the right to recover defense costs advanced by the insurer.

In Georgia, an insurer may reserve rights by unilaterally sending a letter. A reservation of rights letter is apparently often seen by insurers as a formality. However, from the insured’s perspective, it is a cause for concern. It is a good idea to have your lawyer (a lawyer you hire; the lawyer providing the defense cannot do this) review the reservation of rights letter to determine if there are any serious coverage issues.

In some other jurisdictions, the insurer will ask the insured to sign a "non-waiver agreement," perhaps because a unilateral reservation of rights letter is not accepted in that jurisdiction. A non-waiver agreement serves the same essential function as a reservation of rights letter, but requires the insured’s consent. Again, if you are requested to sign a non-waiver agreement, it is a good idea to consult with coverage counsel.

4. The Insurer May File a Declaratory Judgment Action Against You. Particularly if the insurance company believes there is a serious coverage issue, the insurer may file a declaratory judgment action against you. In such an action, the insurer is asking the court to determine whether or not it is obligated to provide a defense or, sometimes, indemnity. If this happens, you have no choice but to hire your own lawyer and defend the case or counterclaim for breach of contract and potentially other remedies.

Insureds should be aware that, although an insurance policy is a form of contract, there are rules of interpretation of insurance policy language that favor the insured. As a general matter, it must be clear that claim is not covered (particularly for purposes of providing a defense) before coverage will be denied. If there are ambiguities in the policy language, they are to be construed in favor of the insurance company. An insured should not conclude that there is no coverage because the insurer has contested it. Rather, the insured should have its own coverage counsel evaluate the situation carefully.

5. The Insurer May Disclaim Coverage. Insurers will sometimes simply deny or disclaim coverage. By this action, the insurer is saying that they will not provide a defense or indemnity. If this happens, you need to consult with insurance coverage counsel, who can advise you whether you should pursue litigation against the insurance company.

6. The Insurer May Settle the Claim. Many policies give the insurer the right to settle the claim, even without the insured’s consent. There are instances in which the insured may prefer to defend a case for reputational or other reasons, rather than settle. In such instances, the insured should have a frank discussion with the insurer’s claims representative. However, in most instances, if push comes to shove, the insurer has the right to make the determination.

Conversely, there may be other instances in which an insurer receives an offer to settle a claim within policy limits, but is unwilling to do so. Particularly if the insured believes that the risk of an adverse judgment (if the case proceeds to trial) exceeds policy limits, the insured should strongly consider putting the insurer on notice of its desire to settle and that, in the event of a judgment exceeding policy limits, the insured intends to hold the insurer responsible for the excess loss. This is usually best accomplished with the involvement of coverage counsel.

7. If the Matter Proceeds to Trial, the Insurer Should Pay Any Judgment. If the matter proceeds to trial, hopefully all will go well. However, if there is an adverse judgment, the insurer should, subject to any potential defenses to coverage, pay any judgment up to the policy limits. As noted above, if the insurer proceeded to trial in the face of an offer to settle within policy limits, it may be possible for the insured to hold the insurer responsible for the excess if the insurer made an unreasonable decision in failing to settle. If there was no opportunity to settle within policy limits and the judgment exceeds policy limits, the insured will be responsible for any excess. However, it may be possible to compromise and settle the result within policy limits due to the risk of the judgment being overturned on appeal.

We hope that this series of posts has provided you with information necessary to understand the basics of the often confusing subject of liability insurance. We note that this series of posts only covers basic concepts. Many liability insurance issues are very complex and are beyond the scope of this series of posts. We close by again noting that this discussion is based on Georgia law and general practices in Georgia. If you have a question about your liability insurance, or if you are in another jurisdiction, please consult an experienced broker or coverage counsel licensed in your jurisdiction.

Tuesday, September 22, 2009

Insurance 101: Understanding the Basics of Liability Insurance, Part 3

By John L. Watkins and Guest Contributor Henry Shurling

It is sometimes said that insurance is one thing that you buy that you hope you never have to use. However, claims may arise. If they arise, there are a few things that need to be done.

1. Have a System in Place for Reporting Accidents or Incidents that Might Lead to a Claim. A business should have a system in place in which accidents or incidents that occur that might lead to a claim are reported to management. Note that some policies have provisions requiring such events to be reported to the insurer. The important thing is to get the information to a responsible person who understands what needs to be done.

2. If Demand Letter Arrives or a Suit is Filed, Notify the Carrier. If a demand letter arrives from another party or the other party’s lawyer, the carrier should be notified. If a suit is filed, it is important to get the suit papers to the carrier as soon as possible.

3. Some Notes About Notice. Some carriers are more aggressive than others about raising an improper or late notice defense. It is never safe to assume that a carrier will not raise such a defense. Many insureds provide notice by calling “the insurance company,” meaning they call their broker. As discussed in the first post, the broker is not the insurance company.

Many brokers assist their insureds with claims as part of their service, and will report a claim to the carrier on behalf of the insured. Many carriers will accept such notice. However, policies typically have specific provisions on how notice is to be given. The safest approach is to follow these provisions exactly. Note that the address for giving notice is often different from the address for paying premiums.

Most insurers will send prompt written acknowledgement of a claim. It is a good practice to confirm in writing with the claims professional that the company acknowledges it is on notice of the claim, and that no further action need be taken to put the company properly on notice.

4. Cooperate. Almost all policies have some form of “cooperation clause.” This is a clause that requires the insured to cooperate with the insurer in the event of a claim. Insurers will need information to deal with the claim. As a general proposition, provide it. If it appears that an insurer is making unreasonable requests, your broker or counsel may be able to intercede and avoid any potential dispute.

Monday, September 21, 2009

Buy/Sell Agreements 101 - Understanding the Basics

By Thomas L. McLain

Whether your small company is a corporation or a limited liability company, most legal advisors recommend that buy-sell provisions be a part of your company documentation. Buy-sell provisions accomplish at least two purposes. First, by specifying the terms pursuant to which an equity owner may sell or transfer an equity interest in the company, the buy-sell provisions provide continuity of ownership and control. Second, buy-sell provisions provide liquidity in the event of the death or disability of an equity owner. By spelling out up front the terms pursuant to which these and other goals are accomplished, the owners should eliminate anxiety, pain, and real controversy later. However there is a lot to consider and this outline of the basics of buy-sell provisions will prime the business owner for an effective consultation with their company attorney.

Types of Buy-Sell Structures. In the case of a corporation, the buy-sell agreement is a stand-alone agreement. In contrast, in the case of a limited liability company, the buy-sell provisions are typically incorporated into the operating agreement. In either case, there are two types of buy-sell structures based upon how the payments are actually made.

· Redemption structures. This type of structure contemplates that the company purchase the equity interest of the selling equity owner.
· Cross-purchase structures. This type of structure contemplates that the remaining owners purchase the equity interest of the selling equity owner.

Triggering events. When an event occurs that causes the buy-sell provisions to be applied, it is said to be a triggering event. There are a variety if triggering events and some of the most common are summarized below.

· Death. The death of an equity owner is usually a triggering event, either based on the theory that the estate of the deceased owner will need liquidity, or based on the theory that the remaining owners do not want to be forced to deal with a representative of the estate. Sometimes the death of an equity owner gives the representative of the estate the right to force the purchase of the equity interest; other times, the death of an equity owner gives the company or the remaining equity owners the right to force the sale of the equity interest.
· Disability. Permanent disability is a triggering event for most of the same reasons that death is a triggering event. If the company has disability insurance, then the terms of the buy-sell provisions need to be coordinated with the terms of the disability insurance policy.
· Bankruptcy. The bankruptcy of an equity owner is almost always a triggering event because having a pre-determined method for the valuation and sale of an equity interest reduces the involvement of the company in the bankruptcy process and provides liquidity.
· Voluntary or Involuntary Departure. Some buy-sell provisions allow the company to force the sale of the equity interest of an equity owner who is no longer involved in the company as a result of a resignation or termination.
· Divorce. Some buy-sell provisions allow the company to force the sale of the equity interest of an equity owner who becomes a part of a divorce proceeding. There are pros and cons to divorce as a triggering event and these need to be considered.
· Proposed Transfer. The most common triggering event occurs when an equity owner decides to sell or transfer their equity interest to a third party. If it’s a sale, there is typically an opportunity to match the terms of the sale. If it’s a transfer, there is typically an opportunity to approve or disapprove the transferee.

Valuation. One of the key reasons for adopting buy-sell agreement is to provide a rational approach to business valuation in the case of a departing equity owner. Some buy-out provisions use different valuation techniques depending on the nature of the departure: For example, the valuation for a departing owner who has been terminated for cause by the company may be less favorable that then valuation used for a payment to the estate of a deceased equity owner. Some of the mechanisms used for valuations include:

· Book Value. Usually the least favorable to the departing equity owner.
· Market value. This method is implicitly used when a departing equity owner has a bona fide third party offer and that offer must be matched by the company or remaining equity owners.
· Appraised Value. Appraisals may or may not give full value to the business due to the variety of methodologies that can be used and discounts applied.
· Agreed Value. Many buy-sell agreements use this method. All equity holders agree to a value of the business on an annual basis.
· Insured Value. In the case of a cross-purchase agreement funded by insurance, the amount of insurance will often be used as the measure of the value of the company. Key man life insurance can also provide a value.

Terms of Sale. In instances where the buy-sell provisions have been triggered as a result of a bona fide offer from a third party, then the terms of the sale are usually dictated by the terms of that third party offer. In other instances, there are several different considerations. For example:

· Should the departing equity owner be able to force the purchase of the equity interest? The answer to this may depend on the circumstances; for example, it may be appropriate to allow a representative of an estate to force the purchase of the equity interest.
· Should the company be able to force the sale of the equity interest? The answer to this may depend on the circumstances; for example, it may be appropriate to allow the company to force a sale of the equity interest in the event of a divorce.
· Should the company or the remaining equity owners be required to borrow the purchase price from third parties? If not and the buyers may use notes, the interest, term and payment schedule of such obligation will need to be determined.
· Should any debt obligations be secured by the equity interest being sold or other security?

Other. There are many other things that can be considered in connection with a buy-sell agreement

· Non-compete. Although not common, buy-sell provisions may include non-competes and other restrictive covenants.
· Exceptions. There are often exceptions to the buy-sell agreement, particularly in the area of transfers. An equity owner may be allowed to transfer all or a portion of an equity interest to a close relative without there being a triggering event.
· Business Continuity. Particularly in the case of buy-sells structured as a redemption that are funded by insurance, additional life insurance may be purchased to make sure that the company receives funds to recover from the loss of a key owner. If so, this needs to be coordinated with the buy-sell provisions.

Tuesday, September 15, 2009

Corporate social media/networking policies; Part 2 - Framework

By Thomas L. McLain

For companies, the fundamental problem with social media and social networking is that employees use them to manage not only their professional relationships, but also their personal relationships. While this dual purpose component of social media may not seem any different than email, the very public nature of social media makes it far different. Part 1 of this series on corporate social media/networking policies established the need to develop policies to address micro-blogging sites such as Twitter, professional networking sites like LinkedIn, social networking like Facebook, and information sharing sites such as Digg, YouTube, and Flickr. In this Part 2 of the series, the framework of a corporate social networking policy will be outlined.

Definition of Social Media. Any social media policy needs to contain a definition of the term "social media" so that employees will know what will be governed by the policy. Social media applications are all Web 2.0 applications; applications that essentially allow real time interaction and collaboration over the Internet. The definition should describe generically the sorts of Web 2.0 applications that are included within the definition and it should also contain a non-exclusive list of specific applications.

Company Social Media Philosophy. A company needs to determine how far its policy will extend in the workplace and beyond. In the workplace, it will want the policy to govern company-sponsored communications, or "official communications," and personal communications. Common topics for official communications include: proactive sales/marketing, reactive sale/marketing (monitoring social media and reacting to "bad press"), direct inquiry customer service, reactive customer service (monitoring social media and reacting to problems), and human resources recruitment. Official communications and personal communications outside the workplace will also have to be addressed. The philosophy should stress that regardless of whether personal communications or official communications are involved, employee productivity is not to suffer as a result of involvement with social media.

Mechanics. Employees will often already have social media accounts so the policy will need to require disclosure to the corporation of all social media accounts. Accounts which will be used for official communications will need to be reviewed for consistency with the public image the company wishes to portray. The company should also have the passwords to all accounts from which official communications are sent. Employees need to understand that accounts will be monitored and that violations of the policy may result in the termination of the employee.

"Playing the Game" and Online Demeanor. Many social media sites are set up so that a participant needs to endorse others in order to gain credibility; however, such endorsements may give the appearance that the company is actually giving the endorsement. Thus, the company has an interest to protect in connection with any social media account used by an employee that identifies the employee as an employee of the company. The policy will need to be defined and require that the employee exercise appropriate business behavior. This requirement will need to be supplemented by training. Employees must not forget that, despite the informality of the communications, the comments they make online are public and essentially permanent.

Compliance. The policy will need to be conformed to all other policies, such as the company's email, confidentiality, privacy and communications policies. The policy will need to remind employees to protect proprietary and confidential company information and trade secrets.

Legal Issues, Monitoring, Training and Enforcement. Whether addressed directly in the corporate social media policy or indirectly outside of the policy, these topics will be discussed in Part 3 of this series.

Insurance 101: Understanding the Basics of Liability Insurance, Part 2

By John L. Watkins and Guest Contributor Henry Shurling

This continues our series of posts on basic liability insurance issues for businesses. In our first post, we discussed the general role of the broker and the importance of obtaining a complete copy of the insurance policy. In this post, we will cover some of the basic types of liability coverage for businesses.

Please note that this post contains only general information. Although many policies are similar, they may contain different terms and conditions. Some policies may have exclusions or endorsements that limit coverage. There is no substitute for a careful review and understanding of the provisions of your policy, which is of course beyond the scope of this post.

1. Motor Vehicle Coverage. A business has motor vehicle liability exposure whether or not it owns or leases motor vehicles. Of course if a company does own or lease vehicles, it is required by law to purchase liability coverage. The statutorily-required limits required are minimal and should be evaluated carefully. However, it is imperative to purchase coverage for “Hired” and “Non-Owned” vehicles as well. This coverage protects the named insured (usually the business) should an employee have an at fault accident when either renting a vehicle on business or when driving their personal vehicle on business.

2. Commercial General Liability (“CGL”) Coverage. Most basic business coverage is provided through a commercial general liability, or “CGL” policy. This coverage typically provides coverage claims for “bodily injury” (which includes physical injury or death) and property damage resulting from an “occurrence.”

There has been litigation about what constitutes an “occurrence,” but in most instances, an occurrence can be thought of as an accident. Generally, if an occurrence happens during the policy period (the period when the policy is in force), that particular policy will respond to a covered claim that is made after the policy period. Thus, for example, if an accident happens on the last day a policy is in force, that policy will provide coverage for a claim – if it is otherwise covered – made after the policy period ends.

CGL policies may also include coverage for “personal and advertising injury.” Personal and advertising injury includes coverage under certain circumstances for claims for libel and slander, malicious prosecution, wrongful entry into a dwelling, false arrest, invasion of privacy, and some claims (in advertising) for copyright and trade dress infringement. Although “personal and advertising injury” coverage potentially includes many claims, it is also subject to substantial exclusions, and carriers may contest coverage for such claims more than for other types of coverage.

CGL coverage often includes coverage for product liability claims. This coverage is typically called “product and completed operations” coverage. If your company is a manufacturer or a distributor of products, you should carefully review this coverage with your broker or insurance lawyer and make sure that it is sufficient for your needs.

It is impossible in a short post to include all types of claims that may not be covered by a CGL policy. Policies often contain many exclusions. As a general rule, breach of contract or breach of warranty claims are not covered. However, claims for “insured contracts,” such as where one company agrees to indemnify another company for claims (as is often common in construction or equipment supply contracts) may be covered. Again, if your company needs such coverage, it should be discussed carefully with your broker.

Claims for intentional misconduct are often excluded. However, this is a complicated issue and often depends on the particular circumstances of a claim.

3. Employer’s Liability Coverage. Often just referred to as part of Workers Compensation coverage, Employer’s Liability is a separate and distinct coverage written in conjunction with Workers Compensation. Unlike Workers Compensation, Employer’s Liability has specific limits stated in the policy that serve to cap the coverage available under the policy. There are typically four areas where Employer’s Liability may respond to an action an employee may take: Care and Loss of Services, Third Party Action Over Claims, Dual Capacity and Consequential Bodily Injury. While these types of claims are much more infrequent than typical Workers Compensation claim, care should be taken in purchasing the limits. If set appropriately, any umbrella coverage would provide additional limits of liability beyond what is set forth under the Employer’s Liability Coverage section.

4. Professional Liability Coverage. Professionals, from doctors and lawyers to consultants, need to have professional liability coverage, which protects them against claims of professional negligence or malpractice. Unlike CGL coverage, which is written on an occurrence basis, most professional liability coverage is written on a claims made basis. This means that the insurance will respond only to claims that are made (and sometimes made and reported) in the policy period.

Thus, unlike an occurrence-based policy, a claims made policy will typically not respond to a claim that occurs during the policy period but is made after the policy period. If the insured has renewed or obtained a new policy, the renewal policy or policy in effect when the claim is made will respond.

Thus, a claims made policy will typically cover claims arising out of events that occur before the policy begins, but even this is subject to qualification. Many claims made policies have a “retro date.” Essentially, a retro date establishes a date that cuts off coverage for claims arising prior to that date. It is therefore important to make sure that a retro date does not unduly restrict coverage.

Saturday, September 5, 2009

Insurance 101: Understanding the Basics of Liability Insurance, Part 1

By John L. Watkins and Guest Contributor Henry Shurling

In a number of our blogs and podcasts, we have noted that start-ups and small and medium-sized businesses should have a strong insurance program as part of their risk management program. A number of recent interactions with clients have reminded me that many businesspeople have a very limited understanding of insurance and how it works.

Accordingly, this is the first in a series of posts that will cover some of the basics of insurance for business. Henry Shurling of the McCart Group, an Atlanta-based insurance agency and risk management consulting company, joins this series as a guest co-author, and provides his considerable insights on these important issues.

Please note that the focus of this series of posts is on liability insurance. We are not covering other important issues such as group health, disability, or life insurance, although they are also very important.

1. Understand the Role of the Agent or Broker. When a company buys insurance, it typically uses, whether it knows it or not, an insurance agent or broker (although there are differences betwween an agent and a broker, we will refer to both genererically hereinafter as a "broker"). Businesspeople sometimes refer to their broker as "the insurance company," but that is not correct. Although a broker serves as the point of contact for obtaining insurance, the broker does not itself provide the insurance.

The role of the broker is to advise businesses on an insurance program and to solicit proposals from different insurance companies, or carriers, for consideration. Insurance carriers include companies such as Zurich, Travelers, Chubb, Hartford, among others. The carrier, not the broker, provides the insurance and issues the policy.

The broker should take the time to understand the customer's business and help recommend an appropriate insurance program with appropriate policy limits. Brokers should help businesses understand their risk exposures and look at alternative ways to address them. The purchase of an insurance product often plays a significant role when dealing with these exposures but is not always the most efficient method available. A competent broker should be willing and able to discuss these alternative methods with their clients.

For example, the McCart Group offers professional and technical services in areas of safety, health and claims management. These areas include OSHA compliance, FMCSA audits, Industrial Hygiene and Environmental Consulting. Although having coverage for a risk is important, avoiding claims in the first place is even better.

2. Obtain a Copy of the Insurance Policy. It is surprising that many companies facing a potential claim cannot produce a copy of their own insurance policy. An insurance policy is an important document, and the insurance policy, as issued, should be kept in a safe place, as is the case with other important company documents. It is true that a copy of the policy can be obtained from the carrier, perhaps with the assistance of the broker. This often takes time, however, and decisions may have to be made quickly in the event of a claim. In addition, having the policy available aids a broker in reviewing and comparing coverage at policy renewal time.

By referring to a copy of the policy, we mean the complete copy. A policy will usually have a declarations page (or "dec page"), which sets forth the basic coverage provided, policy limits and deductibles. But a declarations page is not the complete policy. The policy will also typically include the policy form, which includes definitions (which are often very important in determining the extent of coverage), the insuring agreement (the basic grant of coverage), the policy conditions (which often contain requirements for what the insured must do in the event of a claim), and any policy exclusions (important provisions that limit the extent of coverage).

A policy may also include endorsements, which are extra provisions that are usually attached to the basic policy forms. Endorsements modify the policy provisions and may increase or limit the extent of coverage. Endorsements are often very important in determining the extent of coverage.

In coming posts, we will cover additional insurance issues, and will delve into more specific issues regarding coverage and other issues.

Tuesday, September 1, 2009

We need a social media/networking policy?!? Why, what could possibly go wrong?

Corporate Social Media Policies- Part 1

By Tom McLain

Do companies really need to develop policies to address social networking or social media? The answer to this question may be surprising – Yes. Or, in light of reports of the NFL's recent decision to implement restriction on the use of Twitter (a micro-blogging site) on game days, maybe a "yes" is not so surprising. Still, the NFL is a lot different than most businesses and the fact that it feels the need to put limits or bans in place does not necessarily mean that other companies should. The reality is that the social networking/media phenomenon may be falling below the radar screen of management of many companies for many reasons, including the informality of the media. However, there are some very real dangers that need to be considered.

At the outset, the terms "social networking" or "social media" are themselves misleading, due to the inclusion of the word "social" and due to mistaken belief that, because they occurs on a computer over the Internet, they are not a serious endeavor. For example, it is easy to dismiss social networking as just a new way to chat or gossip. However, a better way to think of social networking it is "computer-based" networking. Company executives understand the concept of networking in the traditional sense – meeting with people in face to face settings that may or may not be social for the purpose of advancing one's business. "Social networking" needs to be thought of in the same terms – its just traditional networking facilitated by computers instead of being face to face.

It is also a mistake for company executives to dismiss or underestimate the social media phenomenon as a fad or as something that is reserved to a small number of people. In August, 2009, a video was produced (for the Internet, of course) entitled "Social Media Revolution" that provided some amazing statistics:

1. By 2010 members of Generation Y will outnumber Baby Boomers;
2. The fastest growing segment on Facebook is 55-65 year-old females;
3. There are over 200,000,000 blogs and 54% of bloggers post content or "tweet" (post on Twitter) daily;
4. What happens in Vegas no longer "stays in Vegas," but shows up on YouTube, Flickr, Twitter, Facebook…

Quite simply, the raw numbers associated with social media are huge and so the question quickly becomes whether social media has any real power, reach, or impact. There is little doubt that the sheer numbers have caught the attention of sales and marketing teams. Consider the following additional statistics from "Social Media Revolution:"
1. 78% of consumers trust peer recommendations, while only 14% of consumers trust advertisements;
2. People care more about how their social group ranks products and services than how Google ranks products and services;
3. 34% of bloggers post opinions about products and brands and 25%Internet search results for the world’s top 20 largest brands are links to user-generated content.

Very quickly, two things become evident: first, the sales and marketing groups of any company will be forced to begin using social networking and social media to promote the company's products and services and, second, the sales and marketing groups of any company will be forced to begin monitoring social networking and social media to manage negative publicity about the company's products and services.

Given the informal nature of these media, there will be a stronger need to establish guidelines on how to promote products and services and how to defend them, particularly with respect to company-sponsored communications or "official" activities. Unfortunately, it’s the "unofficial" activities that can raise even higher levels of concern.

One of the aspects of social networking and media is that user profiles of the party doing the communicating typically indicate where the person works. Moreover, the communications themselves are public and may be of endless duration. So informal, unofficial communications by employees are of considerable potential concern. It is easy to imagine all manner of scenarios which could lead to embarrassment if not liability for the company. For example, suppose a public company employee is active on Twitter and well identified as a mid-level manager for the company. Suppose further than an unrelated but unscrupulous twitter user decides to use twitter as a part of a pump and dump stock scheme for that company. If our mythical company employee were to innocently pass along information from the unscrupulous Twitter user simply because he was proud of his company and that information was false, would our mythical company employee be an accomplice to the pump and dump scheme? Perhaps not, but the circumstances could prove to be highly embarrassing.

Thus, there are several points which need to be addressed in any social media policy adopted by a company. Such policies will need to address communications that are made on behalf of the company or clearly in a person's capacity as an employee. The policy may also need to address communications made in other capacities. The details of how to develop a social media/networking policy will be discussed in later blog posts, but some of the things to be weighed and considered are:

1. "Official Communications"

(a) Procedures used to approve communications?

(b) Personnel authorized to communicate?

(c) Subject matters to be communicated?

(d) Require a separate "official" account?

2. "Unofficial Communications"

(a) Require a separate "personal account?"

(b) Disclosure to company of all accounts?

(c) No references to the employee's company affiliation?

(d) Disclaimer?

(e) During office hours
(1) Time restrictions?
(2) Subject matter restrictions?
(3) Network restrictions?

(f) During personal time
(1) Subject matter restrictions?
(2) Other restrictions?