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Insuring the boss -- companies take out policies to guard against top leaders leaving, or dying

National Transportation Safety Board investigators examine wreckage from the crash that killed Micron CEO Steve Appleton.

By Eve Tahmincioglu

What happens if something happens to the CEO?

In the case of Micron Technology, the loss of the company’s chief executive, Steve Appleton, led to a drop in the stock price and a scramble to replace him with the COO, who had planned on retiring.

Appleton -- known as a daredevil for his love of racing off-road cars and flying stunt planes -- died in a crash of an experimental plane he was piloting last week. He was 51.

It is impossible to predict when tragedy will strike the top dog at a corporation, but some companies choose to insure themselves against just such a scenario with something known as “key-man” insurance (or “key-person” for the politically correct).

These types of policies can cover a host of costs that could arise if a key manager dies including recruiting a replacement, drop in stock price or even mistakes a replacement might make.

A lot was riding on Appleton. Micron is one of the world's top producers of semiconductors. It has about 20,000 worldwide employees and had revenues of $8.7 billion in its latest fiscal year.

It’s unclear whether Micron had such a policy. A recent company filing with the Securities and Exchange Commission makes no mention of it, and a spokesman for the firm, Dan Francisco, declined to comment.

But given Micron’s risk-seeking CEO, some insurance experts maintained, it would have been a smart idea.

“Employers have an economic interest in any employee bringing value back to a company,” said Andrew Shapiro, director of advanced sales at Nationwide Financial, whose specialty is business and executive benefits. “A smart company has to have a succession plan in place for every key person. Companies use these policies to protect against any financial loss. A key person is an asset and can and should be insured accordingly.”

He estimated that the vast majority of Fortune 1000 companies have some sort of key-person coverage for truly key people.

For some larger companies, however, with chief executives who are essentially the face of their companies, insuring such individuals could be cost prohibitive, maintained Tom Baker, a professor of law and health science at the University of Pennsylvania Law School. “Once you talk about companies like Facebook or Google you couldn’t buy enough life insurance,” he stressed.

Indeed, Google actually mentions the risk posed by the loss of any of their key executives in its most recent 10K filing, and makes a point of mentioning that it does not have life insurance to project against such a loss.

“Our future success depends in a large part upon the continued service of key members of our senior management team. In particular, Larry Page and Sergey Brin are critical to the overall management of Google and the development of our technology. Along with our Executive Chairman Eric E. Schmidt, they also play a key role in maintaining our culture and setting our strategic direction. All of our executive officers and key employees are at-will employees, and we do not maintain any key-person life insurance policies. The loss of key personnel could seriously harm our business.”

Facebook’s recent IPO filing also included mention of the issue:

“The loss of Mark Zuckerberg, Sheryl K. Sandberg, or other key personnel could harm our business.”

There is no word in the filing about key-person policies, but it does mention that the company has directors’ and officers’ liability insurance, know as D&O. This type of insurance is used in the event top officials are accused of wrongdoing in their jobs and are sued as a result.

But these policies don’t help protect against the loss of thrill-seeking CEOs, or any CEO for that matter.

An executive who runs with the bulls or jumps out of airplanes may end up costing a lot to insure, Shapiro said. And job risks may also play into the equation.

Shapiro is now in talks with an executive who owns a major oil company and spends a lot of time in Russia and the Middle East. “His risk of death is increased and he could pay more for his insurance coverage,” he noted.

For large companies, there may be little a corporation can do to protect against a key executive’s demise. “More frequently, much smaller companies will do this simply because the company can't survive the executives demise and shareholders want a hedge,” said Gary Rich, president of executive development firm Rich Leadership, about buying key-person policies. “For big companies the insurance available simply won't remediate a failure to have an effective succession plan.”

Realistically, he said, just because one CEO is more apt to take chances than another doesn’t make a big difference statistically.

“The likelihood of a CEO post being vacated as a result of risky behavior is negligible when compared to the likelihood of them either taking a job elsewhere or running into other personal issues that result in their departure,” he explained. “So my point is the relative risks are low.”

In addition, he added, “A board exerting any type of control over an executive is a slippery slope. Where does it end? No motorcycle riding, sports car racing, vacations to exotic locations, hunting, unprotected sex?”

And it may just be the tendency toward risky behaviors that makes a CEO, or other top executive, good at his or her job.

“In many cases,” he continued, “the personality characteristics certain companies want in their CEO are exactly the same qualities that predispose those executives to engaging in more ‘thrilling’ behavior.”