This post was written for Boardmember.com

Most executives view insurance with disdain, because it makes no immediate contribution to production, research and development or marketing. Ordinarily, insurance has no tangible results and does not improve the balance sheet. It does not increase stock value. Generally, insurance represents a pure expense detracting from the bottom line. Few officers and directors truly appreciate insurance and even fewer actually understand it. Properly assessed insurance, however, can be one of the best investments the corporation will hopefully never use.

Insurance protects directors’ and officers’ personal assets if the corporation runs into problems. Officers and directors wear many hats today, and their actions are scrutinized more than ever before. Serving as trustee for an employee health or welfare plan, or on the board of a subsidiary or other corporation can present personal liabilities. Litigation arising from employee workforce decisions may come home to roost with directors and officers. If the company’s financial projections founder, or unforeseen economic circumstances such as the subprime mortgage crisis affect the corporation, directors and officers may be targeted in class action investor lawsuits. Proper directors and officers insurance can protect against personal economic effects from these risks, as well as protect the company.

And what about protecting the company assets, both financial and physical? Physical plants and equipment, whether bricks and mortar production facilities or technological, can be wiped out by catastrophes. The wide-spread effects of the World Trade Center attacks and Hurricane Katrina illustrate the potential devastation. Proper property insurance, including different types of business interruption coverage, is an absolute necessity. Separate flood or earthquake policies may be required. Fidelity insurance protecting against theft and other dishonesty can be critical.

Liability insurance, in its myriad forms, is necessary. Insurers have trimmed the scope of formerly standard general liability insurance, so they can sell additional specialized coverage for increased premiums. Negotiated enhancements to today’s standard policies must be explored. Product liability, professional liability, media liability, personal injury liability, and product recall coverages are just a few of the additional types of liability insurance that must be considered. Your corporation’s needs may require tailored manuscript policies. In day-to-day operations, these coverages may make no difference. But nothing teaches their value better than an uncovered liability, once it happens. Worry about insurance then comes too late; survival of the company may, instead, be the issue.

If a cataclysmic event –whether natural disaster, economic downturn, or potential liability –shakes the company’s financial foundations because proper insurance was not in place, shareholders and others will look to the officers and directors for an explanation. Assuring there is proper insurance means more than just buying standard insurance offerings in the marketplace. Assuring proper insurance health requires a check-up in the form of an insurance coverage legal audit. These audits require engaging lawyers working for policyholders and schooled in the arcane and nuanced law of insurance coverage. Policyholder insurance coverage lawyers are independent of the insurance industry and, through a coverage audit, can assess the quality of your coverages, gaps in your coverages, potential enhancements to your insurance program, and wording in your phone-book-thick policies ripe with the potential for denied claims or litigation by your insurers.

An insurance coverage legal audit assesses your needs and identifies potential problems with your coverage before a loss or claim happens. This allows you to negotiate around the pitfalls or buy additional needed coverages. The time to do an audit is now. Once a loss or claim happens, it is too late to ask the insurer to clarify or broaden the coverage terms. For better or worse, the battle lines are then already drawn.

If they want to sleep well at night, directors and officers should view an insurance coverage legal audit as an absolute necessity. It is an ounce of prevention against potential financial catastrophe for which no pound of cure may well exist.