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An Accident That Should Have Bankrupted a Company

This lesson is a part of an audio course Unconventional Crisis Management by Paul Andrew Smith

Northwestern Mutual Life Insurance Company was founded in Milwaukee, Wisconsin, in 1857. Two years later, Wisconsin suffered its first catastrophic train accident, killing 14 passengers, including 2 Northwestern policyholders. Together, their claims totaled $3,500. And that may not sound like much. But, remember, this was over 160 years ago.

Anyway, all the company’s assets, combined, were worth only $2,000. So, the company was technically insolvent. Meaning, they either had to not pay the families the full amount of the life insurance they’d bought. Or, they’d have to borrow the extra $1,500. And by the way, who’s going to loan money to a two-year-old company that’s insolvent anyway?

Well, that’s a crisis if there ever was one. So, what’d they done? The company president, Samuel Daggett, and the Board of Trustees personally borrowed enough money to make up the difference. They waived the usual 90-day settlement period and paid both claims in full.

Now, they probably could have just paid out the $2,000 they had, filed for bankruptcy, and walked away without owing anyone anything. After all, they were all successful businessmen. They could probably get other jobs or start other companies. But they didn’t. And they didn’t because they believed that a crisis shouldn’t make you compromise your principles and values. They’d promised to pay out $3,500 in life insurance claims, and so that’s what they did.

Think about it. Life insurance is money your family gets after you die when you’re not around to make sure they pay up. So, your level of trust in a life insurance company has to be really high, or you’d never do business with them. And by paying out these claims, even when they couldn’t afford it, and had to borrow money personally to cover, is a story that makes Northwestern one of the most trustworthy organizations anywhere.

So, while keeping your promises during a crisis is usually the most principled thing to do, it can also make good business sense. Even if you’re not a life insurance company. Building trust is an asset that pays dividends for a long time. Just like it has been for Northwestern for the last 160 years.

Okay, in the next lesson, we’ll talk about a CEO who had to fire one of his best friends.

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Written by

Paul Andrew Smith