RISK MANAGEMENT is a practice concerned with pure risk, where there is the risk
of fortuitous loss but no possibility of gain, and with speculative risk, where
there may be either loss or gain. Speculative risk involves business judgment;
for example, buying or making the wrong product, acquiring a building that
becomes inadequate or increases in value. These are business risks that cannot
be insured, but may be prudently anticipated, and our experience in managing
risk can often enable us to offer valuable guidance. We are usually concerned
with pure risk, the loss that may occur but is not expected, such as fires,
explosions, injuries to persons or their property, which may be the subject of
insurance.
The first step in managing risk is to
determine its existence, and the only way to do this with a reasonable degree
of accuracy is to develop a disaster/emergency plan. A disaster happens
suddenly, with little or no warning; an emergency is an event you know can
happen and for which you can plan both your immediate reaction and your
necessary continuing action to restore your operations to normalcy. In either
event, preplanning is vital; it is so important to the future of your
operations that executive management support must be provided. Having
identified the risks, the four accepted procedures for dealing with them are:
ELIMINATE
THE RISK: Many causes of loss are routinely eliminated in any well-run
organization, but some can be overlooked. One way to take care of those is for
a responsible management person to tour every part of your facility once a
month, looking for potential problems; you may be surprised at what you find.
Having identified the risk, you need to determine if it can be economically
eliminated.
REDUCE THE RISK: If
a risk cannot be eliminated, it can often be reduced, the possibility of damage
or injury minimized. A well-run safety program, with sustained management
participation and support, will recognize opportunities to reduce risk to your
property, to others and to your employees. Part of your premiums pay for loss
prevention services to help you reduce risks. See our comments below under "Loss Prevention Services" to learn more. Safety is not
an expense; the rewards from a well-run safety program will be more than its
cost.
ASSUME THE RISK:
When a risk cannot be economically eliminated or reduced, it may be sound
management to assume the risk. Small and recurring losses should be absorbed.
Deductibles commensurate with the size of your operation and the reasonable
frequency of expected loss should be used to reduce insurance costs.
TRANSFER THE RISK:
Risk may be transferred through contract, or by the purchase of insurance,
using prudent business judgment. More often than not, the attempted transfer of
risk through contract is inefficient, and the actual cost is out of proportion
to the risk avoided. An examination of the facts will show that the intended
result is rarely achieved. A common sense purchase of insurance is often the
best protection.
Having an appropriate
disaster/emergency plan is key in minimizing errors and saving time and money.
Every risk of loss cannot be eliminated
or transferred. All insurance
policies contain exclusions and conditions; that is why it is important you be
familiar with the general scope of your insurance policies, and the exclusions
in particular. You should ask questions, and be sure you get satisfactory
answers. The purpose of these General Comments is to give you an overview, and
it is very important you and your management team be familiar with them.
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The following comments describe
the coverage in policies we see in today's marketplace that comprise most
insurance programs. Your policies may differ in some respects, but these
comments are basic. Please review these General Comments for their application
to your operations. Any questions should be brought to the attention of an
insurance professional immediately.
Direct
Damage: The basic policy covers damage by fire and lightning, wind, explosion
other than steam boilers, etc. In most cases this is extended to an "all
risk" basis. There is no such coverage as an "all risk" policy
that covers everything, but most of these forms extend to cover building
collapse (an excessive snow or water load), water damage (broken plumbing or
heating systems), and theft. Some forms may cover flood, surface water, and
earthquake, and other known perils may be included.
Property policies
include a coinsurance clause, a guarantee that the amount of insurance will be
at least equal to a stated percentage of the full value at the time of loss. To
the extent that guarantee is not met, the insured must contribute - he/she is a
coinsurer. The full value will be either the actual cash value or the
replacement value depending on how you insured your property. Only in rare
circumstances would any other basis be used. The coinsurance obligation can
usually be waived by submitting satisfactory information on values to the
insurer.
The basic policy
form insures property for its actual cash value - its replacement value, based
on like kind and quality, less reasonable depreciation. Property that has a
continuing use and must be replaced should be insured on a replacement value
basis. Insurable value can be determined by historic cost, adjusted to bring
that up-to-date, or sometimes your insurance company will prepare an estimate.
The most reliable way is through an insurance appraisal by a qualified
appraisal company.
Indirect Damage to
your property, meaning the loss of income from not being able to use the
facility, can be insured in several ways. A business may insure Business Income
to cover loss of net profits and necessary continuing expenses, to the extent
they would have been earned if there had been no interruption. Extra Expense
coverage should be used if your operations can be continued through the use of
other facilities, other rented premises or sub-contracted production. Indirect
damage insurance can insure against the same perils discussed above for direct
damage, and will include some form of coinsurance. The amount and form must be
considered specifically for your operations and reviewed at reasonable
intervals.
Consideration
should be given to the effect on your operations when a loss is suffered by a
Third Party, such as an important customer or supplier, including power and telephone
utilities. Contingent coverage is available, specific to your needs. This is a
potentially serious exposure that is often overlooked and requires your
attention.
These forms of
indirect insurance contemplate a serious loss to your property. A minor
shutdown of part of your operations, or a complete shutdown for a few hours or
days, will almost never result in a provable loss of profits or require
continuing expenses that cannot be recovered when operations are resumed.
However, the absence of a sound disaster plan may result in confusion and
unnecessary and uninsured expense if you face any serious interruption of your
operations from any cause.
Inland
Marine insurance can be used to cover property away from your premises,
temporarily in your custody, or in transit. Any property that may be moved from
one place to another, or may be in the custody of other than the owner, or
which is an "instrumentality of communication" - including a radio
tower or a bridge or a camera - may be insured under a "floater"
policy. There are several forms for the most common floater policies - cargo,
transportation, fine arts, mobile equipment, jewelry, bailee's customers,
musical instruments, processor's floaters - but a floater policy can be specifically
designed to cover almost any exposure to loss, on a generally broader basis
than is used for other policies.
Floater policies
usually insure on an actual cash value basis, except for fine arts policies
where each object is listed and insured specifically. In any other policy where
objects are scheduled, the company should be asked to endorse the policy to
acknowledge they are "insured for and valued at" the amounts stated,
to eliminate possible coinsurance problems. Replacement cost coverage, the same
basis used for your other personal property, should be considered and discussed
with your agent.
Boiler
and Machinery insurance covers damage to your property and loss of its use by a
sudden and accidental breakdown of your fired or unfired pressure vessels,
electrical equipment, pumps and compressors and other important equipment. Most
policy forms in current use cover all of this property without describing any
specific objects. Electrical equipment may include data processing equipment. Production
machinery can be included, if desired.
This insurance
includes inspection service, which is extremely important on pressure vessels
to reduce the risk of a disastrous explosion. Coverage on hermetically sealed
air conditioning equipment is also important because of the expense for
repairs, often almost as much as the value of the equipment. You should make
sure your equipment is inspected by competent inspectors on a regularly
scheduled basis.
Loss of use of the
object may be insured under a business interruption form similar to that
referred to above, or on a valued form which would pay a stated amount for each
day of total shutdown and proportionately less for a partial shutdown. Extra
expense coverage may also be written.
When
a building does not conform to the building laws because it is not constructed
to meet current building codes, or yours is a non-conforming use, you may not
be able to get a permit to repair any fire or other damage, and your policies
will not pay you for the loss of an undamaged part. You may also be required to
rebuild to a higher standard of construction, including requirements under the
Americans With Disabilities Act, and the additional cost will not be paid. Your
policies can be endorsed to provide the additional coverage.
If you think any
building may not conform to current building laws, you should discuss this with
your local Building Inspector or a qualified architect or engineer. If he/she
confirms you are not in compliance, you should discuss the additional coverages
that will be required with an insurance professional who understand these
exposures.
Casualty
Insurance covers your liability for injuries to persons or damage to their
property. This can be your legal liability determined in a court of law,
liability assumed by you - often inadvertently - in a contract, or liability
imposed on you by statute.
Workers
Compensation is statutory law. This coverage insures your obligation to protect
persons working for you against bodily injuries - and sometimes illnesses -
incurred in the course of their employment. Because the exposure to accidents
can be controlled by the employer, most policies are "experience
rated." Your actual experience will be used to modify the rates assigned
to everyone in your category of operations. A sound safety program to reduce
risks can produce a significant reduction in costs. This will also, almost
certainly, improve your operating efficiency.
The hidden cost of
these accidents is often overlooked, but it is very real. It is at least two
times the amount paid by your insurer in claims and it may be much more. Review
the last loss run from your insurer, multiply the total by two - or four or six
- and consider how much you can save. Your insurer's loss prevention people
should help you in setting up a sound safety program.
General
Liability policies cover bodily injuries, property damage to tangible property,
personal and advertising injury, and premises medical payments. Bodily injury
is an actual physical injury, including sickness or disease. Personal injury is
one of a specific list of non-physical offenses such as false arrest, slander,
libel and violation of privacy. Advertising injury is similar, and includes
misappropriation of business ideas and infringement of copyright. There is no
coverage for the improper use of "intellectual property" of others,
such as patents. These personal injuries do not include, and there is no
coverage for, any injury not specifically listed, such as any form of
discrimination. There is no coverage for any such offense involving employment.
You need to consider your potential for exposure under the Civil Rights Act,
the Age Discrimination in Employment Act, and several others, the possibility
of sexual discrimination, and improper hiring and firing practices. As we have
pointed out elsewhere, the Americans With Disabilities Act imposes uninsured
obligations that are much broader than is generally realized. All of these
exclusions can be insured to some extent, and we suggest you determine the
cost, because the cost of defending a claim can be very high, even if you win.
You must consider your exposure for acts your employees may commit without your
knowledge or approval. A properly written employee handbook may be your only
defense.
Most contracts,
including leases, are not phrased in insurance language and may impose uninsurable
obligations. Hold harmless clauses are limitless and impossible to fully insure.
As pointed out earlier under "Property Insurance,"
there is no such thing as an "all risk" policy that covers
everything, and it is difficult or impossible to insure all real property.
These documents often require personal injury insurance when bodily injury is
intended, and some personal injuries are uninsurable. All contracts should be
submitted to a qualified professional for review while in the draft stage
when revisions usually can be made with little or no difficulty. Be equally
careful with product warranties, whether you issue or receive them.
Automobile
Liability generally insures three areas of exposure: owned automobiles
including those under long-term lease, non-owned automobiles belonging to others
and used regularly or occasionally in your service, and hired automobiles
provided by others, usually under contract, or borrowed automobiles. An
"automobile" is a private passenger or commercial-type vehicle used
on public highways and licensed. It is not "mobile equipment," such
as a crane, shovel, tractor or other such special equipment used exclusively on
your premises. These types of vehicles are not subject to registration.
Liabilities resulting from the use of such "mobile equipment" is
defined in and insured under your general liability policy.
Automobile
Physical Damage is usually insured for convenience in the same policy, as the
automobile liability and insures against "collision" of the insured
vehicle with another object, or "comprehensive" loss, which includes
certain losses other than collision. As the size of the fleet increases, these
coverages become less economically desirable. Consider higher deductibles.
Instead of comprehensive, it may be better to insure only fire and theft. It
may be better to assume the risk.
All of the above
casualty coverages should preferably be insured by the same insurance company
to avoid overlaps and to reduce the possibility of omissions of coverage.
Liability for a
failure to act, or acting imprudently, may be covered under special policies
such as directors and officers, professional liability, public officials
liability or employment practices liability (EPL). It is estimated that in
1997, more than 25,000 EPL suits were filed in federal courts alone, and an
unknown - probably larger - number were filed in state courts. The risk is
real.
All known claims
for damage to property or injuries to person or damage to their property must
be reported to your insurer without delay. Do not assume there is no coverage!
Note: the insurer's duty to defend you may be broader than the coverage. If you
are served with a Summons and Complaint, notify your agent and/or insurer
immediately. Liability claims in particular must be reported promptly
because if the delay results in the insurer not being able to properly
investigate and defend, they may be able to deny coverage. Incidents that will
probably result in a claim should be treated as a known claim. Most policies
say the insurer has the right and duty to defend you against claims, even if
the claims are groundless, false or fraudulent, but you must fully cooperate so
they can do so. Claims should never be discussed with anyone other than your
agent, our office, the public authorities or a representative of your insurance
company. When a claim is serious, it is prudent to inform your own attorney,
but only when there is a risk of non-insurance is active involvement warranted.
Environmental
damage to your property caused by your own operations is not insured unless
caused by a hostile fire. Damage to persons and the property of others is very
limited or excluded entirely. If your operations do not involve other than an
incidental exposure, coverage is available to cover your legal liability for
bodily injuries and property damage, and clean-up costs, with an aggregate
limit of liability for certain possible claims. You should review your exposure
and these coverage extensions with your agent or our office. Pollution claims can
result in substantial legal fees for defense, even in the absence of any
negligence.
Prudent risk
management demands careful scrutiny of your exposures to this risk. It is
unavoidable; it exists. If it cannot be reduced, can you assume the risk? If it
is potentially too great, insurance is available.
Note: Pollution can extend over a considerable period of
time or may not be recognized for years. There may be coverage in expired
policies. See our comments below on Retention of Policies.
Umbrella
Insurance provides additional limits of coverage in excess of your automobile
liability, general liability and the employers liability coverage which is part
of your workers compensation policy. This policy usually provides at least as
broad coverage as the primary underlying policies. However, some umbrella
policies may contain specific exclusions which differ from your automobile and
general liability contracts. Each umbrella policy is slightly different, and
you should have a qualified insurance professional make sure that the coverage
meets your needs.
You cannot insure
against every possible loss; the cost over time would be prohibitive. Umbrella
limits are a good example. No organizations can carry high enough limits to
cover the maximum possible loss; all one can do is to carry a high enough limit
to cover a probable maximum loss. If a loss should occur, which exhausts all of
your policy limits, any additional amount for defense and/or damages would come
out of the organization's capital. Umbrella coverage is one of the most
critical coverages in any corporate risk management program.
Crime
Insurance includes loss resulting from the dishonest act of an employee and
burglary or theft of money or other property. In all cases, it is the
responsibility of the insured to prove, generally through verifiable figures in
his/her books and records, that a loss did occur and the amount of that loss.
Minor employee dishonesty losses are often more difficult to prove than is
justified by the amount involved, but knowledge of an employee's dishonest act
eliminates future coverage as far as that individual is concerned. When a
serious employee dishonesty loss occurs, often it will be caused by a trusted
employee, the amount may be relatively large, and frequently is inadequately
insured. Consideration must be given to the ease with which a loss may be
committed and continued over time by such an employee. The position should be
considered, not the employee occupying it. Comprehensive internal controls
should be in place.
Acts of dishonesty
involving computers are extremely difficult to control or discover, and may
involve substantial amounts. This area of exposure should never be minimized.
Any operation involving substantial sums should be reviewed, preferably by a
specialist. Many data processing policies can be extended to cover viruses, but
that damage is vandalism, not dishonesty.
Burglary means loss
resulting from forcible entry into the premises or an insured safe, with
visible marks of force on the exterior. Theft is a dishonest act (by other than
an employee) resulting in a loss of the insured property. Robbery is an act of
which the victim is aware and is accompanied by the threat or act of violence.
Broad form policies insuring money and securities are preferred in most
circumstances. These policies cover burglary, robbery and theft, as well as
destruction and mysterious disappearance of the insured property.
Almost any risk of
fortuitous loss may be insured, provided it can be measured. Earthquake,
forgery of your checks, flood, ocean or air shipment to or from another country
and loss of valuable papers and records are a few of the most common. Many
insureds have an exposure to loss that is peculiar to their own operation. Any
area of possible material loss not now insured should be brought to the
attention of your insurance professional. Developing a written disaster
plan will often disclose unknown or unrecognized areas of potential loss.
Bidding may be done at
reasonable intervals, but frequent bidding should be avoided, as many desirable
companies will refuse to bid when that is done. In today's insurance
marketplace there can be many reasons to bid: questions may arise about the
stability and the willingness to provide acceptable service by an insurer or an
agent; coverage restrictions may be imposed; equitable pricing may no longer be
available; unknown circumstances may arise where the insurer/agent/insured
relationship deteriorates.
Our bidding process requires the preparation of detailed specifications,
then an analysis of the proposals, and a report to you giving our opinion and
the reasons, and a recommendation for your guidance. This requires, if
possible, four months lead time, because many insurers demand 60 days to make
inspections and gather more information.
All liability policies,
package policies that include liability coverage, and workers compensation
policies, should be marked for permanent retention. Many of our clients have
been faced with claims many years after an alleged occurrence. Property
policies may also provide coverage for contamination of your own property and
should be retained until you are certain there is no possibility of a claim
arising in the future.
The ability to produce an actual policy in
court can be extremely important in forcing an insurer to defend you or pay a
claim for damage to your own property. Retention of your policies is essential.
The inability to produce a policy casts doubt on the actual extent of coverage
and may result in rejection by the court.
Part of your premium is to
pay for these services, so you should try to maximize the return. A management
person should always accompany the inspector, someone who can both ask and
answer questions. Any recommendations should be discussed on the spot, because
some may be simply boiler-plate or due to a misunderstanding. In this way
recommendations that refer to a serious risk can be dealt with immediately, and
inappropriate ones can be eliminated. Remember, this is a service you are
paying for and you should make sure it is provided. Good loss prevention
service is a valuable tool to reduce risk.
The purpose of a sound
insurance program should be prudent protection against losses that can have a
material effect on your assets. Small or repetitious losses should be absorbed
as part of the cost of doing business, as the cost of insuring them is certain
to outweigh the losses.
The guide to a sound insurance program is to
act as a reasonable person, "guided by those ordinary considerations which
ordinarily regulate human affairs," and make those decisions that a reasonable
and prudent person would. A failure to do so constitutes negligence. See
Black's Law Dictionary.
It is important that you tell your
insurance professional about your plans for changes in your operations, new
ventures, new locations, and that you inform them promptly when there are
questions about insurance coverages and perceived exposures to loss. Do not
dismiss your need for a written disaster plan. Do not dismiss any question
because it seems unimportant; if it occurred to you, it is important. No one
knows your business better than you, and it is essential your insurance
professional be kept informed in order to counsel you effectively.
As we stated above, the purpose here is to
give you a general summary of the usual insurance coverages. IT DOES NOT AND
CANNOT INTERPRET YOUR SPECIFIC POLICIES, WITH THEIR MANY PAGES OF PRINTED FORMS
AND ENDORSEMENTS. It has another purpose - to encourage you to ask
questions.
The information in this
article is provided solely for general illustration and instructional purposes
and does not create a business or professional services relationship. Laws and
regulations vary by jurisdiction and change from time to time; compliance with
such standards depends on the particular circumstances. Any reliance on the
information is solely at the user's own risk. Before making business decisions,
please consult a T.E. Brennan professional.
Published by
T.E. Brennan Company
330 South Executive Drive, Suite 301
Brookfield, WI 53005-4275
(888) 271-2232
www.tebrennan.com
© Copyright 2008 by T.E. Brennan Company