Risk Management Strategy
Whether you own a multi-national company, a small business, or a home -- anything you value is subject to risk. If you will take a few minutes to review your risk potential, you will have a better idea what you want to insure. After the review, a few minutes talk may be the difference between proper protection and significant loss.
Each question is ranked on a 1 to 5 scale. The higher the number the more the insured AGREES with the statement presented; thus "1" indicates strong disagreement and "5" translates into strong agreement. The higher the score, the more willing the insured is to explore alternative risk financing techniques.
Each level can point to different programs:
Low (18 -30) - Traditional Insurance (First Dollar). Not ready for too much of the unexpected;
Low-to-Medium (31-45) - Leaning towards risk averse, but might want to consider a retrospective type plan for liability coupled with a high deductible property program;
Medium (46-60) - A high deductible program for casualty lines along with the same for property lines. Casualty lines would require a stop-loss provision of some type for those in this range;
Medium-to-High (61-75) - A high deductible program for all lines with no aggregate or stop loss. Essentially the amount out of pocket is unlimited with the exception of the per-occurrence deductible. A protected cell captive may also be an option;
High (76-90) - Insureds in this range may be ready for a captive without a stop loss or a fully self-insured program.
Risk Taker Questionnaire Rating: (1-5)* *1=Strongly Disagree; 3=Neutral; 5=Strongly Agree
Statement:
We are willing to risk potentially very high “out-of-pocket” costs for property and liability losses in exchange for potentially great savings in our risk financing program. _____
Large fluctuations in our cost of risk are easily absorbed into our operating cost. _____
We have a favorable credit rating that will not be seriously affected by the need to provide a Letter of Credit (LOC). Future credit needs are not in jeopardy because of an LOC. _____
Large unexpected loss-related expenses can be easily covered from available capital. _____
We have an active loss control program in place to protect plant, people and contents from injury or damage. _____
Our safety and loss control program and procedures are stringently enforced on and at all levels of personnel. _____
Upper management actively promotes, participates in and models the loss control and risk management program and procedures in place. _____
We are willing to make all necessary investments in safety (this includes but is not limited to safety equipment, machine guards and full-time or consulting loss control personnel). _____
We make full use of contractual risk transfer and any available insurance transfer (requesting addition as an additional insured, etc.) anytime we contract work to an external entity. _____
All safety and security systems are well maintained and regularly inspected to insure proper response when needed. _____
Every employee is well-trained in the job they do (and cross-trained where necessary). Also, the employee is versed in all loss control and risk management procedures. _____
Our claims (property and casualty) are relatively predictable within a narrow margin from year to year. _____
We want to take an active role in managing our claims and losses. _____
We have the staff necessary to internally manage our claims and losses. _____
We are willing to hire the staff necessary to manage our claims and losses. _____
We are willing to learn and comply with all statutory requirements necessary to manage our own claims and losses. _____
We have access to and a relationship with counsel well-versed in insurance law and property and casualty insurance claims management. _____
We are willing and able to set funds aside for claims and losses without the need to use those funds latter for other purposes. _____
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21 Rarely Reviewed Insurance Definitions
By Christopher J. Boggs, CPCU, ARM, ALCM
November 6, 2009
Material Fact
Information or data supplied by the insured, the truth and accuracy of which the insurer relies on to make an underwriting decision. Three tests are applied when deciding if a fact is material or merely informational. A fact is material if:
· The underwriter would have made a different underwriting decision. For example, the decision was made to offer coverage, but if “X’ had been known, coverage would not have been offered;
· The underwriter would have charged a different premium. The building is located in a protection class 7, not the 4 that was reported which will result in an increase in premium when corrected.
· The underwriter would have applied different terms and conditions. Theft coverage would have been excluded had the underwriter known that the alarm was recently disconnected.
Concealment or misrepresentation of a material fact by the insured (or the agent) will generally lead to the voidance of a policy.
Concealment
A lie by omission; to prevent information from being known. Improving the perception of something by withholding truth that may change a decision; if the underwriter had wanted to know, he/she would have asked. Concealment may actually be an unintentional act. The concealment of a material fact results in a policy becoming void.
Misrepresentation
A dressed-up term for an overt lie. This is a knowingly false statement made in the application and depended on by the underwriter to arrive at an underwriting decision. However, this term is not equivalent to a warranty. The root of this term is “Representation” meaning that the information is true to the best of the insured’s knowledge; the information is not guaranteed - thus, it is not a warranty of accuracy (which implies absolute truth).
Fraud
A false statement or act intentionally committed by one to gain advantage over or induce another to a particular action to the detriment of the second (the defrauded individual). This is a catch-all category commonly tied in with “concealment” and “misrepresentation.” The main distinction with “fraud” is that it is an outright intentional act by the defrauding party. Fraud of a “material” nature will void coverage and may also be a criminal act.
Void
As if it never existed. In essence if certain acts are committed or policy provisions ignored, the insurance policy has no legal effect and is unenforceable on the insurance carrier.
Diminution of Value
The difference in the fair market value of personal property (chattel) following damage and repair, and what the property would have been worth had no damage occurred. The theory is based on the market belief that personal property which has suffered damage and been repaired is worth less than similar property which has never been damaged, even when the damaged property has been restored incorporating parts of like kind and quality. Most often associated with physical damage to automobiles.
Eggshell Skull
A legal term based in tort and criminal law that states that tortfeasors take the injured party as they find them. Also known as the “thin skull” rule, it states that if the injured party has a condition that predisposes them to greater injury than the normal human, the tortfeasor is not relieved of any of the costs resulting from the bodily injury just because of the condition. All injury and the costs associated with such injuries are assigned to the individual that committed the initial wrongful act, regardless of the ability to foresee the results or the fact that that the injury is made worse by a preexisting condition or predisposition to injury.
Crumbling Skull
A legal theory sometimes used as a defense to or argument against application of the “Eggshell Skull” rule. The principle behind this defense is that the result would have been the same whether or not the accused wrongdoer was involved. Best exampled in medical practices: the patient was dying; the doctor attempted some radical measures to maintain life and did not succeed and in fact were the proximate cause of death. Crumbling skull principles would not hold the doctor responsible for causing a foregone conclusion. To protect the doctor, the death would have to have been certain within approximately the same time frame.
Damages
Serves a dual purpose: 1) as a monetary remedy for a person, persons or entity against whom a wrong has been committed; this amount may only be a part of 2) the sum imposed on a tortfeasor for the violation of a duty owed. Combined, these are two sides of the same coin, so to speak. There must be a duty owed or created (tort, contract or statute), a breach and resulting injury. There are several types of “damages” including Compensatory, Punitive and Liquidated damages.
Compensatory Damages
Payment for actual injury or economic loss. Compensatory damages are further divided into Special Damages and General Damages. Special Damages are specific and quantifiable to pay for medical costs, lost wages, repair costs and other such costs. General Damages “generally” have no basis for calculation and include pain and suffering, mental anguish or loss of reputation.
Punitive Damages
Meant to punish the wrongdoer whose actions are egregious, willful, wanton or malicious. The amount is intended to warn others to avoid such actions.
Liquidated Damages
A contractual agreement requiring one party to pay another a specified amount if certain contractual provisions are violated or are not completed. Liquidated damages are necessary when actual damages are difficult to calculate or estimate at the beginning of the contract.
Functional Replacement Cost
Property is valued at the cost necessary to replace damaged or destroyed property with new property of unlike kind and quality. The property performs the same general function allowing the insured to accomplish their business objectives. Property replaced using functionally equivalent materials and products are less expensive and often require a shorter replacement schedule.
Comparative Negligence
Each party’s relative “fault” for the accident is compared and the injured party’s (plaintiff) ultimate damages award is reduced by their percentage of culpability. For example, if the plaintiff is found to be 40 percent at fault, the $1,000 damages awarded would be reduced to $600. Three variations of the comparative fault rule are utilized: 1) pure comparative fault; 2) modified comparative fault - 50 percent bar; and 3) modified comparative fault - 51 percent bar. In each variation, the damaged party’s award is reduced by the percentage of their own contribution to the incident.
Pure Comparative Fault
Allows the injured party to recover even if they are 99 percent at fault. Any award is reduced by their contribution to the injury or damage. Thirteen states apply this rule of comparative negligence: Alaska, Ariz., Calif., Fla., Ky., La., Miss., Mo., N.M., N.Y., R.I., S.D., and Wash;
Modified Comparative Fault - 50 percent Bar
An injured party cannot recover if they are 50 percent or more at fault. They are able to recover if there percentage of fault falls between 0 and 49 percent. Twelve states apply this rule of comparative negligence: Ark., Colo., Ga., Idaho, Kan., Maine, Neb., N.D., Okla., Tenn., Utah, and W. Va.; and
Modified Comparative Fault - 51 percent Bar
An injured party can recover from another party provided they (the injured party) are no more than 50 percent at fault. Twenty-one states apply this version of comparative negligence: Conn., Del., Hawaii, Ill., Ind., Iowa, Mass., Mich., Minn., Mont., Nev., N.H., N.J., Ohio, Ore., Pa., S.C., Texas, Vt., Wis., and Wyo.
Contributory Negligence
Application of the contributory negligence common law doctrine states that if the injured person was even 1 percent culpable in causing or aggravating his own injury he is barred from any recovery from the other party. This is an absolute defense in the jurisdictions that apply this principle; some jurisdictions require the defendant (the one “most at fault”) to prove the negligence of the plaintiff (the one “most damaged”), while others require the plaintiff to disprove any negligence. Only five jurisdictions still apply pure contributory negligence: Alabama, the District of Columbia, Maryland, North Carolina and Virginia.
Constructive Total Loss
The property can be repaired, but the cost to repair the damaged property is greater than the value of the property after it is repaired (it would cost more to repair it than it would be worth when done). It is more economical for the insurance carrier to pay the insured the “value” of the property (its actual cash value or replacement cost, however the policy is set up) and recover as much in salvage value as possible.
Pure Risk
There are only two possibilities; something bad happening or nothing happening. It is unlikely that any measurable benefit will arise from a pure risk. The house will enjoy a year with nothing bad occurring or there will be damage caused by a covered cause of loss (fire, wind, etc.). Predicting the outcomes of a pure risk is accomplished (sometimes) using the law of large numbers, a priori data or empirical data. Pure risk, also known as absolute risk, is insurable.
Speculative Risk
Three possible outcomes exist in speculative risk: something good (gain), something bad (loss) or nothing (staying even). Gambling and investing in the stock market are two examples of speculative risks. Each offers a chance to make money, lose money or walk away even. Again, do not equate gambling and investing on any other level than as both being a speculative risk. Gambling is designed to enrich one party (the house); the odds are always in its favor. Investing is designed to enrich all involved, the house that set up the investment “game” AND those that chose to place money in the game - all participants with “skin in the game” win or lose together. Speculative risk is not insurable in the traditional insurance market; there are other means to hedge speculative risk such as diversification and derivatives.
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