In the high-risk business world, potential problems lurk around every corner. How does a business know if it has enough insurance and that the exposures to loss are properly covered?
Property and casualty business insurance covers a lot of ground. It includes
insuring the building, plant and equipment at a manufacturing plant. It would
be worker’s compensation coverage
where an employee might get injured
and it would include a company’s fleet of
trucks.
“It can include a host of other things,
as well,” says Mike Mitchell, vice president and principal of The Graham Co.
“Things such as product liability, sexual
harassment, wrongful termination and
discrimination.”
Smart Business talked to Mitchell
about how a company can make sure it
is adequately protected.
How is risk determined?
There are two main points. First, you
need to identify and assess the risks that
exist for a company. Once you’ve done
that, the second part is determining your
options.
There are essentially four options for
dealing with risk. The first is to completely avoid the risk. The second is to
try to reduce the existing risk. The third
option is to transfer the risk to someone
else, and the fourth is to assume the risk
yourself.
Can you give examples of each option?
If I’m a landscaper, I may decide that
I’m going to avoid trimming trees. I
would rather my employees stay on the
ground where they are less likely to get
hurt from a fall. Another example is a
country club that decides it’s not going
to have a swimming pool in order to
avoid the exposure associated with
someone drowning in its pool. These are examples of avoiding risks.
The second option is to reduce the
risk. Maybe my landscapers could wear
harnesses while in the trees so that if
they slip they won’t fall to the ground.
Sure, they still might fall, but I’m going
to reduce the chance of a serious injury.
At the country club, maybe I would hire
three times the recommended number
of lifeguards in order to reduce the
chance of someone drowning. These are
examples of reducing risks.
The third option is to transfer the risk.
If I’m a landscaper, I could transfer the
risk of liability from tree trimming to a
subcontractor. Another way of transferring risk is to buy insurance and transfer
the risk to an insurance company.
If you’re a manufacturing company
and you need a building in which to put
your equipment, you can’t avoid buying
a building but you can reduce the risk
of it burning down by purchasing a
sprinkler system. You can then transfer
the remaining risk by purchasing fire
insurance.
Finally, in terms of risk assumption,
you can either self-insure it or retain a portion of the risk by accepting a high
deductible. For instance, you can reduce
your insurance premiums by having a
$50,000 deductible. You can afford the
$50,000 loss but not a $5 million loss if
the building burns down.
Are there things that can’t be insured?
If I’m a painter and I spill paint and ruin
your hardwood floors, that property
damage claim is covered by insurance.
But if I finish the job and you don’t like
the color or the quality of the work,
that’s not an insurance claim.
There are some risks as a business
owner that you will always have to
retain. Examples include loss of market
share, breach of contract, fraud, intentional acts, etc.
What about when a claim is made?
Claims happen. Part of the risk management responsibility is the management of the claims process.
If you have a history of having lots of
insurance claims, your insurance premiums are going to go up. So, even if you’re
transferring the risks to an insurance
company, you want to try and make sure
claims don’t happen by implementing
safety precautions. When claims (especially liability claims) do occur, you need
to aggressively manage them so they
don’t mushroom out of control.
Remember, the cost of claims represents a part of your overall risk management expense. Sometimes they are
direct costs and sometimes they are indirect costs. Either way, they impact your
bottom line.
MIIKE MITCHELL is vice president and principal of The
Graham Co. Reach him at [email protected] or (215)
701-5274.
