There’s something in the air, water or walls — and it could be costly

Environmental problems have been in the news lately, a lot. Whether mold, contaminated drinking water or poor indoor air quality, many organizations shut down operations for an extended period with the humid and muggy weather Pittsburgh experienced this summer.

“The most important and usually costliest are mold and contaminated drinking water,” says Patrick Zedreck, area assistant vice president at Gallagher. “These types of claims can not only take days to clean everything from start to finish, but we have seen, at times, it can cost well over $100,000. All while commercial property owners lose revenue from an unexpected shutdown.”

Smart Business spoke with Zedreck about the tell-tale signs of environmental troubles and what to do about them.

What indicates you have mold or contaminated water?

If your allergies are more severe when away from home, mold could be growing in your building. Signs of moisture include water stains or discoloration on walls, floors or ceilings. If your walls are bowed, bulging or warped, moisture probably got into them.

With contaminated water, people tend to notice a visual change first — it looks cloudy. The smell of chlorine is a red flag. Drinking water shouldn’t have much of a smell. A colored tint is another warning sign — frequently a brown or orange discoloration. A number of causes are possible, but the most common is mining or excavation near water supplies.

However, the only way to know whether your tap water contains lead is to have it tested. You cannot see, taste or smell lead in drinking water.

Which companies are most at risk? Why?

Multiple buildings in close vicinity with a large number of people means environmental exposures can spread and affect many quickly. If your building is older, it could be more at risk because old pipes, storage tanks and past flooding increase the probability of mold or contaminated water. If your office shuts down its HVAC equipment for periods of time or the flow of water is intermittent, it also has a higher risk for environmental liability.

A good example of an industry that fits all these categories is education. In addition, younger children also are more susceptible to severe mold problems.

How can insurance help transfer the risk?

Environmental insurance, also known as pollution insurance or pollution coverage, is designed to respond to claims for loss or damage resulting from unexpected releases of pollutants. These losses or damages typically arise in the form of claims against insureds for bodily injury, property damage, cleanup costs and business interruption.

Insureds often think they have coverage under their general liability and property policies. However, those policies restrict coverage by having time-element clauses, exclude coverage for certain pollutants altogether, or don’t provide enough limits to investigate a pollution-related claim, let alone adequately respond to a claim or clean up a pollution condition.

An environmental insurance policy fills the gaps created by pollution exclusions in liability and property insurance policies.

How should the coverage be designed?

This is a coverage that is creating a lot of discussions with brokers and companies. With increasing claims in the region, it’s becoming more important to be educated on these different exposures.

First, it’s important to find an insurance carrier that can write a policy with a fair deductible. Some claims are costly — in excess of $100,000 — so deductibles need to be low enough for the purchase of this coverage to be relevant.

Deductibles also shouldn’t be applied on a per building basis. Some organizations have up to 10 buildings on their campus. If a claim were to occur in one building, it’s likely to pop up in one of the others.

What else do property owners need to know?

While mold can occur quickly, it’s good to periodically complete a mold survey. Check your HVAC equipment annually and try to run it all year long. And be sure to ask your broker if you’re properly covered.

Insights Insurance/Risk Management is brought to you by Gallagher

How to make sure your contractors are truly backed by insurance

A certificate of insurance is not a binding document and you should never rely on it as evidence that a contractor has obtained insurance.

“At the end of the day, a certificate of insurance doesn’t legally mean anything,” says Josh Daly, risk management consultant at Gallagher. “That’s why you need to be backing up your certificates of insurance by requesting copies of policies or declaration pages to prove coverage.”

This is just one of the ways your business should be reviewing certificates of insurance.

“While there tends to be more focus on this in hazardous industries like construction or energy, it’s important for transportation, health care and others as well,” says Dereck Malzi, area assistant vice president at Gallagher. “It can affect anybody that contracts with another, paying somebody else for their services, such as manufacturers who have someone distributing for them, a school district with a food service vendor or a professional service provider with a maintenance agreement.”

Smart Business spoke with Daly and Malzi about what you should know about insurance certificates and contractual risk transfer.

What could happen to a business that doesn’t review its certificates of insurance?

A worst-case scenario could be that you receive a certificate of insurance that claims somebody has general liability insurance and there’s a bodily injury or property damage claim that results from a subcontractor’s actions. However, once a claim is filed, you find that there is no insurance in effect. So, most likely, you’re picking up that exposure because of somebody else’s negligence.

What should you be looking for with contracts and certificates of insurance?

All contracts should be reviewed by your lawyer, risk manager and insurance broker before you sign so they can point out areas of concern. But just because you’ve done business with a contractor for years doesn’t mean they have coverage.

In general, your risk manager or insurance department needs to know the contractor’s name, when the work will start and finish, what type of insurance is required, if you will be added as an additional insured on their policy, when the insurance policy will expire, and the contact information of whoever is in charge of the certificates of insurance and/or signing off of contracts. You also can state that you require a 30-day cancellation notice if that contractor’s insurance is cancelled.

Make sure you have a mechanism in place so that when something is going to expire, you request a new certificate of insurance, and you should request — at a minimum — the policy declarations of each of those policies to verify that coverage is in effect. Another best practice, especially in a hazardous industry, is to request a copy of the language of your additional insured status. In some cases, you’ll be listed on the certificate of insurance as an additional insured, but the policy states that additional insured status is only for scheduled entities. If your company isn’t listed in the schedule, you don’t actually have that status.

Another thing to watch is how the general liability policy is written. Is the limit written on a per policy, per project or per location basis? This is important because, let’s say, the company has a $1 million policy aggregate, but it has had five other claims. If it’s written on a per policy basis, there may be no money left to pay claims that happen on your premises. The better scenario is a policy written on a per project basis, so every project has the full amount of the policy limits. A policy written on a per project basis will cost a little more, so not everyone has it.

How should companies review and maintain these records to limit risk?

It’s about continual upkeep. At the end of the day, it’s a record keeping exercise, and the better you are at finding a way to manage that exercise, the more you can limit risk.

Your insurance broker can help you set up a program to review the contracts and certificates of insurance. While larger organizations have certificate tracking software, most of the time, a risk manager or insurance department will track this, via spreadsheet or another internal mechanism, to make sure coverage doesn’t lapse. And like anything else, people leave, retire or responsibilities change, so knowledge could shift. If you’ve got some new people, it might be time for a refresher course.

Insights Insurance/Risk Management is brought to you by Gallagher

Data analytics are making their mark on commercial insurance

Insurance professionals need a lot of information. Previously, that meant insurance brokers would collect data based off of prior policies, fill out a few supplemental applications, tie a bow on it all and send it to a number of insurance carriers. From there, the premium was calculated and the broker presented it to the employer.

However, the old-school way of doing things isn’t enough today.

“Submissions should not sit on an underwriter’s desk for an extended period of time. The data and analytics that now exists needs to be conveyed not only to the carriers but also to employers, so that their companies can benefit to their fullest potential,” says Patrick Zedreck, area assistant vice president, at Gallagher.

Smart Business spoke with Zedreck about how data analytics are affecting — and will continue to affect — how insurance policies are designed and priced.

How are data analytics being used by the insurance brokers? How does this technology benefit employers?

Data analytics are becoming extremely useful and important. As technology progresses, the access to information is much easier. With all of this data only a couple clicks away, your broker can compare and contrast different quotes to each other. For example, he or she can discover what an employer should expect for umbrella and general liability insurance — the two types of policies with the least variables and therefore the easiest to benchmark.

It’s possible to identify if a company has premiums in line with its peers of like size within their industry. The data is also able to point out where an employer may or may not be properly insured — either the company is overpaying or the limits are too low. For example, it can measure a large number of companies against each other to discover what the median limit should be, so they are not underinsured and are hit with what could be a detrimental loss to the company.

Another way brokers can help employers use data analytics is tracking injuries on the job. Companies can learn if there’s been a specific type of claim that could be potentially prevented in the future, like slips, trip and falls within a certain part of the business. If that company has had some claims in the past, and then uses data to set up better safety programs and a safer work environment, the broker can take those procedures and reports to the insurance carrier to negotiate lower rates.

How has underwriting changed in this new environment?

It is imperative that the insurance adviser does his or her research and benchmarking before sending out to carriers. This will greatly benefit the company and allow it to manage what exactly it wants from its program.

In addition to using historical information, benchmarking and looking at loss histories, insurance carriers are now using real-time information to collect data to underwrite companies more precisely. For example, with a large bus fleet or trucking company, certain data analytic tools will show the habits of drivers during their routes. It can show if an employee is driving the proper speed limits, accelerating and breaking too quick, while also using cameras to get an internal view of the route from beginning to end. This technology helps enable a safer work environment for employers. It also helps insurance carriers gain a better understanding of the safeguards companies have in place or are willing to put in place — and may make them more willing to work with employers on lowering premiums.

What else should employers know about data analytics in the insurance industry?

Employers should start to expect more out of their brokers in the future. They should be aware that this technology and data exists as a resource to be utilized for their benefit. As time goes on, real-time information will only become more and more useful to them.

It’s no longer a matter of just taking your losses, and the rate increases that go along with those; there’s a modern way to present your business to the insurance marketplace. It is important that your broker uses data analytics to validate your premiums, limits and deductibles. Be sure to ask how brokers arrived at the limits they put in place for your insurance program.

Insights Insurance/Risk Management is brought to you by Gallagher

Five mistakes nonprofits should avoid in their next RFP

Many nonprofits follow the request for proposals (RFP) process when choosing their service providers. Some nonprofits must send out RFPs because of their grants or federal funding. Others have boards of directors who see the RFP process as the best scenario for doing due diligence.

“Whatever the case, if your organization uses RFPs, you need to make sure you’re not defeating the purpose of the system, which is to reduce risk by finding the right advisers in an efficient and effective manner,” says Ryan Brandt, area vice president, Gallagher.

Smart Business spoke with Brandt about common errors in the RFP process.

Where do you see nonprofits go wrong with their RFPs?

They can cast either too narrow or too wide of a net. For example, you may already have an idea which service provider you want. However, the organization requires at least three bids. So, instead of drawing up a fair RFP, you reach out to Firm ABC and say, ‘I want you to write up this RFP for me; put it in any wording that you want.’ When the RFP goes out, other service providers see through the wording and realize there’s no point putting effort into it. If you don’t keep an open mind, and give your advisers a fair chance, it can snowball into complacency, poor service or a missed opportunity.

On the other end of the spectrum, a nonprofit might email the RFP to every service provider it can or post it directly on its website. Reputable, qualified firms won’t respond because they know their odds aren’t great. It can send a message that the organization is fishing for ideas and doesn’t really know what it wants. Also, nonprofits that try to get as many responses as possible every year could be price shopping. Again, some service providers won’t put in the time because no matter what they do, the lower price is going to win. You’ll end up with the service as a commodity, not a relationship.

As much as firms research the nonprofit going into the RFP; nonprofits should also be researching the service providers before they release the RFP.

What are some other mistakes?

Another misstep is assuming that you must accept a proposal as is. Obviously, in an RFP, service providers put their best foot forward. But sometimes, a firm could get dropped out of the RFP process or not win an account because of one thing. That’s why it’s important to include goals in an RFP, which allows them to better understand how to approach the solution. If a service provider isn’t aware of the underlying issues or goals the nonprofit wants to obtain or correct, it could misrepresent itself. If you agree to give someone your business after an RFP, the negotiation doesn’t stop. If your nonprofit’s first choice checks all but two boxes, for example, see what can be done to tick those two boxes.

Sometimes, nonprofits are afraid to release their budget. Say your nonprofit has $100,000 to get X, Y and Z insured. Rather than let the insurance agents go through the RFP process knowing about the $100,000; let’s see what they come up with. However, realistically, what you’re trying to do may not even be possible. Being direct saves everyone time. You get a better understanding of the adviser. You can see if they’ll give you a variety of options. Service providers also can let you know if they cannot help you. They’re already aware there is competition, so your organization is more likely to get a better rate. There is no reason to keep the budget a secret.

Finally, allow enough time for a well-thought-out proposal. The rule of thumb is a minimum of two weeks, and more if possible. An RFP shouldn’t be rushed. If an RFP says to respond in three to five days, that’s a turn off.

How would an ideal RFP process go?

In a perfect RFP process, you would pick an adequate number that the board feels comfortable with. Then, do your research on the service providers you want to invite in to make sure they have the background and success in your industry. Be very precise and exact when writing the RFP regarding your goals and your budget, and then give them about four weeks to respond. When the RFP presentations are done, don’t hesitate to ask if you have further questions. Don’t assume what they put in front of you is all that they can do. Reach out and, if need be, have the firms come back out and talk to you.

Insights Insurance/Risk Management is brought to you by Gallagher

How to get predictable tax results from your captive insurance program

How a captive insurance company is structured and, therefore, how it is taxed, is based on many factors.

Factors include the company’s risk perspective, the goals of the program — building liquidity, filling a hole in a risk management program, building a war chest of insurance funds to combat long-term contingent liability — where the captive is based, its size and more. How a company ultimately structures its captive, and who it chooses to help, sets the stage for everything that follows.

“When the business plan for the captive is created, the tax impact on the financial statement plays a big role in driving its financial success,” says Andrew Seger, general counsel at Imprise Financial.

Smart Business spoke with Seger about some of the common tax structures that may apply to captive insurance programs and their implications.

What should be the initial considerations when determining the tax structure of a captive insurance program?
Tax considerations generally hinge on whether the captive is based inside or outside of the U.S — and if it’s a foreign captive, whether it’s controlled by a small group of stakeholders or not. Then it’s a matter of whether the captive is in the life insurance business or the property and casualty insurance business, and whether it qualifies as a large or small insurance company.

Most captive programs tend to be property and casualty, so how it’s taxed comes down to whether it’s considered a large or small company and where it’s located.

The tax code allows large U.S. property and casualty companies to recognize premium revenue over the life of a policy, which spreads revenue out over term of policy without spreading out expenses. On long-term policies, this may delay revenue recognition (and taxation) for several years.

Small property and casualty companies that are U.S. taxpayers can elect not to pay federal income tax on insurance income, while foreign captive insurance companies, provided they are not owned by a small group of stakeholders, may not be subject to U.S. income tax at all.

Under what circumstances can captives elect not to pay federal taxes?
Certain small property and casualty companies can elect not to pay tax to the federal government on their insurance income. There are still other income taxes to pay, but none on insurance income.

To qualify for an exemption, the small captive insurance company has to be under a designated premium limit. That amount changes every year because it’s tied to inflation — it’s $2.3 million this year, up from $2.2 million in 2017. If the captive has less than the designated premium amount and meets other check-the-box requirements designed to ensure companies aren’t abusing the structure as a tax shelter, then the captive can elect not to be taxed on its insurance profits left over after it pays claims.

Who should business owners work with to both determine the best tax structure and set it up?
The process should be managed by the company’s captive manager, which will oversee this aspect of the captive’s creation on behalf of the company.

Captive management companies rely on specialized and knowledgeable accountants to develop tax models for clients through pro forma financial statements that project the potential effects of the financial performance of the captive within the applicable tax structures.

Accountants involved in the tax setup must understand insurance taxation because it’s a specific part of the U.S. tax code. Insurance taxation structures are too complicated for generalists, so companies will want to make sure their captive manager has a solid and healthy relationship with tax accounts who are experts in this specific area of the tax code.

Companies should be wary of a captive manager that asks them to retain their own accountants to advise on the tax structure because if the captive manager and the accountant aren’t the same page, it could result in costly setbacks.

In the end, tax planning is an important part of putting a captive together, but it’s just one of many considerations for how a program is structured.

Insights Insurance and Risk Management is brought to you by Imprise Financial

Keep safety front and center in the wake of the construction labor shortage

Due to a labor shortage in the construction industry, some contractors are being forced to hire inexperienced workers just to keep up with project demand. This issue may create significant safety concerns on the job site, says Charlie Salazar, CLCS, area vice president at Gallagher.

“These workers do not have the same level of training and experience as more seasoned workers,” Salazar says. “They may try to cut corners, resulting in more injuries and claims. Job site accidents may force contractors to delay or stop construction until an investigation is complete. This project delay, and its associated costs, hurts the bottom line of everyone involved, from the general contractor and the subs, to potentially the project owner.”

Smart Business spoke with Salazar about how some have responded to construction labor shortages and increased safety risk.

Why are labor shortages such a problem for the construction industry today?

The Great Recession started this shift. According to Tradesmen International, the industry lost 2.3 million skilled workers during the recession (2006-2011) — many of whom were qualified veterans nearing retirement age. Skilled workers who were unable to find jobs dropped out of the industry, and many have never returned.

Societal and population changes have also contributed. Many millennials no longer consider construction as a viable career option. Vocational and training schools that were once prevalent have become nearly extinct, and parents increasingly steer their children to traditional four-year colleges and white-collar careers.

In addition, natural disasters have contributed to worker migration. For example, regions hit by hurricanes need more workers as the projects are long term, thus creating a need for workers there and shortages elsewhere.

How are some contractors and construction firms finding qualified talent?

The short-term solution that many contractors are using is offering increased wages, bonuses, overtime opportunities and retention rewards. AGC of America states that average hourly earnings in the industry climbed to $29.24, a rise of 3 percent from a year earlier. The construction industry pays 9.8 percent more per hour than the average private-sector job in the U.S.

The long-term solution will require education, training and changing the perception of the industry to re-engage at the student level, with more vocational-technical schools, construction industry trade education or unique programs sponsored by businesses. The school-to-work programs that helped build the construction industry must be overhauled to engage the same skilled workers the industry had before the recession.

What strategies can companies employ to keep safety a priority, even with more turnover and fewer people? How is this different from what they’ve done in the past?

The use of technology and artificial intelligence is one strategy that many contractors are finding effective.

Drones equipped with 3-D mapping capabilities can fly above construction sites, creating highly accurate models of work-in-progress and relaying photographs and other data to site managers to monitor progress. Before drones, this used to involve several workers manually mapping everything out over the course of several hours. Now, the same job can be accomplished in minutes. Artificial intelligence can help to monitor many exposures, such as the location of workers and equipment, allowing a supervisor to monitor every job site more efficiently.

What else should the construction industry understand with regards to these risks?

The labor shortage is not ending any time soon. It is imperative to have a strong risk management program and create a safety culture to manage the risks that come with labor shortages.

Make certain that your safety manual, toolbox talks, safety rules, best practices and trainings are up to date and effective. Make sure you have a broker who has a service team that is familiar with the industry. They should provide guidance and expertise to help you develop and continually enhance your risk management program.

Insights Insurance/Risk Management is brought to you by Gallagher

Nonprofits are cyber targets, too. Do you know your cyberrisk?

Any organization with a computer is at risk for cyberattack — and nonprofits are no exception.

In fact, nonprofits face unique challenges because they often don’t have the funds to build a strong IT infrastructure or purchase cyber insurance. Without an IT department, they also are likely to miss proactive steps like updating software and installing security updates, says Ryan Brandt, area vice president at Gallagher.

Smart Business spoke with Brandt about how nonprofits can mitigate their cyberrisk.

How common is it for nonprofits to experience cyberattacks?

It’s not something they’ll see every day, and nonprofit leaders may not be fully informed about cyberrisk and cyber liability insurance because it’s a new and rapidly changing risk area.

One leading cyber insurer studied cyber incidents since 2016 and found health care to be the largest industry to be impacted at 33 percent. This includes nonprofits that contract with health care entities and have access to medical records.

In addition, any nonprofit is susceptible to attack through its donation web page. This exposure falls into the retail sector in many surveys, and retail is another high-risk industry. In one instance, hackers donated $1,000 every month for six months, which was the time it took to penetrate the website’s vulnerable points. The hackers then stole 90 percent of the nonprofit’s grant balance.

Another study, commissioned by GuideStar, found that 78 percent of nonprofits have added mobile device capability to their donation traffic. This streamlined process creates ease of use, but it also increases the risk of a cyberattack.

What reasons do nonprofits give for why they don’t purchase cyber insurance?

It usually comes down to budgetary restrictions. Nonprofits have limited resources for cost items such as workers’ compensation, employee benefits and other insurances.

Also, some nonprofits rely on their IT vendor to provide the appropriate protection for their legal exposure following a breach. Unfortunately, in most instances, the protection is inadequate.

How should nonprofits address this risk, either through insurance or other activity?

Education is critical. Have someone come in to discuss the risks with your staff, such as the dangers of a phishing campaign, where, for example, your employees get an email that includes a chance to win Steelers tickets. However, when they click on the email’s link, it’s tied to hackers. Other risks are ‘spear phishing,’ which targets someone who handles the day-to-day finances like a controller, or ‘whaling,’ which specifically goes after someone in the C-suite.

Social engineering is a concern, especially if your nonprofit does international relief work. If the CEO or team leader is overseas, the home office may receive an email that looks legitimate, asking for money to be transferred. Ransomware, where the infrastructure is held for ransom, is another danger.

Cyber liability insurance is relatively inexpensive — yet too often it’s considered a luxury, not a necessity. Even if cyber insurance isn’t a line item on your budget, nonprofit leaders should evaluate whether their current insurance program could be modified to make the addition of cyber insurance a cost-neutral event.

As the threat environment continues to escalate across all industries, the insurance market is evolving to provide robust cyber solutions in a competitive market. Your risk management broker can assist you in developing a practical strategy to evaluate your cyberrisk and manage the financial risk of a cyber event in a prudent and thoughtful manner.

Insights Insurance/Risk Management is brought to you by Gallagher

Add dollars to a deal with the right captive insurance structure

From a high level, captive insurance programs offer companies flexibility to manage their unique risks.

Captives can also bring value to companies, and wealth to owners and stakeholders, but too often these opportunities aren’t recognized.

“Owners of a captive insurance program have access to the earned revenue that exists in the program,” says Andrew Seger, general counsel at Imprise Financial. “That money can be added back into the value of the company at the time of a sale or extracted when the owner exits. But the potential value that captives could contribute is commonly overlooked.”

Smart Business spoke with Seger about the ways captive insurance programs can be structured and how that affects company value.

What are the factors that determine how a captive insurance program is structured?
A captive insurance program’s structure is contingent on the needs of the business and the goals of ownership. Generally, structuring a captive as a subsidiary of a company places ownership of the captive with the operating company. Structuring as an affiliate puts ownership with the person or persons who own the company. In both instances, it’s a separate legal entity.

Owners who want to make sure the assets of the captive are going to be reported on the operating entity’s balance sheet should structure it as a subsidiary. In a situation in which only some of the shareholders are entitled to the profits of the captive, it’s best to structure it as an affiliate.

How does the structure of a captive program affect whether it is sold as part of the company?
Whether or not to include the captive in a sale is up to the buyers and sellers. Often it hinges on how important the captive is to operating the business. If it’s an entire franchise that’s being sold and all franchisees have insurance from the captive, that’s part of the value proposition and the acquiring company will want that program as part of the deal.

Other times, the buyer is not interested in the captive or it is not essential to business operations, which leaves the assets of the captive with the exiting owners to be extracted. In situations in which the captive is set up as an affiliate and more for long-term wealth building for the business owner, it’s not usually part of the deal.

How do buyers calculate a captive program’s value when it’s a part of the sale of a business?
When a captive is structured as a subsidiary of a company and the company is sold, bankers and private equity firms tend to add back to revenue the cost of its insurance premiums because it’s a risk management vehicle and not an expense — it’s not decreasing the revenue number that someone valuing a business would look at.

With the help of a captive manager, the purchaser will also project the future performance and profitability of the captive and work that into the value of the business. If the assumption is that the operating business is going to grow, the captive grows with it. It comes down to determining what the metrics will look like and how that affects EBITDA.

Valuing the unearned premium — money that’s tied to existing claims or policies and can’t be extracted — is accounted for differently. If there’s a lot of it, then there will be a larger risk of future claims. In that case, the captive manager will conduct an actuarial review of the projected future losses to help the parties agree upon a future valuation of the captive involved in the transaction.

That could also take into account the history of the captive’s operations and what the actuaries predict could happen while the premium is still unearned.

As with any business, there’s no perfect science to determining the value of a captive in a transaction, but the key is to get everyone involved to understand the captive’s operations and come to an agreement. That’s why having an experienced captive manager involved from the start of a program is critical.

They know how to get the most out of a captive based on the owners’ long- and short-term goals. Companies that don’t discuss their plans with a captive manager will have fewer options when major events, such as an exit or capital investment, occur.

Insights Insurance and Risk Management is brought to you by Imprise Financial

How to find the total cost of risk — and do something about it

When it comes to driving down your company’s risk management costs, employers may not always see the whole picture. In fact, depending on your individual business, you could save 20 percent of your insurance spend by focusing on additional risk cost drivers outside of your insurance premiums.

Six buckets of risks drive costs:

  • Insurance premiums.
  • Program structure.
  • Losses within a deductible/retention.
  • Uninsurable or uninsured losses.
  • Coverage gaps.
  • Contractual liability.

Most employers regularly manage their insurance premiums and program structure. The other cost drivers tend to slide under the radar.

“There’s no trigger that says I’ve got to be thinking about this right now — unlike your annual insurance renewal,” says Marshall Wunderlich, area president at Gallagher.

In other words, there’s no annual physical for the other cost drivers, even though they factor just as much into your total risk costs.

Smart Business spoke with Wunderlich about how to add the necessary checkups on all risk cost drivers to build a comprehensive risk management program.

Which companies are more successful at examining the total cost of risk?

The organization needs somebody who takes ownership for examining the frequency and severity of risk, with a process that’s connected to the business’s culture. Typically, that person is a risk manager in larger companies, or somebody on the executive team of a smaller company who has a passion for it.

How can organizations without an internal risk manager better manage these costs?

The solution is to find a risk adviser you trust who has the process down to a science, so you don’t have to. Your risk adviser needs a process that holds him or her accountable for delivering on measurable objectives on all these risk areas that drive your costs.

It’s not uncommon to find risk advisers who say they focus on more than your insurance program. It is uncommon to find firms that have it in their DNA and do it all the time for middle-market companies.

What are examples of manageable risk costs that can be decreased?

If you have a fleet of vehicles, you may decide to self-insure your first layer of risk with a high deductible. Then, you need to manage those costs as they come up, by asking questions. Should you be going to different garages? Why is a particular driver wrecking his vehicle multiple times?

These kinds of questions also can apply to safety costs. What’s your spend on personal protection equipment? Is it more cost effective to buy in bulk once a year, rather than as needed?

It’s a good idea to review your claims management process. Who is involved and when? How long does it take to report it? Who is communicating from the accident investigation back to the safety committee?

The same thing applies to contractual liability. As you enter into contracts, you are assuming risk. Somebody needs to be reviewing the language and tracking certificates of insurance.

Even if you’re reviewing trends, a deeper look may be warranted. If you had 100 claims last year and 70 this year, that’s good, right? But what’s driving the 70? Are there common denominators? How are you going to get from 70 to 35? Should you really feel good about the 70, or do your peers only have 10?

How can companies get started on this?

Executives understand that comprehensive risk management is important. There’s only so much you can save through insurance brokering. But it doesn’t have to be overwhelming or time consuming.

Start by identifying the top three to five risks that aren’t covered by your insurance program. Then, the next time you meet with your risk adviser, ask for help putting together a process to deal with them.

You’re paying your risk adviser to help you with costs that you’re insuring every year. So, create a relationship where you’re communicating regularly on these other buckets of costs. Then, agree on the objectives to be met and the process for holding each other accountable for the results.

Insights Insurance/Risk Management is brought to you by Gallagher

Know the rules and risk before flying a drone for commercial use

Years ago, the thought of drones being used in everyday life was something you would only see on the movie screen. However, this is the 21st century where technology is rapidly improving and becoming more advanced every day.

“Not too long ago, people stopped using drones just for a hobby and began to implement them as a part of their businesses,” says Patrick Zedreck, area assistant vice president at Gallagher. “The popularity of business owners using these unmanned aircrafts can be attributed to the decrease in cost, the portability and their easy to access information without putting an employee at risk.”

Smart Business spoke with Zedreck and Brad Meinhardt, managing director of Aviation Insurance & Risk Management, North America, Gallagher, to get a risk management perspective on drones.

How are drones being used by employers today?

The possibilities are limitless, but they have been used for things like motion pictures, documentaries, sporting events (ESPN College GameDay) or by the construction industry. Loss adjusters are even using them for significant disaster events. Drone use is also growing in the agriculture, aerial survey, mapping and security industries.

As commercial drone use increases, the Federal Aviation Administration (FAA) is trying to balance safety rules for unmanned aircraft systems against innovation. The FAA’s Drone Advisory Committee has dissenting opinions about how civilian drones should be tracked by authorities, but the FAA is considering the committee recommendations in order to create a rule about flights over people and beyond the pilot’s line of sight. After that rule is crafted, expanded commercial uses would be pipeline patrol, energy grid infrastructure oversight, package delivery or medical supply delivery to remote areas.

What kinds of risks and potential liabilities do employers need to be aware of?

Similar to manned aircraft exposures, the biggest risks are bodily injury and property damage to third parties, and invasion of privacy (personal injury).

Commercial use is governed under the FAA’s Small Unmanned Aircraft Systems Rule or Part 107. It requires the drone be registered and the pilot be certified through the FAA. Drones need to be under 55 pounds and fly within a visual line-of-sight, during daylight or civil twilight, at or below 400 feet. They can’t fly near other aircraft, over people or controlled airspace near airports without FAA permission. However, the FAA does issue waivers for certain Part 107 requirements.

FAA violations for not following Part 107 guidelines can be significant, and local law enforcement entities are empowered to enforce them. Those liabilities are not insurable. But ultimately, the worst case for careless operations would be impacting a manned aircraft and causing significant loss of aircraft and passenger lives.

How should these exposures be covered, through insurance or otherwise?

The insurance is the same as manned aircraft coverage, but excludes passengers. There is a robust insurance marketplace willing to insure $1 million of coverage for about $800 to $1,000 annually, but higher limits are available. Physical damage to drones can also be insured.

Most firms that hire a drone operator require evidence of insurance, including additional insured status. Government entities, colleges, universities and nonprofits require insurance to access their facilities.

What else should employers know about drone liability coverage or drone operation?

Be careful to study and follow guidelines of FAA Part 107 if your organization is operating its own drone. You also want to buy insurance, just like you would for any other manned aircraft on an annual basis.

When hiring an outside drone operator, vet the operator to make sure it’s legal and following best practices. Secure the insurance information with additional insured status, and consider non-owned aircraft liability insurance for yourself if your use of third-party operators is frequent.

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