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 firstname.lastname@example.org or (215) 701-5274.