Some usual perils include such things as fire, theft, explosion, bodily injury and property damage, termination, death, illness, disability, embezzlement, fraud, employment practices, professional liability, to name a few. Finally the consequences of a loss need to be considered whether they are financial, loss of reputation, or marketplace setbacks in market share. There are seven basic risk management techniques in dealing with exposures to loss.

1. The first technique is that of avoiding or eliminating the exposure to loss in its entirety. If you have a troublesome exposure, such as a location that is uninsurable, you can eliminate that exposure by selling or getting rid of the property. Another technique is to avoid the exposure by never entering into problematic loss exposures in the first place. While this is a 100% solution to eliminate your loss exposure it might not always be practicable or feasible based upon your business situation.

2. Loss prevention is another strategy to help reduce losses. The prevention can be such things as preventing a total loss to a building by having the building completely outfitted with sprinklers.

3. You can reduce your exposures to loss by focusing in on the perils or risk circumstances that tend to generate claims. Drivers under the age of 25 have a much larger propensity to have an accident. You can reduce your exposure by only hiring drivers who are over 25 years age of age.

4. Segregating your exposures to loss. This would entail not keeping all your eggs in one basket. Thus, you would spread out your property over multiple locations in multiple buildings and possibly in multiple cities and/or states.

5. Non-insurance transfers. This is whereby you transfer the risk to someone else and they provide the insurance and/or name you as an additional insured under their policy. This is usually termed an additional insured endorsement, a waiver of subrogation, etc.

6. Transfers via insurance. This is the most typical transfer of risk and loss is through having an insurance policy in place. This technique only works if you have the proper insurance policy with the proper coverages and the proper limits in place. All three of these items must be in place. You must have the appropriate policy, with the appropriate coverages, and limits high enough to take care of any exposures to loss that you may have.
7. Finally the last technique in dealing with exposures the loss is to retain the risk either partially or in full.

The seven risk management techniques, depending on the size of your company can all be used interchangeably within your risk management portfolio. The selection and implementation process is dependent upon your risk tolerance, and your financial ability to fund the losses within each specific strategy.

Valuable papers can take on many forms within your company. Depending on your industry if you are a design engineer then it is pretty clear what kind of valuable papers, such as your drawings, that need to be insured. The amount of time, effort, and materials that go into creating your valuable papers can be substantial if they were lost or destroyed. If you have the ability to easily re-create the valuable papers that might alleviate you from having to have insurance to provide this protection. If you’re able to make complete copies and replicate all necessary documents via having copies off site or at some other safe, secure location then you might not need to provide insurance and pay a premium for protecting your valuable papers. In larger companies usually a gap in coverage comes from a person or department that is organizing the risk management portfolio and not knowing what a valuable paper within the organization actually is. Somebody in sales could have a valuable sales contract in place as could the CEO of the company might have a special addendum in a lease modification. Both papers are valuable and represent high value for the organization. If you have not identified what indeed is a valuable paper to your organization then you could have gaps in coverage.

Accounts receivables also fall under this category a type of special property. Having accounts receivable files, paperwork, or software database that has been destroyed or compromised, can lead to severe cash flow problems in the inability to collect monies that are due the organization. Clients that owe you money will have a field day in not paying monies that are owed to you if you are not on top of the Accounts Receivable collection process. If the accounts receivable documentation is lost, stolen, or damaged, you will have a hard time in a court of law trying to collect monies due your organization. Commercial property insurance can cover both valuable papers and accounts receivable quite readily. You will have to have some historical data to justify the numbers and limits that you choose come claim time. The insurance company is not going to just write you a check because that is the amount you show as a coverage limit. You are going to have to have a paper trail to justify your numbers. The old axiom of the person who has the most paper wins is very applicable in this circumstance.

The premiums and rates for valuable papers and accounts receivable are very inexpensive as compared to building and contents premiums and rates. Having this coverage in place is not very expensive. The difficulty usually arises in having historical data to justify the limits you are requesting a claim payment on as well as identifying in the first place what papers and receivables are valuable to your organization.

Unlike a self-insured plan whereby the organization takes on and retains all the risk, a large deductible plan has a maximum amount that could possibly be owed and it is known in advance for the company. That makes it more palatable for the insured to be able to provide internal funding to come up with the per-occurrence and per-aggregate large deductible exposure that they have signed up for.

In the large deductible plan the shock losses or catastrophic exposures are fully insured except for the large deductible. There are obvious cost savings by going to a larger deductible. In the larger deductible plan the insured does not have to provide their own claims administration, lost control services, etc… The insurance carrier still provides all those services that are included in the premium. The insured has skin in the game with a larger deductible.

What are the issues that an organization needs to sort out in order to decide to go to a large deductible plan? The overriding decision criterion is mostly mathematical. Having actuarial numbers to crunch help make sure it is feasible is tantamount in order to have success in this strategy.

• Having a reliable source of historical claims data and industry-specific claims data to analyze the frequency and severity of losses in this large deductible area is at the cornerstone of the decision-making process.

• The second component of deciding whether to jump into the large deductible Arena is to make sure that the organization has the ability to fund large deductible payments when required due to claims or losses.

Unlike self-insured plans, large deductible plans have tax advantages. The premiums that are paid throughout the year and all deductible payments and/or reimbursements that are made by the insured to the insurance carrier are also tax deductible in the year they are paid. An organization that participates in a large deductible plan is a lot safer and has more options in exiting the plan then choosing a self-insured plan. Normally at the renewal, the insured can lower the deductible plan and thus is only exposed to the large deductible plan for a 12 month period of time, if they so choose. The self-insured plans are not so easy to exit from the insured standpoint in that there tends to be some delayed cost over time and the liability exposure for the insured can linger on for an indefinite time period. The business owners who have accurate and reliable historical claims data for both their company and the industry they are in can usually with great certainty predict the outcome of going to a large deductible plan. Basically what one would do is to crunch all the numbers looking backwards on the historical data has if the organization had a large deductible plan in place. You can then compare the cost savings on the insurance premiums from going to a large deductible plan versus the amount that was historically paid out if the deductible had been larger. Doing a trial run analysis will probably make the decision clearer whether or not this is for you and your company.

The captive issues policies directly to the insured or insured’s and provides the risk transfer mechanism that the insured or insured’s desire. Since the insured owns the captive insurer, the insured will be able to participate in all or some of the profits. On the downside, the insured will also participate in any and all of the claims and losses. Clearly captive insurers present the insured extreme control over the insurance underwriting, claims and investments. Captives are usually created in industry sectors that are considered high-risk or have high risk exposures for loss.

Most professional liability industries, such as doctors, attorneys, engineers, and other professional organizations have captive insurers for their member organization. Captives can also be formed to deal with catastrophic events that are reoccurring and somewhat predictable overtime. Usually you see this along the coastal waterways with the high wind exposure to loss on property accounts. As with a self-insured plan, which this highly resembles the company profits and commissions are savings that are passed through to the insured. In high risk industries by the nature of their business or because of high risk exposures of loss, captives can provide some continuity in insurance pricing overtime. High risk industries that have exposures to malpractice claims tend to go in cycles depending on laws and regulations and other in inherent global factors.

Businesses that are exposed to catastrophic damages such as hurricanes, earthquakes, floods and the like have losses that tend to come in climactic cycles over long periods of time. Captives can help prevent these premium highs and lows by stabilizing the premiums over time. Just like self-insured plans, there usually is a tremendous amount of capital that must be invested to make the program work. Thus entering and exiting a captive insurer can be complex and difficult just like a self-insured plan. The Captive has tax advantages by having your own captive insurer but it is highly regulated and normally the captive would need to allow outside businesses to access the plan in order to receive favorable tax deductibility of premiums.

Within this category of captive insurers there are legislative laws in place allowing risk retention groups to be formed. These groups operate as a sharing of mutual risk financing by insuring all of its owners. Risk retention groups can form quite easily with very little capital as long as the group is a homogeneous group of business owners.

• Usually depending upon the tax ramifications captive insurers can either be domiciled in the state where the insured is domiciled and thus this is called a domestic insurer.

• The captive insurer could be based in another state other than the insured State and this would designate the captive insurer as a foreign insurer.

• Finally, it might make sense to base the captive insurer in another country and that would give it the designation of an alien insurer.

Captive Insurance Company’s fill a certain niche and usually works well within the niche and not so well outside their niche.

How this all plays out is that the fronting insurance company which is licensed in that state or country, contracts with the unlicensed, non-admitted insurer to do all the preliminary filings and certifications for that state or country. Then the fronting company immediately reinsurers 90% to 100% of the risk to the non-admitted insurer. This fronting process has been existence for well over 100 years but it does give the appearance of behind-the-scenes backdoor dealing. Sometimes it looks like the unlicensed insurer is just trying to pull fast one on the state regulators. In the current economic global unrest these fronting transactions are coming under more scrutiny.

A few years back Congress passed the Liability Risk Retention Act and that has opened the door for unlicensed carriers to meet the regulatory filing and certification process on the front end without having Fronting Agreements. It makes for a more transparent process versus getting a licensed carrier upfront to appear to be on the front lines when really the unlicensed carrier is 100% insuring the risk. Fronting is still legal and is still used in all 50 states and in many countries.

As a business owner it would be prudent to know the contractual relationships behind the scenes of the insurance policies you are purchasing. Having a policy with the fronting carrier that is a brand name and well-known but whereby 100% of the risk has been transferred to a non-admitted unlicensed insurance carrier might lead to insolvency issues come claim time for you.

There can be some advantages for you as the insured, for the fronting insurer and for the unlicensed non-admitted insurer.

• For you as the insured this type of fronting arrangement usually is done in high-risk industries or high-risk exposures to loss. Thus the premiums from fronting arrangements tend to be less than policies purchased directly from the carrier.
• For the fronting insurance carrier this can be an advantage in that they might be able to enter tougher market arenas without having to jump in with 100% of the risk. Even if the fronting carrier reinsurers 100% of the risk they still are entitled to a fee for their services.
• Finally, for the unlicensed non-admitted insurer whose desire is to write policies for a class of business with up to 90% of the risk on their books, having a fronting carrier to help them in regulatory compliance opens up new doors and markets for them to make a profit.

Fronting agreements have their advantages and their disadvantages and as a business owner it would be prudent to know what type of arrangement you are under in your insurance program. Fronting agreements can be advantageous if used properly but they also can be an opportunity for fraud if used incorrectly.

The basic formula for a retrospective premium plan is the “basic premium plus the incurred losses”. There is a little bit more math to the incurred losses and how that number is determined. Insurance carriers take the incurred losses times a loss conversion factor that they use internally times a tax multiplier.

• Incurred losses are actual losses sustained plus the anticipated losses to be paid.

• The tax multiplier is easy enough to ascertain as that is just incorporating the state premium taxes, fees or any other assessment that the regulators impose upon the insurance carrier. Usually that is set on an annual basis and does not fluctuate much.

• The loss conversion factor, for lack of a better term is simply a fudge factor for the insurance company. Most workers compensation claims tend to grow and expand the longer the claim is open and not closed. Therefore for all open claims the insurance carrier multiplies this loss conversion factor times the incurred losses. The conversion factors vary greatly amongst insurance companies because all carriers have different inherent overhead cost structures. Many times on larger accounts the rating structure is pretty close for the competing carriers and it might come down to the loss conversion factors of each insurance carrier in determining which plan with which carrier is the most competitive. Most loss conversion factors are between 1.10 and 1.25 as a multiplier of the incurred losses.

Retrospective rating plans can offer many advantages for the insured but it can also have some disadvantages. One of the major advantages is that you can see premium reductions immediately based upon current losses. Businesses that have good loss experience and very predictable claims usually will come out on the positive side of this equation with a retrospective rating plan. Even if a business has had a catastrophic shock loss in the past this type a plan can be financially beneficial for that business’s current situation of low claims or minimal losses. This rating plan is a two edge-sword in that if the claims and losses turned sour during the policy year, the insured will have to come up with the funds for the increased premiums immediately due to increase claims after the policy renews in 12 months. As a business owner, doing the math and crunching the numbers will determine whether this strategy, for primarily workers compensation premiums, is advantageous for your company.

First of all there are many policies whereby a binder is not allowed verbally or in writing. Some of the typical policies that do not allow binders are Worker’s Compensation policies, professional liability policies, medical insurance, and life insurance policies. In almost all cases the retail insurance broker is not permitted to issue an oral or written binder to the client on these types of policies. If you as the client have received an oral or written binder you need to make sure that it is backed up in writing from the carrier.

Another red flag for the client to be aware of is that typically legitimate binders from the retail broker normally cannot be for limits greater than $1 million. Receiving a binder for $10 million in general liability limits from your retail broker is in almost all cases not a valid binder without carrier approval.

Finally, most states do not allow brokers to do binders for longer than 90 days. So if you receive a binder that is longer than 90 days from a retail broker, unless it is a binder directly from the carrier it is probably not a valid binder.

Another idea that should be considered is that even if you have a valid oral insurance binder on a policy that is permissible you still should insist on the insurance binder being a formal document in writing. That will help you as the client in many ways.

• One way it will help you is that you will immediately be able to see if there is any errors or omissions that have been made on your coverage request.
• If everything is in order, then you will have the peace of mind knowing that you have in writing what you have asked for.
• Also, and probably the most important is if you at experience a claim during this temporary period, you will be on much firmer legal ground by having a written document so that you will be able to hold the agent or carrier for the commitments that have been made to you.

To recap the management tip of the day, as a client if you receive a binder for insurance orally or verbally on one of the policies we listed above, or the limits are greater than $1 million, or the length of the binder is greater than 90 days, then you need to investigate further to make sure you have a valid binder. Taking the time during the initial insurance binding process can help in providing the upfront protection that you are seeking so that the policy that is being issued is issued according to your specifications.

Most insurance policies clearly define what they mean by vacant or occupied. Reading and understanding these definitions can be tantamount for you as the insured in knowing whether or not you’re going to have coverage if a claim should occur. Usually insurance companies are not as concerned with the building being unoccupied as they are with the building being vacant. The insurance companies understand that from time to time buildings can be unoccupied as new tenets come and go. Or there might be some remodeling issues that need to be addressed and the building could be unoccupied for a period of time. Knowing what the limit of time for a building to be unoccupied is the number you should know. You probably can break that string of being unoccupied simply by just occupying the building for a short third time and the meter will be reset and start counting again. Most insurance policies have a 3 to 6 month unoccupied clause in their contracts. The building remains unoccupied for the specified period of time the policy can be rendered null and void come claim time.

A building being vacant, meaning usually having nothing in the building except for the four walls usually has a shorter timeframe. That is usually 90 days in most property policies. The risk management tip of the day is that you as insured should read the occupancy and vacancy clauses in your property insurance contracts. Also, sometimes in your general liability policies there can be occupancy and vacancy clauses built in to the warranties so that the general liability policy may not respond if you exceed the occupancy and vacancy clauses. When you got to market for proposals, besides comparing prices and coverages, it would behoove you to also compare what occupancy and vacancy clauses are built in to the respective insurance carriers contracts. If you typically experience longer periods of unoccupied and/or vacant buildings, an insurance policy that might be cheap in price but restrictive in these clauses might not be in your best interest in the long run. As the insured, being knowledgeable about these clauses can help you in your insurance decision making process.

As is the case in all negligent claims in United States there must be a legal duty that is owed to someone and there has to be a breach of that duty that results in damages or injuries and there has to be a connection or causality between the breaches in the proximate cause of loss.

Risk levels vary depending upon the type of engineering work that is being performed. An electrical engineer who is designing electrical systems for buildings typically has less exposure and thus less premiums that are paid for professional liability insurance, then compared to a structural engineer.

Some risk control techniques that engineers can use to limit their loss exposures are as follows:
1. Have formal written policies and procedures in place for workflow and risk evaluation.

2. Keeping adequate details and complete records of all projects, consultation, and meetings with clients will help if I claim should arise.

3. Having appropriate schedules, PERT charts, and reasonable timelines can help keep projects on track and possibly foresee upcoming problems.

4. All change orders or modifications must be in writing with the appropriate sign off from all affected parties within the project.

5. Peer reviews within their own company and maybe having the ability to have peer reviews within their engineering association or other engineering firms that they have contact with.

6. Having protection built into their contracts that provide hold harmless agreements, arbitration clauses, and other contractual verbiage that limit the engineer’s exposure to loss can go towards greatly reducing the risk of your professional liability claim.

7. Incorporating loss control techniques that go towards preventing losses as well as reducing the quantity of losses and the severity of losses can help and keeping the insurance premiums low as well as advert unwanted lawsuits and litigation.

8. Finally, the engineer professional should seek out insurance carriers for the professional liability coverage that specialize in the engineering profession. If the engineer has an insurance policy that is tailor-made for the specific engineers type of products and services, that will go a long way in filling any gaps that any engineer might face from future litigation from a project that they have done.

Engineers need to be careful in how the insuring agreement and clause is written within the policy. Sometimes insurance carriers exclude joint ventures and partnerships and other entities and only cover the named professional. Some design professionals desire and need much broader named insured coverage than just coverage for the professional. As is common in most professional businesses, professionals tend to come and go on a regular basis. Having the ability to have an insurance policy that can cover past, present and future claims is important so that the engineer and their firm has no gaps in coverages.

Directors and officers are in a fiduciary roll and thus they have legal obligations that they must adhere to in the role for the organization. They must exercise reasonable care that is customary and reasonable for the position that they are in. They have a loyalty to the company and to any stockholders to operate the business prudently that is in their care, custody and control.

Transparency is tantamount in this role in that full disclosure must be made for any and all transactions that involve each and every director and officer. Many times within the corporate bylaws there are provisions that dictate that the corporation will reimburse and/or indemnify directors and officers for any litigation that is brought against them as individuals. In order to fund that obligation most organizations purchase and provide directors and officers insurance for this liability exposure. Typically lawsuits involve the individual director and officer as well as the corporation. Thus, the policy needs to protect and indemnify both the individual director or officer and the corporation as a whole. With that in mind, some key provisions of the policy should be reviewed and considered before one purchases this type of policy.

• Purchasing a policy that covers both the individual in the corporation well obviously cost more than just covering the individual but they will provide much broader and complete coverage than just covering the individual.
• The definitions of what is a wrongful act can also be an important area of concern when purchasing this type a professional policy. The broader the definition of wrongful acts the more coverage one is going to receive when a claim is presented.
• If this is the first time the organization has purchased directors and officers insurance having coverage for prior acts can be very important part of this policy.
• You may or may not want to consider having a consent provision that allows you as the professional consent to any payments for claims that are presented. There usually is a cost for that provision and you usually have to pay the portion that exceeds the amount on the table when the carrier could’ve settled the claim without going further in the litigation.

Typically directors’ and officers’ policies exclude coverage that should be purchased and provided in other policies. Usually claims dealing with property classes or general liability losses are not covered on this type of professional policy. Criminal acts are not covered in this policy. Nor are they covered in any other policy as that is against public policy countrywide. In larger corporations the directors and officers might serve on multiple boards across multiple industries. Have any specific endorsement to cover those ancillary exposures might help in attracting quality directors by providing that type of coverage for them. Having directors and officers insurance in place will help complete your insurance portfolio and risk management strategy for most corporations.