Refine your risk management techniques

Rough Notes, Jul 2003 by Malecki, Donald S

Producers need to appease risk managers and CFOs who often see hazards from different perspectives

Business publications report that American businesses today are looking beyond insurance to protect their assets. While the reasons are open to speculation, high on everyone's list is likely to be the fact that insurance for certain risks is either unavailable or unaffordable. This is a period in time when risk managers have no other choice but to employ risk management techniques, such as high retentions, contractual risk transfer, and avoidance so as to protect the revenue-generating sources.

When the insurance market is soft, and coverages and limits are readily available at reasonable prices, there's a tendency for businesses to rely on insurance as the first resort, rather than the last. The primary risk management techniques that are supposed to be employed on a daily basis by risk managers are shelved for future use.

In a recent study, however, involving nearly 400 chief financial officers, treasurers and risk managers at both U.S. and international companies from a broad variety of industries, 88% of the financial executives and 83% of the risk managers said that their companies' level of preparedness to recover from a major disruption to a top revenue source is less than excellent.

This second annual study, conducted by commercial and industrial property insurer FM Global, the Financial Executives Research Foundation, and the National Association of Corporate Treasurers, also pointed out differing views between CFOs and risk managers relating to the primary hazards affecting revenue sources today, despite the fact that both share the same common pursuit of balancing risk and return.

Of the chief financial officers queried, the majority said that nonproperty-related hazards-such as improper management and employee practices, product recall, pricing volatility and personal accidents-pose greater threats to loss.

On the other hand, risk managers, as a group, perceive the greatest threat to revenue-producing sources to be property-related hazards such as fire, explosion, natural disaster, terrorism, theft, mechanical or electrical breakdown, service disruption, a supply shortage, labor strike or cyber crime.

It appears that risk managers and the agents and brokers serving them have their work cut out for them, because it often is difficult to get chief financial officers, who are holders of the purse strings, to change their minds. One thing for sure is that CFOs are likely to welcome risk managers who employ non-insurance techniques as opposed to relying on insurance to deal with risks, because CFOs are interested in the bottom line.

One of the conclusions of this study is that there needs to be better communication between financial executives and risk managers. This suggestion has been espoused among many disciplines for many decades but, for the most part, continues to fall on deaf ears.

Producer challenges

Agents and brokers alike also have corresponding problems with CFOs or those persons who make decisions about purchasing insurance. Weighing heavily on the minds of producers is that at the time of a loss, the CFO or person who makes decisions about insurance purchases is not going to ask how much the insurance cost, but whether the insurance purchased-costly from the insurance buyers' perception-covers the loss.

A dilemma of many producers is whether they should read contracts of indemnity that their clients are asked to sign. Since 1986, standard CGL policies, at least, automatically provide broad form contractual liability coverage. This means that the named insured's policy will cover the assumed tort liability of another whose sole or partial negligence results in third-party injury or damage.

What producers need to be watchful for is that CGL policies are not amended by the Contractual Liability Limitation endorsement, CG 21 39, which appears to be issued by a growing number of insurers with some regularity.

The effect of this endorsement is to take away the broad coverage that once required an endorsement and an additional premium charge. What's left are indemnity agreements limited to leases, easements, agreements in relation to municipalities, e.g., permits for work, railroad sidetrack and elevator maintenance agreements.

Closer to home, producers need to be careful about signing hold harmless agreements required of them by their own clients. It's common today for clients to require their producers to sign hold harmless agreements.

Just recently, a consultant rejected the signing of one such hold harmless agreement because its E&O liability policy specifically excluded liability assumed under contract. What the consultant was practicing was the risk management technique of avoidance.

As it turned out, the prospective client questioned the rejection of the indemnity agreement, stating that other consultants and producers have never refused these requirements in the past. The consultant lost that job. In another case, the client was willing to accept a compromise indemnity agreement limiting liability solely to the acts or omissions of the consultant.