Producers' Risk Management Approach to Sales: Exposure Identification and Analysis

1. Chapter 4: Exposure Identification and Analysis

2. Objectives • Explain how producers use risk management in their approach to sales; • Describe property loss exposures and provide examples relating them in a general way to insurance coverage; • Describe indirect loss exposures and provide examples relating them in a general way to insurance coverage; • Describe common liability loss exposures and give examples relating them in a general way to insurance coverage; • Describe human asset loss exposures and give examples relating them in a general way to insurance coverage.

3. Producer’s Role – Sales Approach • Producers can use the risk management process to make an objective study of a clients exposures or needs and develop ways to treat those exposures. • Producers can be on the client’s side with value added service. • Possible to provide a risk management service in return for a fee – the risk management approach may reveal an uninsured exposure. • Producer must be informed as to the client’s insurance needs and requirements. • The producer is the expert when it comes to insurance.

4. Pre-Sale Preparation • Producers must become thoroughly familiar with risk management concepts and practices – continued education • Participating/leading seminars and developing a network • General industry information provides some benchmarking criteria • Information sources to plan a risk management sales approach: • Newspapers • Etc.…..

5. Pre-Sale Preparation • Producer should be knowledgeable about the operations and be able to have a reasonable discussion – speak the language. • Sales interview, the goals are to: • Sell the risk management concept; • Establish credibility; • Gather information. • Use time wisely www.creativehomekeeper.com

6. Sales Interview • Opportunity to explain the risk management process in nontechnical terms. • A team process where the producer and client can: • Define ; • Develop to attain the goals. • Producer can analyze the information and determine the best techniques and how to implement. • Producers can be effective advisers and coordinators of the information gathered to manage risks.

7. Practical Considerations • Risk management approach requires more effort and additional time but can lead to greater rewards. • Insurance is a service industry – best service and value-added most likely to secure and retain clients. • Time consuming – account must be monitored and modified as required. • System oriented – requires investigation; concepts and programs are what is sold. • Should connect the producers and client • Difficult to compete against a successful risk management program.

8. Risk Management Resources • Team approach • Other employees in the producers office – draw on the experience of others. • Complete job identifying all exposures from the beginning www.gopixpic.com

9. Risk Management Review • Must understand the organizations risk management objectives (focus and direction) • Primary task of risk management is to keep an organization intact by preserving its physical assets • Risk Management Objectives: • S • P • E • C • S • M • O • S • S

10. Identifying Exposures to Loss • Failure to identify an exposure will lead to other failures. • Use whatever tools available – be imaginative! • An effective device: the insurance survey form • Refer to the Appendix at back of text to view Risk Analysis profile (Pg. 15 – Appendix) • However, a basic understanding of loss exposures must be achieved first. • See Exhibit 4-1 Exposures to Loss • HOMEWORK: Find a news story where there has been an Exposure to loss. Email me the type of loss, how it affects/affected the company and what could be done to prevent or reduce exposure in the future. Ex. Steve Jobs death

11. Property Exposed to Direct Loss • Types of Property • Property can be divided into two general categories: • Real Property – land, buildings and other permanent structures on the land. • Personal Property – often defined to mean the right or interest that a person has in personal, movable, or other property that is separate from real property. • Personal Property can be divided into threecategories: • Property intended for permanent placement • Property subject to movement but notnecessarily intended for frequent movement; and • Property intended for frequent movement.

12. Types of Property • Being able to classify the property can help to identify the perils to which it is susceptible. • Helps to understand coverage under an insurance policy. • Personal property items subject to movement but not intended to be frequently moved are generally less bulky than items in the real property category. www.damacproperties.com

13. Perils to Property • Real property is generally exposed to the fewest perils. • See Examples of Perils – Pg. 10 • Personal property is usually subject to more perils than real property • Special cases may require special treatment – Ex. Boilers, air conditioners, etc. • Can get policies specifically for these exposures • Personal property that can be easily moved creates the exposure to the additional perils of theft from outsiders or employees and transportation in addition to the perils to which more permanent property is subject.

14. Perils to Property • Personal property intended for movement is exposed to the broadest range of perils. • Losses from crime and transportation perils more likely than other property • Property confronted by the most perils and most severely endangered is property intended to move about or “float” • - insure most of this type of property; special coverages. • Automobiles, watercraft and airplanes always require special risk management attention (covered by specialized contracts covering property losses and legal liability) • Ocean marine and inland marine cover moving property (apply mainly to water and land and air transport).

15. Identifying Property Exposures • Identify the real and personal property • Task of risk treatment is more difficult as insurance contracts tend to insure property against direct damage. • Basic fire and EC (Extended coverage) policies are intended to give coverage at specified locations. • Normally restrictions on coverage away from the named locations and on property while in transit • Movement of property away from described premises may constitute a new exposure. • Certain property is excluded from fire and EC policies or only covered for certain risks and special insurance is needed for full protection.

16. Exclusions • Several reason for excluding perils or property from insurance coverage. • Uninsurable • Ex. • Available elsewhere • Ex. exclusion in the general property form. www.gamerevolution.com

17. Indirect Loss (Business Interruption, etc.) • Indirect Losses – losses that result from direct damage to property. • More difficult to identify than direct losses as they are one step removed in chain of causation. • Ex. Loss of customers when closed due to a fire, still must pay rent, extra expense for advertising new location, etc. • Business interruption concerns loss of profits along with expenses that continue when the insured’s business operations are interrupted because of direct damage to the insured’s property.

18. Business Interruption • Another form of business interruption exposure arises when a business relies heavily or exclusively on some other business either as a customer or supplier. • It is even possible to have contingent business interruption exposure because of a business with which the insured has no direct economic connection. • Magnet or store: a store that is the primary source of traffic to the other stores. • Contingent business interruption exposure is in addition to the company’s own business interruption exposure at its own location.

19. Individuals’ Indirect Losses • Individuals as well as organizations can have indirect losses. • Human Asset Loss Exposure (discussed later) • Loss to a physical asset such as a store or plant can cause loss of income to a person who is paid on commission. • Coverage can be arranged as part of the employer’s or principles business interruption insurance.

20. Other Types of Indirect Losses for an Organization • When a loss occurs to a building occupied by a tenant we must look to the lease. • Two relevant clauses in a lease are: • Rental Abatement clause – if the leased premises are made untenantable by fire or certain other perils the rent is cancelled or reduced for the period of time that the building is untenantable (building maybe wholly or partly unusable). • Clause – deals with prolonged interruption of tenancy by fire and certain other perils (lease may be cancelled if restoration will take longer than X time units).

21. Other Types of Indirect Losses for an Organization • Rent insurance (or rental income insurance) – indemnifies the owners of a property, if the owner’s rental income is interrupted by an insured peril. • Rental value – indemnifies the occupant for the loss of use of the premises. • Extra expense exposure – where a business must stay in operation regardless of what happens and must pay extra expenses to continue operations. • Ex.

22. Other Types of Indirect Losses for an Organization • Leasehold interest exposure – if a low rent building is damaged and the tenant must find substitute premises at prevailing market prices, the difference is called the leasehold interest exposure. • The amount of loss is the difference between the rent for the damaged building and the rent for substitute quarters. • Coverage decreases with time as termination of lease approaches • Building By-laws – indirect loss that may result from the operation of building codes (the established minimum standards for fire safety required for buildings – codes usually apply only to new construction). • If rebuilt, must be to current building code.

23. Building By-laws • Building may suffer three kinds of loss under the code: • Partially damaged building may have to be torn down going from a partial to a total loss. • Cost of tearing down must be paid • New building must be built to code requirements - increasing cost of construction.

24. Liability Loss Exposures • The liability exposure is the possibility that the individual or firm will be held legally responsible for damages suffered by another party. • Cost of defending against such claims can be very large • Liability arises when the rights of one party are violated by the actions or inaction of another so as to result in injury or damage. • Rights of individuals arise from several sources: • Rightful expressions of reasonable behaviour of others, contractual agreements and specific laws granting or defining various rights.

25. Liability Loss Exposures : the failure to use that degree of care which a reasonable person in the same situation would use in order to avoid injury to another. Vicarious liability: one party, example – an employer or parent, becomes responsible for the actions or omissions of an employee or child. • Negligence is caused by stupidity, ignorance, carelessness, and overall lack of prudence. • Accidental in that the damage was not intended. • Assault is an intentional tort and not covered by insurance.

26. Liability Loss Exposures Absolute liability: a modification of negligence liability. Engaging in inherently dangerous activities, regardless of the degree of care employed, is sufficient to create liability if a third party is injured. Ex. • Most exposures except automobile, aircraft, and watercraft can, and should be insured by a single policy. • Commercial General Liability ( ) – replaced the Comprehensive General Liability Policy in 1986 • Non-owned automobile () and coverage for smaller watercraft often provided in same “package” but special approved wording must be used for NOA

27. The Premises and Operations Liability Exposure • Premise Exposure • The most common liability exposure. • Has to do with things that occur on the premises. • Operations Exposure • Broader than premise as it includes operations on and off premises. www.capital-moments.com

28. The Products and Completed Operations Exposure • Products exposure requires that you clearly understand what a product is. • A product liability action exists: • When physical possession of the product has been relinquished, and • When the bodily injury or property damage occurs away form the premises. • Some exceptions to the requirement that the injury occur away form the insured’s premises – example: Restaurant

29. The Products and Completed Operations Exposure • Completed Operations exposure is the counterpart of the products exposure for businesses that sell services rather than or in addition to physical items. • Contractor example: Contractor repairs a furnace and the house burns down • If the contract had finished the job = • If the job was not yet finished = www.geeksdo.com

30. The Contractual Liability Exposure • Involves the transfer of liability from where it would normally lie to someone else. • Accomplished in a contract which has some other principle purpose • Examples: leases; construction contracts, contracts of sale, supply, or service; railroad side track agreements; elevator rental and maintenance agreements; etc. • Main purpose - define the terms of some business arrangement • The portions of these contracts which transfer liability are often referred to as “Hold Harmless Agreements” or “Indemnity Agreements” Read Contracts!

31. The Independent Contractor Liability Exposure • A fundamental of liability is that responsibility and liability will lie with the person committing the act that causes the damages or injury. • Vicarious liability, in some cases, the liability will be placed with someone other than the person committing the act. • The “principle” is responsible for the acts of the “agent” or the employer is responsible for the acts of the employee (Note: the employee or agent is still liable). • IMPORTANT: Vicarious liability gives the plaintiff an additional person to proceed against; someone able to pay any damages awarded by the court.

32. The Independent Contractor Liability Exposure • Vicarious liability is widely recognized. • Employer’s premises and operations liability insurance covers employer’s responsibility for negligent acts by employees (even intentional as long as not at direction of employer) • HOWEVER, independent contractors must be distinguished from an employee. • Independent contractor is hired to perform particular tasks and the principle exercise little or no control over the method of performance. • General rule: one is not responsible for acts of independent contractors.

33. The Independent Contractor Liability Exposure • When an owner exercises any supervision over the independent contract, the acts of the independent contractor may be imputed to them. • This may also occur if the owner/general contractor provides equipment or supplies, the contractor is incompetent or if the duties delegated are very dangerous. • Producer must recognize that the owner can be held responsible for the acts of supposedly independent contractors • Exposure is insured by “Owners and Contractors Protective” coverage.

34. The Automobile, Aircraft and Watercraft Exposure • Ownership, maintenance, use, loading and unloading of automobiles, aircraft and large watercraft liability is commonly excluded in the CGL (Commercial General Liability). • Sold separately as not everyone has these exposures – additional premium. • Watercraft liability historically written by marine companies. • Automobile liability can arise out of ownership, use, or maintenance of automobiles. • Regardless of who is driving or if the auto is being operated to the benefit of the owner, liability is imputed to owner in many provinces.

35. The Automobile, Aircraft and Watercraft Exposure • If a hired or borrowed car is used or operated negligently and damage results, the user or operator may be held responsible. • Concept of vicarious liability also applies (vehicles driven in course of employment – owned or not) • Ownership of an automobile is not required for the exposure to exist (NOA coverage may be required). • Wording of automobile policies and their endorsements must comply with provision of the Insurance Acts and be approved by the provincial legislator. • Security for insured and producer, as any coverage has a statutory basis regardless of insurer chosen.

36. The Automobile, Aircraft and Watercraft Exposure • In addition to statutory owners’ and non-owned policies, there is a standard garage automobile policy and an excess automobile policy. • Excess Automobile policy – permits very high limits over the basic limits and can be written as part of an umbrella policy. • Fleet is usually vehicles under common ownership or management. • Likely source of liability for most organizations. • Fleets are “fleet rated” – base premiums are amended by debits/credits based on the loss experience, using the insurer’s fleet rating formula. • Good fleet management is key to containing losses/premiums

37. The Automobile, Aircraft and Watercraft Exposure • Large truck and bus fleets require sophisticated management. • Some insurers specialize in fleets and provide fleet risk management services. • Usually written using “blanket basis fleet endorsement” which provides cover for many changes occurring, without the necessity of prior advice to the insurer. • Premiums are adjusted at the end of the policy period. • Written on “receipts” or “mileage” basis and premiums are adjusted at expiry on actual compared to estimates developed at inception. • “Retroactive rating”

38. The Automobile, Aircraft and Watercraft Exposure • Aviation and watercraft are not so common. • Many business do not have the exposure because they have no occasion to use aircraft or watercraft, whether owned or non owned, except as passengers or shippers on common carriers. • However, the exposure may still exist, so prudent producers should inquire about these. www.pixshark.com

39. Workers’ Compensation and Employers’ Liability Exposure • Until the early twentieth century recourse for employees and non employees was to sue the employer. • Court decision in the latter part of the nineteenth century established powerful defenses for employers: • The fellow servant rule • Contributory negligence, and • Assumption of risk • Employees rarely won – which helped lead to workers compensation laws (benefits for injured employees regardless of negligence of employer).

40. Workers’ Compensation and Employers’ Liability Exposure • Tradeoff – workers receive compensation (income, medical expenses, etc.) and the worker gives up the right to sue the employer. • The amounts are specified by provincial law. • Almost entirely provided by provincial government bodies generally known as Workers’ Compensation Boards (WCB). • In a few instances this does not apply and the employer can be sued by an injured employee if the injury is caused by the fault of the employer. • Coverage for this exposure, know as Employers Liability, is obtainable from private insurers.

41. Bailee Exposure • Bailee – a person or firm that holds possession of personal property that belongs to another. • – owner of the property • Bailment – the agreement under which the property is held. • Professional bailees owe a greater degree of care than do gratuitous bailees (both types may be held liable if negligence causes damage to property) • Virtually all liability policies have a “care, custody, and control” (CCC) exclusion. • Does not cover labiality for damage to property while in care, custody or control of the insured, or being worked on. • Must assess exposure, special coverage may be needed.

42. Bailee Exposure • Another dimension – common carriers to transport property. • Truckers, railways or airlines may be common or contract carriers. • Owner may proceed against the carrier for compensation if goods are lost or damaged. • However, common carriers not responsible for “Acts of God” and certain other causes beyond their control. • Released bills of lading – the owner of the goods being shipped may agree to a stated valuation for those goods in case of loss. • Liability of contract carriers depends on the terms of the contract. • Silent – contract carrier only liable if their negligence. • Shipped on owners own trucks – less likelihood of recovery -owner’s insurance more important.

43. Tenants’ Exposures • Tenant is renting real property, not personal property and therefore is not a bailee – however is in a similar position. • If a tenants negligently damage the building they rent, they are liable • Fire Legal Liability coverage is available – an extension of the CGL policy covering fire, explosion, some and leakage from fire protective equipment (sprinklers). • Lease should be examined to determine tenant’s obligations. www.tenantsbc.com

44. Human Asset Loss Exposures • Every business has two major classes of productive resources: • Property • People • Usually people are only viewed from a life and health or benefit packages perspective. • are an organizations most valuable asset. • Risk management role with regard to this asset is twofold: • Protect the firm from economic loss or disruption due to the death or disability of a key person or persons, and • Apply the risk management process on behalf of all employees in order to offer the employee compensation package necessary to maintain a stable committed workforce.

45. Human Asset Loss Exposures • Death or disability of a key person can create a severe economic exposure. • May lose their contributions and may need to support the disabled individual affecting financial resources • Problems with business continuity and estate settlement. • Dissolve the organization? Dispose of assets? Buy-out? • Employee benefit exposure - Accident or sickness, death, disability and old age of employees (impact on firm, employee and family). • Most common are group life and/or health insurance, and retirement or pension plans. • Benefit plans benefit employer as well as employees.

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