A few issues ago (#142), I stated my opinion that the umbrella policy is the most important insurance policy that organizations purchase. The reason for this opinion is that it is the policy that insures against crippling catastrophic losses. Most of the readers who responded agreed with this opinion (see issue #143), and many of those who argued that the CGL is more important hold that opinion because it largely shapes coverage under umbrellas (a very good point).

If you subscribe to IRMI publications, you know about the extensive work we have done over the years in analyzing and comparing coverage under the various umbrella forms, and I wanted to remind you of this valuable resource. This information is provided in Commercial Liability Insurance. Early this year, we began a major overhaul of the umbrella discussions in this manual, rewriting most of them to reflect changes in the forms we've seen in recent years and reflecting on court decisions interpreting coverage. Nearly 300 legal citations have been added to this section of the manual to back up our analysis, comments, and conclusions. The discussions that haven't already been revised will be completed in the next supplement or two.

We also created a new comparison form on which we analyze various insurer umbrella forms. This year, some 15 new analyses have been added using the new format and many more will soon be included. You can use the discussions of umbrella language to help decipher provisions that you have trouble understanding, and you can use the policy form comparisons to evaluate and compare one insurer's policy to another's. In other words, this manual can help prevent errors and omissions in the sale or purchase of the most important policy for most organizations.

Frankly, there isn't a better source of information on umbrella liability insurance coverage issues than "Commercial Liability Insurance." It is hard to imagine why it wouldn't be consulted whenever an umbrella is bought or sold. If you subscribe, be sure to put it to use. If you do not subscribe, you can learn more.

Thank you for your trust and confidence.

Have a great day.

All the best,

Jack

Jack P. Gibson, CPCU, CRIS, ARM
President
IRMI

Risk Tip

Changing Patterns in Workplace Drug Abuse—What is the most commonly abused drug, other than alcohol, in your workplace?

If you guessed marijuana, you'd more than likely be wrong. Prescription painkillers and meth use has accelerated dramatically over the past few years. In 2004, for example, 2.4 million persons initiated nonmedical use of prescription painkillers, more than marijuana (2.1 million) and cocaine (1.0 million). Tracking first-time use is important as it sets trends for the years to come. Overall, an estimated 32 million Americans have used pain killers nonmedically in their lifetimes ... up from 29 million in 2002. Oxycontin (oxymorphone) is a drug of particular concern as well as Vicodin and other "brand names."

One last statistic: the National Highway Safety Transportation Agency recently posted the number one cause of large truck accidents: "driver error." And the number one associated factor: "prescription painkillers".

It's important to note that most "standard" urine drug tests as well as DOT and SAMHSA tests do not screen for oxycodone, oxymorphone, hydrocodone, or oxymorphone. This means they may not be in synch with "current" drug usage patterns in the United States. This should be an important consideration when choosing the drug screening vendor for your organization.

By: Peter Cholakis
Vice President, Avitar
Canton, MA

Suggest a Risk Tip. Send us a practical tip (less than 300 words) for identifying and managing risks, buying insurance, managing claims, or filling gaps in insurance coverages. Submit your tips. We'll acknowledge your contribution as we did for Peter.

What's New in Your IRMI Library

We have recently updated a number of the reference manuals in the IRMI library and published new issues of The Risk Report and Captive Insurance Company Reports. To make sure you don't miss any of this new information take 30 seconds to scan the "What's New" summary page.

For IRMI Online and Print Subscribers

For SilverPlume Sage subscribers

New Expert Commentary

There are now over 800 risk management and insurance articles on IRMI.com. Below you'll find summaries of some recent additions with links to the articles.

How To Make Friends with Your Reinsurer—In his commentary, Larry Schiffer discusses some ways that ceding companies maintain successful relationships with their reinsurers.
Deming's Point #11 as Applied to the Insurance Industry—John Pryor examines Dr. Edwards Deming's Point #11: Eliminate numerical quotas for the workforce . . . and for people in management.
Managing Construction Risk through Pre-Operational Planning—Peter Furst explains that the goal of preplanning is to reduce hazards, which will minimize disruption, increase efficiency, and lower costs.
Public Adjusters: Do Their Contracts Create Irrevocable, Enforceable Assignments?—Jay Levin explores why postloss assignments should be clearly expressed to eliminate any ambiguity about the extent and nature of the interest assigned.

Logistical Info for Construction Risk Conference Attendees

Are you heading to the IRMI Construction Risk Conference in San Diego? If you need to know what clothes to bring, what weather to expect, the hotel address or phone number, or have other questions about the conference, drop by this FAQs page on IRMI.com for answers.

Your View—Insurance versus Risk Management?

In IRMI Update 145, Editor Jack Gibson pondered the question of whether some businesses overly rely on insurance as a safeguard and, inadvertently or not, neglect risk management. Does insurance lull us into a false sense of security? Many reader comments were received on the subject, some of which are reproduced below.

I agree insurance does de-motivate clients to implement a sensible risk management plan, especially in the middle-market area. Some firms could realize significant savings and opportunities if they would simply pay attention to their exposures and manage them. Some clients are convinced it is prudent to insure down to low deductible levels so they can push off on carriers when there is a loss. This mindset disallows for vital safety and security programs to be implemented that could prevent the claims they have in the first place. If such programs were implemented, it would show the employees and other stakeholders they are serious about their business and are on the ball. Although there is not a straight line to the bottom line, I do believe it would impact it with lower insurance premiums and increased productivity. What I have found, typically, midsized accounts usually think risk management is for large firms. What is not being properly conveyed, to the midsized account, is they do have the same exposures, if not more.

—Angela McInerny, VP Business Div. & Risk Management Services, Swan & Sons-Morss Co., Inc., Elmira, NY
Prior to becoming a producer, I was risk manager at a large healthcare facility. We had been around for 50 years without any large claims. Risk management was something that was not much of a priority, except perhaps at the governance level. We then had a major auto accident. It was an extremely traumatic experience from which both the organization and I learned a great deal.

Now, as a producer I interact with dozens of clients and I see the same dynamic at work: risk management is something that in many organizations does not get the attention it deserves. I think this is due to a couple factors:

People have a difficult time dealing with the nature of risk. It is hard to allocate scarce resources to something of uncertain probability.
Most organizations will never experience a large claim and thus may never see the true value of risk management.

In this way, I do think that insurance takes the place of sound risk management because it is one risk management technique that people understand and it is one that works most of the time. This being said, I still hear people complain that the only reason they need insurance is because someone is requiring it of them. I try to use my experience to help them understand that nobody plans to have incidents and we all do our best to prevent them, but they still happen.

—Howard Kohler,
Stailey Insurance Corp., Denver, CO

I could not agree more. I have been teaching risk management, not insurance, for years. If you don't present insurance as the last and most expensive risk transfer method, the client does tend to fall asleep at the wheel.

—David Thornton, Owner,
Greater Lexington Insurance, Lexington, KY
Risk management is underrated across the board. There is a false perception that it's only for the Fortune 1000 companies. Every company of any size needs someone to be responsible for risk management and buying insurance should only be a small part of the picture. You do not need to hire an Associate in Risk Management designation to be responsible for this. Any intelligent individual that understands the company inside and out can take on the responsibility. If a company does not feel they have the appropriate personnel, then they need to find a good, qualified agent to help. Many insureds and agents do believe that once they pay the premium, the issue is handled, and this mentality is wrong. I think we as an industry need to educate our clients and the public better about what risk management is all about and how they can utilize the services they already have access to via their current agent or broker and insurance company. Insureds don't need to wait for the loss control rep to call them to make the annual visit, there are many more resources at their disposal.

—Donna McCormick, CPCU, AAI, AIS, CPIW, CRIS,
McCormick Insurance Agency, Las Vegas, NV

I do think insurance can lull owners, managers, supervisors, into ignoring or making bad decisions based on the insurance "safety net." But I have also seen owners implement many of the insurance company's loss control recommendations to prevent loss.

Bottom line: from my experience, it is across the board, but I always advise my clients that insurance is not the "holy grail," and that they are better off using as many other solutions that make financial sense as they can.

—Jim Sammons, Producer, Watkins Insurance Group, Austin, TX

Felix Kloman's denigration of insurance buying as "not true risk management" has a kernel of validity but overreaches. Ideally, insurance can be and should be the last line of defense in a risk management program—not the first. When blended with retention and loss control, insurance remains a sound risk management approach. The problem Kloman cites is not a failing of insurance—it is the failing of management to recognize that insurance complements risk management and isn't a substitute for it. Put differently, not every organization "falls asleep at the wheel" or takes a blasé attitude toward loss because it happens to be insured. It is fashionable to belittle insurance as a risk management tool, but the reality is that for many firms—especially small to medium-sized firms who have limited financial means to pursue retention—insurance is a bedrock.

—Kevin Quinley, Senior Vice President,
Medmarc Insurance Group, Chantilly, VA

Is purchasing insurance a drug? Are policyholders by extension on drugs? Are drugs the problem, or just the abuse of drugs? Whew! And I thought it was just going to be another "IRMI Update."

The question being asked I think is less legal and more of a moral responsibility issue. To put it another way, does purchasing, say, automobile insurance relieve one from driving safely? Of course, that answer is no. But on the other hand, there is no obligation to behave yourself. So if you apply the same logic, should insurance underwriters be settling claims for those who may perhaps misbehave? Or better yet, should we be developing new industry products that in exchange for a lower premium will pay only when the loss does not involve the mistake, negligence, or error of any given customer? That should be a cheap date so to speak.

On balance, the more sophisticated customer is probably going to see insurance as a risk financing technique. And the less sophisticated purchaser of insurance is going to be more likely to ignore the life safety and property risk management issues. In the brave new world we might create, would lie detector tests be a good risk evaluation technique, and an interview with all your past girlfriends be, how do you say, an effective method of risk evaluation?

However in answer the question, some people see the broader holistic issues, and some just like the reassuring sound of their pen writing a check for their premium. It's easier to punish bad behavior than to legislate good behavior. Life is just unfair.

—E. Bernard McGlynn, Jr., Director, Claims & Surety Services, Lewis-Chester Associates, Inc., Summit, NJ

I see where Felix Kloman is coming from, and this appears to be a CFO phenomenon. That's why it's so important that risk management and/or insurance should never fall under the responsibility of a finance/treasury department. I suppose that's one reason why the CRO position came about, as organizations should note the criticality of risk management and the importance it plays to it—hence, I am of the view that the CRO should report directly to the CEO or board.

I agree, insurance in most instances does remove motivation to improve risk management, and that's why a risk management expert (risk manager or CRO) should play a critical role in reviewing policy fine print, etc., and noting possible gaps. As you have rightfully mentioned, organizations should use insurance only for catastrophic loss purposes and not rely on it for its attritional day-to-day minor loss coverage purposes. This is where I think our financial friends have lost it!

Organizations should gradually increase retention levels as their risk portfolio increases in credibility, but I do not think this should happen as a result of market forces pressuring it to do so. Risk retentions should be the accountability of management, and this should be prioritized in any risk management meetings at the senior management level. Lower deductibles tend to only portray an organization's lack in confidence in its operational capabilities. The assumption of risks should move gradually upward, as risk management initiatives improve. This can take a while, depending how quickly these initiatives are achieved—insurance should not confuse risk management efforts and must only be dealt as a security and/or contingency if all systems go wrong (fortuitous) resulting in a catastrophic incident.

Yes, I agree that most companies should try to assume as much risk internally for the sake of better risk management—reliance on insurance should be kept to the minimum.

—Anil Kumar, Manager, Risk Management,
Titan Chemicals Corp., Malaysia

I think it goes deeper than buying insurance or not. It comes down to management's unwavering commitment to risk management. However, having seen both sides - before as a broker with insurance-buying clients of all sizes and now as a risk manager of a company that self-insures much of the risk - total company buy-in to risk management and a greater understanding of the total consequences of loss seems to correspond to buying less insurance.

—Todd Kixmoeller, Insurance Manager,
ELD-WEN, Inc., Klamath Falls, OR

Insurance should not lull you into a false sense of security. There are exclusions and limitations in the policy that may eliminate coverage. Like the old saying goes "Is it covered?—Depends, what is the size of the claim?"

Even if you believe everything is covered, you must still manage the risks involved. If you ignore losses or preventative measure available, you will soon have a high loss ratio on your insurance program, and there will be several issues that will arise. Where will your premiums be next year? Will your carrier renew? Will you be able to find coverage?

Companies should hire a risk professional who will be able to review the risks, insurance, or other transfer options available, deductible levels and the multitude of other variables to develop a comprehensive risk strategy.

—David Riggs, Insurance Specialist,
Asplundh Tree Expert Co., Willow Grove, PA

Does insurance sometimes remove the motivation to implement superior risk management programs? Yes, for some insureds. Have you ever seen an organization greatly improve its risk management program after deciding (or being forced by the market) to retain more risk? Yes, "responsible" insureds that have high deductibles or are self-insured are much more likely to be concerned with their business risk. Has the fact that a risk was insured ever led to a bad management decision by your firm (or your clients' firms)? In general, should most companies assume more risk than they do and then do a better job managing the risk they assume? It depends on the insured. What is their motivation to assume more risk? The threat of being dropped as an insured or socked with high insurance premiums can also be a deterrent to a cavalier attitude toward risk.

—Mark Hansen, Commercial Auto Claims Liaison,
Progressive Insurance, Cleveland, OH

How To Get IRMI Update E-mails

IRMI Update is sent to subscribers by plain text e-mail twice each month. To initiate your free subscription, use the e-mail registration form.

IRMI Update—Issue #146

In This Issue

Message from the Editor