IRMI Update—Issue #146
An E-mail Newsletter for Risk and Insurance Professionals
ISSN: 1530-7948
October 4, 2006
In This Issue
Colleague,
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
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.
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
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.
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.
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.
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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
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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:
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People have a difficult time dealing with the nature of risk. It
is hard to allocate scarce resources to something of uncertain probability.
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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
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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
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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
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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
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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
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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, JELD-WEN, Inc.,
Klamath Falls, OR
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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
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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
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