IRMI Update
Risk Management & Insurance
Commentary, Tips, and Tactics
May 20, 2009 | Issue 206 | ISSN: 1530-7948
In This Issue
Colleague,
Business Insurance reported on March
23 that Marsh was in the process of asking its clients to agree to a $10 million
contractual limit on its professional liability exposure as part of the insurance
broker's own risk management program. Brian Duperreault, president and chief
executive officer of MMC, was quoted as saying, "We do stand behind our business,
but we are not the insurer of last resort."
Only time will tell if Marsh is successful in implementing this risk management
tactic. Regardless, including liability limitations in contracts makes sense
and probably should be a more prevalent risk management practice than it currently
is. Architects have used such limitations for decades, and it has become much
more common in other professional services contracts in recent years.
Additionally, a strong argument can be made that most contracts which require
one party to indemnify another for the other's sole or joint negligence should
include a cap on the amount of liability being transferred. It has become far
too prevalent for businesses and public entities with buying power to force
their smaller business partners to become, in essence, their insurers and to
do something no insurer would do—assume unlimited liability. These smaller firms
often do not understand the risks they are agreeing to cover and frequently
have inadequate insurance coverage or limits to fully respond to the risks they
are allocated.
Perhaps we should approach contractual risk transfer a bit differently, making
it a given that indemnity clauses will be capped at some level. The amount of
the cap would then become the bargaining issue rather than the extent of the
liability being transferred. Not only would such an approach be more equitable,
it would be simpler and result in a quantifiable exposure that the indemnitor
can more easily manage.
What do you think? Have businesses and public entities gone overboard in
allocating their liability to others? Should indemnity clauses be capped in
contracts? What about limitations of liability for errors and omissions, as
is common in professional services agreements? Will this become a prevalent
practice in the agency/brokerage community? Or will the competitive market for
brokerage services make it impossible to implement?
[See
reader
responses].
On a related topic, we will soon be kicking off a new webinar series,
Tips & Tactics: Managing Construction Contract Risks, which will feature
two of our most popular Construction Risk Conference speakers. In it, we provide
practical tactics and tips for use by project owners and contractors and their
brokers and underwriters. Sign up for the webinars individually (only $39 each)
or subscribe to the entire six-part series at a discount.
All the best,
Jack
Jack P. Gibson, CPCU, CRIS, ARM
President
International Risk Management Institute, Inc.
Risk Tip
Stock Market Turmoil Highlights Fiduciary Liability Risk
If you sponsor a retirement plan such as a 401(k) or 403(b) plan, always
be aware that the Employee Retirement Income Security Act (ERISA) imposes
significant responsibilities on anyone serving as a fiduciary for the plan,
with the threat of stiff civil penalties as an incentive to comply. This is
especially important to remember at a time when the stock market is in turmoil
and employees are checking their account balances anxiously.
Working with their investment advisers, plan fiduciaries should review the
status of all investment vehicles in their plan, including the rating of all
mutual funds, and document that review process even if no changes are warranted.
Fiduciary liability has expanded steadily over the past 2 decades through
a series of court decisions interpreting ERISA. Despite all precautions, plan
sponsors can be vulnerable to allegations of "wrongful acts" under ERISA and,
at a minimum, incur the cost of defending themselves. Fiduciary liability insurance
is designed to protect against this risk exposure. A related insurance coverage,
employee benefits liability, protects against allegations of an error or omission
in the actual administration of a benefits plan. Your insurance broker can provide
information.
For employers who automatically enroll their employees in 401(k) or 403(b)
defined-contribution retirement plans, the Labor Department's 2007 final regulations
on "qualified default investment choices" under the Pension Protection Act of
2006 can be useful. By sticking to the qualified defaults for employees who
do not direct their own investments, employers now are protected from fiduciary
liability under Section 404 (c) of ERISA. The qualified default investment choices
are: "life-cycle" funds, in which the asset mix is adjusted to reflect the number
of years until the employee's expected retirement; balanced stock/bond funds;
and professionally managed accounts—a diversified portfolio managed by an outside
adviser.
By: William Henry, Vice President
The CIMA Companies,
Inc.
Alexandria, VA
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What's New in Your IRMI Library
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The Atlantic hurricane season will officially begin on June 1. While most
of the experts are predicting a slightly milder season than last year, it is
still expected to be worse than average with 4-8 hurricanes. Whether for businesses
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from storm surge and update your catastrophe plans before the first storm hits.
For personal lines accounts, be sure to review the flood insurance discussion
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IRMI Featured Education Event
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IRMI is proud to present a series of six webinars, covering pre-contractual
risks, specialized contract terms, indemnity, contractual liability coverage,
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