This piece published by James Leach of the Insurance Specialty Group, explores the challenges many investors need to be aware of in taking over finished and unfinished property in 2011.  As the opportunities in this market accelerate, so do the risks.  With our larger clients we’ve seen an increased awareness in the importance of risk evaluation.  

This piece answers questions such as:

• Do banks’ current insurance programs provide comprehensive liability protection for construction defect claims and related litigation?
• Should a bank have a residential project finished by the low bidder?
• Can a bank sell property “as is” and escape liability exposure?
• Does a bank have a legal duty to maximize the value of real estate owned (REO) for the bank’s shareholders and note-holders?

Being informed and proactive in the protection of your assets ensures their value and the success of your investments.  Our firm provides a suite of services to REO investment teams – let us know if you have questions.

The risk manager often feels limited in relying on the insurance carrier or the broker/ agent for the information needed to fulfill this charge. For instance, if an agent or broker lacks construction industry experience, or is unfamiliar with the risks and/or loss exposures associated with a specific class of business, it is difficult for an owner to obtain an optimal result.

Many insurance agents and brokers are generalists. Therefore, owners should be more proactive in selecting a qualified insurance or risk management professional that can recommend and structure a comprehensive risk management program that covers all of their risks and loss exposures. This will significantly reduce the potential of any coverage gaps or coverage duplications.

Do your homework.  Be sure that the firm you are relying on is a qualified, credible source that will provide your business unbiased data and guide you through the insurance audit.

Your insurance audit should begin with an evaluation of the effectiveness and extent of your current insurance programs with a review of the following areas:

• Protection afforded
• Adequacy of limits
• Cost competitiveness

Specifically, look for insurance coverage gaps, coverage duplications, as well as cost inefficiencies that are sometimes hidden within insurance policies.

In addition to analyzing your current insurance program, you may also elect to evaluate your insurance carrier and broker on the following aspects:

• Quality and effectiveness of service
• Cost fairness and fee/commission structure

Following an analysis, request a report of the findings, conclusions and actionable recommendations.  Some firms may also be available to guide you through the next steps – the request for proposal (RFP) and broker selection process.

years in light of undisclosed fees and commissions.

Insurance brokers/agents are compensated by insurance companies. As

vendors/salespeople of insurance policies, brokers/agents have a fiduciary

responsibility to the insurer which means they represent the interest of insurers

and the client. Representing both parties interests can be complicated and

murky. Full time risk managers of large organizations spend at least 50% of

their time managing their insurance brokers/agents. Who is managing this for

your organization?

Understanding how to manage your broker/agent including their compensation

requires substantive business knowledge of the insurance industry. As

outsourced risk managers, we utilize proprietary strategies to tie broker/agent

compensation to services provided.

What an Independent Risk Manager can do for you:

Policy Review

Our clients do not employ specialists on staff who are capable of reviewing

insurance policy language nor do they have the interest or time to request for

timely policy issuance. We review policies to ensure they match broker/agent

quotes and follows up with brokers/agents for timely receipt of all insurance

documentation.

Process Management

Our clients have online access and receive monthly correspondence with

respect to ongoing projects an outstanding documents from the broker/agent.

We set up a broker/agent services calendar, implementation plan, and an

ongoing independent evaluation of broker/agent performance as measured

against a scorecard.

Relationships

We assist your broker/agent with strategy for shopping insurers and offer our

clients transparency in the multi-layered workings of the insurance marketplace

while using personal relationships to achieve optimum market access and

consideration.

Portland Business Journal – October 27, 2006 by Sean Meyers Special to the Business Journal

Should your business conduct a formal risk assessment?

In its simplest form, a business risk assessment is committing to paper what has already swirled around in your head for years. “Every business has a different risk profile. You should always ask yourself, ‘What keeps me up at night?’ What’s the worst exposure to loss that we have, and would it cripple the business if it happened?” says Scott McElroy of McElroy Risk Advisors in Portland.

A risk assessment means different things to different officers of the company. A chief financial officer, especially in a company with any outside investors, must constantly analyze threats to operating cash flow. As attractive as return rates on some riskier investments might seem, the CFO’s job is to keep the patient breathing at all costs.

The firm’s information technology officer looks at threats to the company’s data. Should a backup server be purchased? How strong is the firewall? Where best to spend the department’s limited funding? What’s the plan in the event of a catastrophic loss of data? Will the company be sued if there is a gross defect in software sold to the public?

The human resources manager works to prevent the possibility of an employee-driven lawsuit regarding unfair labor practices. The safety officer prevents lawsuits by minimizing the risk of bodily injury to employees or clients.

But what’s really driving the business risk assessment industry in the United States today are product and quality control managers and their relationship to the insurance industry, says McElroy. Insurance companies are understandably tired of paying out claims for customers who were killed or injured using a poorly made product, and they’re refusing to insure companies that don’t adequately address potential risks to the public.

So it’s no coincidence that when you set about to get a business risk assessment for your company, you’ll find that many of those assessors — we hope you’re sitting down for this one — also sell insurance that will help offset that risk.

That can be a problem on two levels, says McElroy.

“There are a lot of great insurance agents out there who will give you good advice on managing risk. But they often are compensated by commission, and that commission generally increases in proportion to increases in the premium. When you ask an agent how much insurance you’re going to need to offset a certain risk, of course they’re going to give you a higher number.”

Second, insurance isn’t the answer to all risk. Some risk cannot be assumed. Given the precarious nature of entrepreneurship in the United States, it’s safe to say that the average business owner is not only comfortable in the cold arms of risk, but has, at various times through the early stages of the company, put on a lampshade and partied with risk all night long.

The only person who can adequately define insurable risk verses uninsurable risk is the business owner.

Most small companies don’t survive a catastrophic event such as a fire or a flood even when they have insurance, McElroy points out.

“If your IT manager isn’t backing up the company’s data every week, insurance money isn’t going to get you up and running again when the system crashes.”

An alternative to adding insurance might be to subcontract portions of your workload out to other companies, or sharing risk directly with a supplier or distributor through a contract, or getting an IT manager that actually backs up data when they’re supposed to, says McElroy.

Another option is to assume all the possible consequences of a certain risk.

The insurance company has, after all, assessed the risk of insuring your risk, and has every intention of receiving more in premiums than it will pay out in claims.

McElroy is an independent risk consultant, which means he gets paid by the client, not by an insurer.

There are only a handful of companies in the United States doing exactly what he does, McElroy believes.

He typically works with companies with 50 to 500 employees and from $10 million to $100 million in sales.

McElroy conducts on-site inspections of the business and meets with key players across all divisions of the company. “Risk management is enterprise-wide.”

A substantial portion of what he does is to audit insurance policies.

“I find a lot of holes in insurance policies,” he says. “Companies sometimes trade dollars with the insurance broker foolishly.”

For example, a lot of companies keep a low deductible on outdated equipment they’ve paid off and have no intention of ever making a small claim on, he says.

Whether your company conducts its own risk assessment or seeks an outside consultant, don’t make the mistake of shelving it after the process is completed, advises McElroy.

“People think, ‘Great, I’ve done this. Now I can move on to the next thing.’ But risk assessment is an ongoing process, and you need to keep updating your plan so that it’s current if you ever need

it.”

Many businesses, especially those in residential and commercial construction, outsource work to a number of subcontractors or vendors. In order to shield themselves from liability for work done by a subcontractor or vendor, businesses need to hold certificates of insurance proving that their subcontractors or vendors have adequate insurance.

In fact, some insurance companies now require their customers to provide proof that they are in possession of their subcontractors’ and vendors’ certificates of insurance and are tracking their compliance of specific requirements, such as adequate coverage levels, additional insured endorsements, expiration dates, and more. If these requirements are not met, a business assumes the risk of its subcontractors and vendors, and it could adversely affect that business’ insurability.

Not only can the tracking process be quite complex, it can also be very cumbersome and expensive to administer. We have the solution to your certificate tracking needs: RightCertTM.

RightCertTM is a completely outsourced certificate tracking solution. With RightCertTM, certificates are tracked for all required coverages, additional insured endorsements, CG Forms, expiration dates, and more. The RightCertTM database creates specific automated deficiency reports to track and meet requirements and deadlines. We perform all follow-up with subcontractors and their brokers. For our clients’ convenience, all data and certificates are available via our secured extranet website.