1 2017 FALL CONFERENCE H I L T ON COLUMBUS P OLARIS Columbus, Ohio October 13, 2017 RISK MANAGEMENT ARE YOU MANAGING RISK? or ARE YOU LETTING IT MANAGE YOU? No matter what you do for a living, we all have an exposure to risk or the uncertainty which can arise from a given set of circumstances. This presentation will be delivered in four (4) short sessions that will focus on the following: THE PRINCIPLES OF RISK MANAGEMENT CASE STUDIES IN RISK MANAGEMENT CASUALTY OR LIABILITY INSURANCE STUDIES OF PROFESSIONAL LIABILITY CLAIMS Robert H. Cooper, Jr., C.I.C., C.R.M. Certified Insurance Counselor Certified Risk Manager Rob is the founding Principal of R. H. COOPER & COMPANY, LLC; an independent insurance brokerage dedicated to serving the unique insurance and risk management needs of Architects, Engineers, Land Surveyors, and all Real Estate and Title professionals. He is a graduate of the United States Merchant Marine Academy at Kings Point, New York, served on active duty with the United States Coast Guard, has worked in the insurance industry for over thirty years, and earned the advanced professional designations of Certified Insurance Counselor (C.I.C.) and Certified Risk Manager (C.R.M.). He has written a number of articles on Surety Bonds, Insurance, and Risk Management, and has been invited to speak at professional trade association meetings. He can be reached by telephone at 614-761-8808 or at rhcooperjr@rhcooperandcompany.com.
2 T H E P R I N C I P L E S O F R I S K M A N A G E M E N T W H A T I S R I S K M A N A G E M E N T? Risk Management is commonly described as a process of protecting an organization s assets by Identifying the exposures which could lead to loss, Analyzing the potential impact the exposures could create, Controlling the exposures with strategies, Financing the losses which can occur, and then Implementing a system to monitor and manage the risk management process. For purposes of managing risk, an Exposure is generally considered a situation, practice, or condition that may lead to an adverse financial consequence which can affect an activity, people, or assets. Perils are considered an event that causes a loss. Hazards are considered conditions within an Exposure which could lead to a loss.
3 R I S K I D E N T I F I C A T I O N This is a process of identifying and examining exposures to an organization which can affect Property, Human Resources, Liability, and Net Income. Some of the more common methods of identifying exposures are: physical inspections, reviewing policies and procedures, reviewing insurance policies, reviewing contract documents, analyzing financial statements, analyzing loss data, compliance reviews, or talking with experts. CASE STUDY A newly licensed Surveyor has decided to begin his practice and operate as a Sole Proprietor. While the opportunities for his professional services have been slow in developing, he was contacted by a large general contractor who wants to engage him for the construction staking of a waste water treatment facility which is scheduled to be constructed in a nearby state. The Surveyor knows that he has limited experience; but, his business has been slow in developing and he agrees to accept the offer of engagement. WHAT ARE THE EXPOSURES?
4 R I S K A N A L Y S I S This is a process of analyzing the financial impact various exposures can have on an organization by considering a variety of factors; such as, appetite for risk, long term objectives, growth mode, stability of your company and market, competition, public image, safety concerns, social responsibilities, and regulatory requirements. CASE STUDY A company engaged in the practice of providing Surveying and Engineering services has experienced a decline in revenue and new business opportunities. There has also been a change in the industry with increased competition that is offering lower fees. A group of similar professionals have discussed adjusting their fees, and the company decides to change its fee structure in order to compete and survive. WHAT CAN BE THE FINANCIAL IMPACT?
5 R I S K C O N T R O L This is a process of minimizing at an optimal cost the probability, frequency, severity, and unpredictability of a loss. There are five (5) techniques to controlling risk; namely, avoidance, prevention, reduction, segregation / separation / duplication, and transfer. CASE STUDY An engineering company has been favored with more work than it can possibly handle. The staff is working six days a week and many times in excess of ten hours each day. Clients have pressed for the engagements to complete sooner than the initially scheduled dates. And, more work, with an increased scope and higher fees, is under consideration in which the company could be potentially asked to undertake without a written contract WHAT CONTROLS CAN BE CONSIDERED?
6 R I S K F I N A N C I N G This is a process of acquiring internal or external funds in order to pay for losses at the most favorable cost. The more common approaches to financing a loss are as follows: developing internal funds through planned budgeting of expenses and capital, developing external funding by implementing risk transfer strategies and or purchasing insurance. CASE STUDY A surveying company was contacted and asked to provide services for a major construction project which would result in the billing of significant fees. The Principal of the company has not been a fan of purchasing insurance; so, he has decided over the years to maintain minimum limits of coverage. Unfortunately, he has viewed Professional Liability insurance as nothing but a deep pocket for others to try and access. He has also not typically used a Professional Services Agreement; so, he has typically entered into engagements without one and has even relied on a contract provided by the Client. HOW CAN THIS RISK BE FINANCED?
7 R I S K A D M I N I S T R A T I O N This entails implementing a plan to monitor and manage the risk management process. Among other things, it requires a commitment by the owner(s) or senior management, a formal program for assignment of responsibility and accountability, effective communication, training, and a system for regular evaluation with providing feedback and making appropriate adjustments. The following are basic tenets or guidelines for managing risk: Don t retain more than you can afford to lose. Don t risk a lot for a small reward. Consider the likelihood of events and their potential impact. Don t treat insurance as a substitute for risk control. There is no such thing as an uninsured loss. It is really nothing more than loss retention. An effective risk management program uses at least one risk control technique and one financing technique for each identified exposure. Utilize techniques of risk avoidance, prevention, and reduction before relying on insurance. KEY FOLLOW UP POINTS OF ACTION
8 CASUALTY OR LIABILITY INSURANCE WHAT IS THE PURPOSE OF A COMMERCIAL GENERAL LIABILITY INSURANCE POLICY? A standard COMMERCIAL GENERAL LIABILITY insurance policy is designed to pay on behalf of the Insured those sums in excess of an applicable deductible which it becomes legally obligated to pay for claim expenses and or damages from a claim for Bodily Injury and or Property Damages which arise from the premises of the Insured or from its operations, products, or completed operations which includes advertising and personal injury. WHAT IS THE PURPOSE OF A CYBER LIABILITY INSURANCE POLICY? A standard CYBER LIABILITY insurance policy is designed to pay on behalf of the Insured those sums in excess of an applicable deductible which it becomes legally obligated to pay from a breach of personal information. In addition, the policies will insure a variety of expenses which include: forensics to determine what happened, damages to third parties, notification costs, credit monitoring, costs to defend claims by state regulators, fines and penalties, the loss from identify theft, the liability from website media content as well as the exposures from business interruption, data loss and destruction, computer fraud, funds transfer loss, and cyber extortion.
9 PROFESSIONAL LIABILITY INSURANCE WHAT IS THE PURPOSE OF A PROFESSIONAL LIABILITY INSURANCE POLICY? A PROFESSIONAL LIABILITY insurance policy is an instrument to finance a loss which can result from a wrongful act in the course of rendering professional services. The policy is designed to pay on behalf of the Insured those sums in excess of the deductible and or retention which it becomes legally obligated to pay for claim expenses and or damages from a claim which arises from a wrongful act that is committed by the Insured or on behalf of the Insured while rendering professional services on or after the retroactive date and reported to the Insurer during the policy period or during an applicable extended reporting period. SELECTING THE RIGHT INSURANCE BROKER THE INSURANCE BROKER It is important to select an insurance Broker which understands your profession and (a) has an established expertise and reputation; (b) has access to several insurance markets; (c) understands your unique exposures; (d) has a known reputation for integrity and reliability; and (e) is an effective communicator, advocate, and risk management counselor.
10 SELECTING THE RIGHT INSURANCE COMPANY THE INSURANCE COMPANY It is important to select an insurance company which (a) has a proven commitment to serving your profession; (b) is financially strong and stable as measured by ratings established by A. M. Best Company, Inc.; (c) is licensed by the insurance department for the state in which you conduct business; (d) has a proven record of strong claims handling services as measured by ratings that are published by Standard and Poors ; (e) offers risk management services and support; and (f) offers an insurance policy which is tailored to your profession with broad coverages and supplementary payments. THE COMPLETION OF AN INSURANCE APPLICATION It is important to carefully prepare the application for insurance because the statements and representations will be relied upon by the insurance underwriter and will become a part of the policy. The application can also be used as an educational resource to highlight certain risk management practices which should be followed. It can also serve to help the applicant better understand what risk management strategies should be implemented if they are not currently being followed.
11 YOU HAVE A DUTY TO READ YOUR POLICY! The courts have ruled that an Insured has a duty to read its insurance policy and to ask questions if coverages or exclusions are not understood. The typical PROFESSIONAL LIABILITY insurance policy is composed of a Declarations Page and the actual policy form which will include the following: (a) Insuring Agreement; (b) Definitions; (c) Exclusions; (d) Limits of Liability; and (e) Duties of the Insured. There will also be a mutual understanding set by the Insured and Insurer for the handling of Defense and addressing a Settlement offer. UNDERSTANDING KEY POLICY TERMS AND QUESTIONS TO ASK Is the policy form Claims-Made or Claims-Made and Reported or Occurrence? Does the policy pay on behalf of or indemnify an Insured? Who is considered an Insured? Read the definition in the policy. What are the covered Professional Services? Read the definition in the policy.
12 Know the Effective and Expiration date of coverage and the significance of 12:01 a.m. Know and guard your Retro Active date for covering Prior Acts. Does the Insurer have a Duty to Defend? What are the terms which govern Consent to Settle? Is there a Hammer Clause? And, what does it really mean? Are Claim Expenses a part of or in addition to the Limits of Liability? Is First Dollar Defense available? What does this mean and do you share in the loss by paying a Deductible or Retention? And, what is the difference between these two terms? Are Risk Management Incentives available? (For example, will the Insurer assist with mediation, address a Subpoena, or provide legal counsel in advance of a claim?) Is there coverage for Independent Contractors? What is your Vicarious Liability exposure?
13 Is there coverage for Innocent Insureds? Does the policy offer any Supplementary Payments? What are Your Duties in the event of an Incident or actual Claim? How is a Claim defined? Do you understand the Process of Filing a Claim? If not, be sure you ask. What is the Territory for covering your professional services? What are the Automatic and Optional Extended Reporting Period arrangements? Is there an endorsement for excluding Prior or Pending Litigation? How does the policy treat a claim for Bodily Injury or Property Damage or a Pollution Incident? How will your Insurer respond to a request from your Client to be listed as an Additional Insured?
14 CASE SITUATION FOR DISCUSSION TOP-NOTCH SURVEYING & ENGINEERING, LLC was formed ten (10) years ago by Mr. J. R. Top-Notch who is a licensed Professional Engineer (P.E.) and Professional Surveyor (P.S.). He recently learned that Hilton Hotels and Resorts has engaged the service of a large General Contractor to construct a new Conference Hotel and that his firm is being asked to provide a proposal for the construction staking and related civil engineering services. After submitting a proposal, Mr. Top-Notch is awarded a contract from the construction company and learns, for the first time, that there are extensive insurance requirements with which he must comply. The most notable requirement is that he needs to provide evidence that he maintains a Professional Liability insurance policy. So, Mr. Top-Notch decides to ask his insurance agent to review the proposed contract, provide comments on all of the insurance requirements and risk transfer language, and help him procure a Professional Liability insurance policy. While waiting for a response from his Broker, Mr. Top-Notch agrees to a request from the General Contractor to begin work. What potential issues does Mr. Top- Notch have by agreeing to quickly begin his engagement before hearing back from his insurance agent? KEY POINTS TO CONSIDER
15 A STUDY OF PROFESSIONAL LIABILITY CLAIMS THE CLAIM HANDLING PROCESS ANTICIPATE A CLAIM The first indication that a professional liability claim might be made against your firm often comes before an official demand for money or services alleging your negligence. If you suspect a claim might be filed, do not wait but contact your Broker and Insurer. USE PRE-CLAIM ASSISTANCE A dispute can happen and dissatisfied clients will often try to reach into a deep pocket to solve real or perceived problems. The use of a pre-claim assistance program that is provided by the insurance company can be like preventative medicine. REPORTING A CLAIM A Claim is generally defined as a demand for money or services. When a claim is received, it should be discussed with your Broker and reported to the insurance company in writing. The written report should include the following: (a) your firm s name and address; (b) your policy number; (c) the date, time, and location of the situation; (d) a brief description of the allegation against you; (e) the name of the individual or entity which is making the claim against you; (f) the amount of the demand, if known; (g) a copy of any lawsuit papers, letters or legal proceedings relative to the claim ; and (h) a copy of any underlying contract or Professional Services Agreement. DEFENDING A CLAIM: THE INITIAL RESPONSE Upon receiving the written filing of a claim, the insurance company will assign an adjustor who will respond with a letter to acknowledge receipt of the claim. The letter will usually disclose a Claim Number which will be used for future referenced purposes.
16 DEFENDING A CLAIM: THE FOLLOWING RESPONSE After the initial contact, the adjustor may wish to speak with the Insured which will serve to help the adjustor determine if there is an obligation of the insurer to respond to the claim. The adjustor will also determine whether legal counsel needs to be assigned. The adjustor will usually follow with a formal letter, on behalf of the Insurer, that outlines the initial determination that the Insurer has an obligation to respond. The letter will also include a reservation of rights statement by the Insurer to change its determination if information subsequently develops to support changing its position. AFTER COUNSEL IS ASSIGNED Once counsel is assigned, the Insured will have more contact with legal counsel then with the adjustor. There could be a need for the discovery of more information, written interrogatories may be initiated, and depositions may be scheduled. This could be a lengthy process which depends largely on the circumstances of the claim. The Insurer will also likely forward an Invoice for the deductible if one needs to be paid. ARBITRATION Legal counsel will also work closely with the claims adjustor in order to determine whether there is a need for arbitration or mediation. And, the claims adjustor will likely work to determine whether there is any merit to support the negotiation of a settlement. SETTLEMENT OR TRIAL If the adjustor believes that it is in the best interest of the Insurer and Insured to settle, then it will deliver a written offer to the Insured. If the Insured decides that it does not wish to settle, then the adjustor may formally outline the conditions under which it will continue to process the claim; but, the Insurer may seek to limit its liability in the form of a statement which is commonly considered a Hammer Clause. If the claim is not resolved, then it will likely continue on the path to a trial date while claim expenses continue to accrue. In most cases, it is reasonable to expect that all parties will agree to negotiate terms for a settlement in order to avoid a trial. And, when there is a settlement, it is important to obtain a Release from Any Further Liability.
17 CLAIM STUDY NO. 1 After finally procuring a Professional Liability insurance policy, TOP-NOTCH SURVEYING & ENGINEERING, LLC was retained by a local home building company to stake the footings for the construction of the basement of a new home. In the course of going through his calculations, Mr. Top Notch miscalculated the depth and communicated the measurements to the builder who then retained a contractor to begin the excavation. After the excavator finished his work, the builder began to lay the footers. Before the walls could be poured, one of the crew members for Mr. Top Notch thought the depth seemed unusually shallow; so, he mentioned it to Mr. Top Notch who visited the project site and agreed that something seemed wrong. When he stood in the basement, he could clearly see that the basement floor was only three feet below grade; so, Mr. Top Notch reviewed his calculations and noticed that he made a mistake. The footers needed to be placed another six feet deeper. Mr. Top Notch mentioned his mistake to the builder, and it was agreed that Mr. Top Notch would indemnify the builder for the extra cost to re-excavate. The final cost for this claim was $16,000.00 in which the Insurer paid $6,000.00 and Mr. Top-Notch paid $10,000.00 which was his deductible. ADDITIONAL POINTS AND COMMENTS
18 CLAIM STUDY NO. 2 It was not long after TOP-NOTCH SURVEYING & ENGINEERING, LLC settled the claim with a local home building company that it was invited to provide the staking for the construction of two new homes which would be on identical size adjacent lots. When one of the surveyors for Mr. Top Notch measured the front and rear set back lines, he placed the construction stakings so the basements on each lot could then be constructed. A local excavator was retained and the basements were prepared for the pouring of the concrete walls. While the walls were setting, the Project Manager noticed one morning from the front street that each home appeared to be set too far off the front line and too close to the rear of the property. He contacted Mr. Top Notch who visited the project site with his surveyor who provided the construction stakings. Upon further review and rechecking of the calculations, Mr. Top Notch determined that the initial measurements were inadvertently reversed which caused the basements to be misplaced. Mr. Top Notch admitted the error and agreed to indemnify the builder for the extra cost to correct the location of the basements. Fortunately, the builder was able to work with the excavator to re-excavate just the front and rear walls. The concrete walls were then poured and the cost to resolve the error was less then what it could have been. In the end, the final cost for this claim was $18,000.00 in which the Insurer paid $8,000.00 and Mr. Top-Notch paid $10,000.00 which again was his deductible. ADDITIONAL POINTS AND COMMENTS
19 CLAIM STUDY NO. 3 TOP-NOTCH SURVEYING & ENGINEERING, LLC ( Top Notch ) went on to provide surveying services for a shopping center expansion which included the staking out of two (2) new buildings. Shortly after construction began, it was discovered that the new structure was incorrectly placed about thirty (30) feet west of where it should have been located. The error would have resulted in the loss of parking spaces for an office supply store and would have created accessibility problems. Footings, foundation walls, and the concrete slab had to be demolished, and the building had to be relocated. As a result, the project owner filed a claim for delays and extras in the amount of $656,000. While Top Notch accepted responsibility for the miscalculation, it also pointed out that the drawings provided by the architect were ambiguous and incomplete. According to Mr. Top Notch, the drawings contained only two (2) fixed reference points in lieu of three. To properly place the building, a third fixed point should have been provided. Without the third point for reference, the building could have been placed in more than one location; thus, the building was misplaced. The architect argued, however, that a third fixed point had been given to Top Notch in a telephone conversation; but, the surveyor failed to document the conversation accordingly. Top Notch had, in fact, failed to document this critical issue, and the information was never transferred to the field. Defense counsel for Top Notch believed that the case could have been defended by highlighting the fact that if the architect would have provided the drawings with three (3) fixed points, the building could have been properly placed. It could have been also argued, however, that the surveyor failed to perform its services according to the standard of care. A prudent surveyor would not have staked out a building without a third fixed point. After several negotiations, the claim settled with the Insurer paying $362,500 in indemnity and more than $25,000 in defense cost while Top Notch paid its deductible of $10,000. WHAT IS THE LOSS RATIO FOR TOP NOTCH For illustration purposes, the annual premium for the Professional Liability insurance was $25,000, $37,500, and $41,250 over a three (3) year period. The total incurred losses from the three (3) claims were $16,000, $18,000, and $397,500. What is the three (3) year loss ratio? And, why is a Loss Ratio important?
20 RECOMMENDATIONS TO AVOID CLAIMS