Before You Buy Insurance, Consider a Risk Assessment

Many companies buy insurance out of habit, often renewing policies with little or no consideration—unless the premium goes up. But as businesses grow and change, so do their risks. And as the legal environment evolves, policies sometimes change without business owners realizing it. If buying insurance has become automatic, it may be time to consider a risk assessment.

What exactly is a risk assessment? When done correctly, it is a comprehensive analysis of your organization, designed to identify the risks that are unique to your business and to determine whether your existing insurance and risk management programs adequately address those risks.

Assessing the Insurance Program

To accurately assess your insurance program, your broker and lawyer should start by gaining a thorough understanding of your business. They should also be familiar with the types of losses other businesses are experiencing, the types of policies available to respond to them and the ways in which insurance companies are responding to such losses.

Once your broker and lawyer understand your business, they should turn their attention to your existing insurance policies. Do they cover your specific risks? Are the limits of coverage adequate? (Too much coverage wastes money, while too little coverage may leave you exposed for anything catastrophic.) Are there risks for which you think you are covered but, in fact, are not? Are there insurance policies available to you through your contractual relationships? Are there conflicts in coverage or unnecessary overlaps? Knowing the answers to these questions can help you spend your risk management dollars more efficiently.

Your broker or lawyer can also help you identify whether your risk profile is suitable for alternative risk management strategies, such as joining a risk retention group or setting up a captive risk entity.

The Right Policies with the Right Terms

Insurance policies are contracts, and the law treats them that way. The important thing is not necessarily what you think your policy covers or what you've been told it covers. Instead, it is the words on the paper—and how the courts in the various states in which you operate interpret those words—that most often control.

This is perhaps where your broker and lawyer can provide the greatest value. Serving as your risk management advocates, they can advise you on the policies to buy and the endorsements to request that will best match your risk profile. They can identify any confusing conditions that warrant clarification, as well as overly broad exclusions that could be narrowed. They also know what types of policies are available to cover specific categories of risk based on

  1. An individual's status (e.g., directors' and officers' personal liability for decisions made on behalf of a company)

  2. What a person does for a living (e.g., the risks from errors and omissions arising from one's profession or business)

  3. Certain assets (e.g., the risks of infringement of intangible assets, or damage to professional reputation)

  4. Certain events (e.g., a product recall)

Assessing the Risk Management Program

Although insurance is a critical element of any risk management program, a good risk assessment will also examine your corporate policies and procedures. Well-conceived and reliably implemented policies and procedures can go a long way towards preventing loss.

For example, good employment policies can reduce the risk of employment-related claims for sexual harassment, wrongful termination and other similar issues. A well-designed safety program can limit the risk of workplace accidents, which will lower the cost of workers' compensation insurance. Good accounting policies can reduce the risk of loss from employee dishonesty. Likewise, a program that allows employees to report financial concerns, without fear of retaliation, can minimize the risk of exposure related to Sarbanes-Oxley. Collectively, these kinds of programs can also make your company a more attractive risk to insurance companies, which may ultimately result in lower premiums and a higher quality of coverage.

Risk Assessments Can Save Money

There are many ways a thorough risk assessment can save money. By helping you get the coverage you need—with the right terms and conditions—you may avoid gaps and overlaps in coverage, both of which waste resources. By negotiating for clear policy language, you reduce the risk of a dispute with your insurance company over coverage and increase the likelihood of obtaining a recovery without a costly court battle. By identifying where you have coverage through your contractual arrangements, you may be able to save money on premiums. You may also reduce the risk of having to wait for coverage while two or more insurance companies fight over which one is supposed to cover you. Furthermore, a good risk assessment can save you money by helping you improve your company's compliance, governance and safety practices, which can reduce the risk of having a claim in the first place.

In the same way that obtaining credit and raising capital are critical aspects of growing a business, managing and transferring risk are essential elements of your success. All too frequently, however, businesses view risk management as a cost without an upside (unless there is a loss, in which case collecting from the insurance company is often seen as a hassle). But a good risk management program can protect your balance sheet, which leads to greater flexibility to develop and grow your business. Getting there begins with a comprehensive risk assessment. Working together, your broker and lawyer can be a valuable part of that process.

Neil Posner successfully counsels his clients on the complexities of buying and maintaining insurance, and using insurance as part of an overall risk-management program. Chair of the firm’s Policyholders' Insurance Coverage group, Neil focuses on insurance recovery and dispute resolution, risk management, loss prevention and cost containment. His clients include public and private companies, organizations, boards of directors, individual officers and other policyholders.

This article contains material of general interest and should not be construed as legal advice or a legal opinion on any specific facts or circumstances. Under applicable rules of professional conduct, this content may be regarded as attorney advertising.