There have been a number of articles in newspapers and other publications
recently describing horrific liability
incidents involving pallet operations. These have included reports about trespassing children and adults crushed to death by falling pallets, pallets breaking and injuring persons and property, and vehicle accidents.
How far does a business have to go
to protect itself against liability losses and guard against the rising cost of liability insurance?
One way to work toward protecting against liability losses is to review your company’s exposures and develop a risk management program.
The first step in developing a risk management program is identifying your exposures to loss. The review of these exposures should include evaluating the probability of occurrence as well as the severity of the potential loss. Developing the list of exposure should involve input from various team members to encourage creative evaluation. Once the list has been completed, exposures should be ranked according to probability of occurrence and likely severity of loss.
For example, the most probable liability occurrence to your company would be an automobile accident involving a company vehicle. The severity of the accident would vary as to the type of vehicles used for company business; logically, the larger the vehicle the more likelihood of personal injury or property damage. Also, the larger the fleet of vehicles, the greater the exposure.
Another possible exposure is injury or damage caused by a falling pallet. The severity of an accident and resulting injury may vary depending on how high pallets are normally stacked, whether employees wear hardhats and other protective equipment, and other factors.
Once the exposures have been identified and assessed, risk control techniques should be developed that will guide how your business approaches each one. Techniques include exposure avoidance, loss prevention, loss reduction, and contractual transfers of losses to others.
Exposure avoidance is the elimination of any possibility of a particular loss. As an example, insurance underwriters perceive that recycled pallets have a higher risk of failure, and it is reflected in higher premiums for liability coverage. You may decide to eliminate that higher risk of liability by supplying only new pallets.
Loss prevention aims to reduce the
frequency of a particular loss. For example, if your company has been experiencing a high frequency of automobile accidents, you may decide to limit access to company vehicles and-or reduce the number of vehicles. Fewer vehicles on the road and fewer miles driven will result in fewer accidents.
Loss reduction aims to lower the severity of a particular loss. For example, to help reduce the severity of automobile accidents, driver training programs and strict speed limit enforcement programs could be put into place. Reducing the impact speeds of accidents as well as training employees how to react defensively in order to minimize loss to persons and property will reduce the number of high cost losses.
Finally, the contractual transfer of losses to others is a transfer of legal and financial responsibility for a particular loss. The aim of this technique is not to reduce the probability or severity of a particular loss, but rather to shift the burden to another party. For example, your business may have a large trucking fleet to haul lumber and deliver pallets.
Instead of assuming the liability risk
of transporting lumber and pallets on company trucks, you can transfer it by contracting the trucking operations to a third party.
Deciding on the techniques to control your loss exposures is very specific to each business. The use of a risk manager, either as an internal member of your management team or contracted independently for consultation, can be pivotal to the development of a risk management program. Some insurance agents operate very effectively as risk managers to their clients while others do not.
In order to avoid the possibility of uninsured losses as well as reducing the probability of being misclassified and over-charged by your insurance carrier, a comprehensive risk analysis should be performed every three years. This can be as simple as completing a checklist detailing how your company’s operations have changed, such as the discontinuation of particular operations, the broadening of the scope of operations, participation in joint ventures, and the addition of other partners or formation of sister companies where crossover of liability may exist.
Most insurance programs are renewed annually based on assumption of risk made by the insurance company for years prior. Mistakes in the underwriting material can be costly to your company.
Once an evaluation of exposures has been completed and techniques for controlling risks are established, your business should evaluate available risk financing techniques. The smaller the organization, the fewer the options available to alternative risk financing.
Typical pallet manufacturers only have guaranteed cost programs made available to them through standard insurance carriers. In the case of smaller organizations, it is important to review what liability class codes are being employed in the rating of your operations. Misclassified exposures can be costly. It is also helpful to request deductible options. A quick analysis of five years of losses can quickly demonstrated what — if any — saving in premium versus increase in financial risk can benefit your organization.
Medium-sized organizations have a few additional risk finances options available to them. Group captive insurance programs are a form of collective self-
insurance and can greatly reduce your total cost of risk.
The prerequisites of most group captives are $150,000 in combined automobile liability, general liability, and workers compensation premium, five years of good loss history, as well as strong financials.
The group captive programs are typically structured in three tiers. The first tier is the level of losses the participating company will fund — for example, $75,000. The second tier is the layer of losses shared with all the other participants in the program, say $75,000 to $300,000. Any losses that exceed the upper limit would be covered by reinsurance. Group captive programs would fit an organization with an appetite for great risk assumption and strong financials.
Finally, larger companies can select to self-insure, assuming the maximum amount of risk with the assumption that they can accurately predict and minimize their losses year to year.
The objective of any sound risk control program is to maximize benefits while minimizing costs. Evaluating the body of risks your business accepts for purposes of increased profitability is helpful in planning for growth and reducing your total cost of risk. No organization can plan for or safeguard completely against all losses, but calculated risk assumption along with sound risk financing (guaranteed cost insurance programs, group captive insurance programs, and self-insurance programs) can be essential elements to maximizing growth and profit rather than a line item commodity that increases tens of percentages year to year.
