By Matthew Reitz, originally published in Rochester Business Journal on March 13, 2019.
Analyzing Risk and Buying Proper Coverage Key Task for Managers
Assessing and managing risks is an important part of any business endeavor, but without any one-size-fits-all approach it can be a difficult task for many companies to shoulder, especially in an ever-changing world.
Risk management is the assessment and calculation of financial risk along with the recognition of any potential actions to avoid or minimize their impacts. Assessing risks is part of managing any business, from legal obligations such as workers’ compensation, disability and health insurances to cybersecurity and a variety of other insurances.
Jim Mickles, a principal with Walsh Duffield Insurance Cos., said assessing the needs of a business typically starts with “statutory,” or mandated, coverages, such as workers’ compensation and disability insurance. With very few exceptions, employers must carry workers’compensation and disability insurance for all employees.
In addition to the legally required insurances, many businesses must provide health insurance to employees and may be forced by a landlord or through other contracts to carry general liability and/or automobile insurance.
When first considering managing risk, Bond Benefits Consulting CEO Erick Bond Sr. said employers should consider each area in which they’re exposed that could have a significant impact on their business or financial health.
“It’s really doing an assessment of where you have exposure,” Bond said. “That’s really the first step. Once you know where you have exposure you can decide how to deal with that. Maybe you need to change a practice, maybe you need to insure that risk, or maybe it doesn’t make sense to do a certain thing.”
The right amount of insurance can vary greatly for different companies and individuals, according to Bond, who said companies have different risk profiles. Using professionals to help assess risks is a good thing to do, Bond said, noting insurance professionals can help, but accountants and attorneys can also weigh in on financial and legal risks as well.
“You need to balance the risk vs. the reward and you need to keep in mind the fact that when you’re buying insurance you’re really buying peace of mind,” Bond said. “If you can be comfortable with the risk and have a lower premium and assume more of that risk that’s probably a good place.”
Business owners should be searching for an adviser rather than strictly purchasing insurance products, Mickles said. He said an adviser can help ensure the right choices are made by asking the right questions and minimizing costs.
“One of the things when you talk about risk management is that you don’t want to have somebody think they have to buy insurance for every single thing out there,” he said, noting when managing risks it’s important to talk to experts about the best ways to protect one’s self because there’s no way to insure all potential claims or protect against every possible financial obligation.
Mickles said first and foremost business owners, and individuals for that matter, should be seeking to protect against catastrophes.
“If you’ve got $100,000 of liability insurance on your automobile and you get in an accident and sued for $3 million — that’s what I’m talking about as a catastrophe,” he said.
Businesses must find a balance between what they can afford in monthly or yearly premiums and what a reasonable deductible might be in order to find cost effective insurance options.
For businesses that do choose an insurance policy with a higher deductible, Mickles said one potential option is to purchase an umbrella policy with the savings. Umbrella policies are additional liability insurance designed to protect holders from major claims and lawsuits not covered, or covered in full, under other policies.
Mickles said risk management doesn’t only apply to the property side of things, but also the benefits and health insurance side of business.
“When you talk about health insurance, especially in today’s day and age, it’s a huge, huge cost for a lot of businesses and if you can find ways to lower their costs and provide risk management expertise in that area you’re helping that client along the lines of staying in business and remaining profitable,” Mickles said.
Bond, who described his Pittsford-based company as an employee benefits consulting firm, called risk management an integral part of the company’s business, adding insurance is built on that concept.
In looking at risk management on the health insurance side, Bond said companies must balance what they want to spend on health care, how much risk they want to hold and what it will take to attract and retain employees.
Understanding what your risks are the first step in the process, Bond said, adding customers must be comfortable with their exposure.
Employers also must know what the risks are from a regulatory perspective, Bond said, noting there are a lot of issues around benefits and human resources. Employers of a certain size are required to offer insurance coverage or could be subject to penalties, Bond said, and the employers must also communicate the benefits properly and give proper notices to employees.
To be successful in business, Bond said you must seek to integrate risk management into everyday business practices, rather than approaching it as a separate entity.
Bond pointed to data protection in his own business, something that is “an ongoing process.” Bond said the company has to incorporate data protection into “everything we do to make sure the data is protected and not exposed to unforeseen risks.”
Due in large part to high-profile data breaches in recent years, there’s an entirely new area of insurance products, Bond said, noting there are protections available that not only provide insurance but educational resources.
Mickles says in addition to cyber-insurance products there are a handful of other policies businesses should consider, some of which have become more prevalent in recent years, including professional liability, or malpractice, insurance and employment practices liability insurance.
Employment practices liability insurance can cover sexual harassment, wrongful termination and other workplace or employment issues, Mickles said, adding the policies have become much more prevalent due to an uptick in lawsuits related to racism, ageism and sexism in the workplace.
Bond said sexual harassment training is a related form of managing risk and integrating risk management into business practices. With all employers in New York now mandated to offer sexual harassment training, Bond said his company provides such training and offers an online service.
“It’s a good thing for employers to do because by having the training the occurrences should be less,” Bond said. “But also by having the training it also limits your liability should you ever have an event because you’ve done all the steps you’re required to do.”
Another area in which managing risks enters the business world is in contracts, according to Richard Marinaccio, a partner with Phillips Lytle LLP, who advises small-, medium- and large-size companies on various types of commercial contracts.
“The allocation of risk is obviously a big part of that,” Marinaccio said of commercial contracts.
Contracts are an important way to protect your interests and rights, Marinaccio said, but it’s equally important to know about the company with which you’re entering into a contract.
Marinaccio said there are always negotiations to discuss how risk is allocated between parties in a contract, and those could often include requirements to carry liability or other insurances. Marinaccio said, however, that smaller companies often do not have the leverage to shift risk to a larger company.
Contracts are ubiquitous in business dealings and our personal lives, but as a company more scrutiny should be placed on contracts before entering an agreement. Though business owners likely understand the business terms and other portions of a contract, Marinaccio said lawyers should be consulted to better understand how risk is being allocated in contracts and other terms.
“Every company has contracts and really should be examining those to understand how risk is being allocated between the parties,” Marinaccio said.
Matthew Reitz is a Rochester-area freelancer writer.