And Now… Businesses Must Also Attend to Reactive Risk Management

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The prior article in this series addressed the role and value of proactive risk management for businesses. 1 That piece made the case it is well worth the time, talent, and treasure {money} to incorporate and implement regular and routine {pre-scheduled} operating systems {using checklists} based upon a never-ending learning curve to prevent loss and damages from occurring and, when it does occur, to do so on a mitigated basis.

Now, imagine that despite implemented preventive measures risk has gone wrong anyway. There has been a loss and damages incurred.

There was a brief side-note in last week’s article that a fundamental element of a proper proactive risk management plan is consideration and inclusion, as well, of reactive risk management. That is, to attend to the results of risk gone awry after-the-fact. In other words, to get out the ‘big mop’ to clean-up the mess.

First, a premise. It is acceptable as a matter of public policy to shift risk onto another party who is willing and able to assume that risk. The most common version of risk-shifting is insurance. Moving past the premise, and somewhat back to the domain of proactive risk management, a well-devised proactive risk management plan should include risk-shifting elements such as property and liability insurance.

Insurance serves to protect one’s own and third-parties’ identified insurable interests, whether those be things or human lives. This is very common in business. Think, for example, of building or vehicle insurance to protect against the financial implications of physical damage, destruction, or in certain cases theft. This is, effectively, inwardly protective insurance. Think further of insurance to protect others injured on or as the result of the use of that same property. This is effectively outwardly protective insurance. In all cases, insurance is a specific type of contract between the business and the insurance carrier.

There are three basic steps for a business to obtain insurance:

  • The business desiring insurance protection (again, to shift at least some of its risk away from itself to an insurance company willing to consider taking on that risk) must submit an insurance application. It is critical to note that an insurance application contains statements upon which the insurance company will rely when it decides to accept a risk, so applications must be complete and must be truthful. To do otherwise could result in a claim of insurance fraud against the applicant, with a minimum denial of coverage if a loss actually transpires.
  • The insurance company next underwrites the potential risk to be on-boarded by analyzing the application, conducting other research about the insurable interest and the party to be insured, and engaging in other due diligence. NOTES: (1) It is acceptable for an insurance company to reject an insurance application, provided it does not do so for an illegal, discriminatory purpose such as ‘red-lining’. (2) To further spread risk, an insurance company can reinsure insurable interests it undertakes, which allows it to increase its operating reserves and continue issuing new insurance policies.
  • Once the insurance company has decided to cover an applicant and its insurable interest, the price to assume that risk is calculated by actuaries using longitudinal studies and algorithms intended to quantify the value of the risk (plus, of course, a share of the insurance company’s other operating expenses and profit). This is the premium businesses holding insurance policies pay. ANOTHER NOTE: An insurance company can also impose other boundaries on an issued policy such as limits of coverage, deductibles, and co-payment amounts.

Once a loss has occurred there are three separate steps for a business to respond given its insurance coverage:

  • Initially the business can self-assess the claimed loss to determine its bona fides and if it is better in its interest to pay for the cost of that loss out-of-pocket without involving the insurance company. These claims management activities apply to all loss scenarios, with direct payments made for legitimate small-dollar claims. YET ANOTHER NOTE: Be sure to get liability releases and waivers related to the loss being paid.
  • If the loss is of a sufficient nature or amount to merit referral to its insurance company, that carrier will then step-in to investigate and adjust the cause, the basis of coverage, and the amount of loss to be covered (after application of the contractually established financial limits). The insurance company will then decide whether to cover the loss (or to defend a lawsuit related to that loss) and, if so, how much it will pay. (Again, obtaining its own release and waiver, sometimes referring its payment to an applicable reinsurer for reimbursement, and sometimes also seeking reimbursement {subrogation} from the party it determines caused the loss.) It is altogether possible the insurer can decide to reject a claim, which is permissible if not done in bad faith.
  • On a return-loop basis, the insurance company will then add the information it gleans about the claim, loss, and payment to its algorithmic database generally and to decisions about whether to continue covering the particular policy holder and its insurable interest and for what ongoing premium.

Proactive risk management policies, practices, and procedures can be observed, absorbed, and adapted from the ecospace within which one works and the overall environment, whether directly germane to one’s business or not.

What the introduction to this article did not mention is that insurance is one form of reactive risk management. There is another hybrid proactive/reactive form of risk management. Which will form the basis of the next piece in this series. 2

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1 https://www.boginmunns.com/engage-risk-management/
2 This writer will be traveling next week, so it will be two weeks until this mysterious third way will be revealed…

– For more information, call Philip N. Kabler of the Gainesville, FL office of Bogin, Munns & Munns at 352.332.7688, where he practices in the areas of business, banking, real estate, and equine law. He has taught business and real estate law courses at the University of Florida Levin College of Law and Warrington College of Business Administration. And is now the President-Elect of the Eighth Judicial Circuit Bar Association.

NOTICE: The article above is not intended to serve as legal advice, and you should not rely on it as such. It is offered only as general information. You should consult with a duly licensed attorney regarding your Florida legal matter, as every situation is unique. Please know that merely reading this article, subscribing to this blog, or otherwise contacting Bogin, Munns & Munns does not establish an attorney-client relationship with our firm. Should you seek legal representation from Bogin, Munns & Munns, any such representation must first be agreed to by the firm and confirmed in a written agreement.

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