Chapter 1 Introduction and the Risk Management Process

Review of commercial risk management process

Identify potential risk control solutions for a few risk exposures
Introduce different types of commercial property insurance policies

Four Types of Loss Exposures
Property
o Damages to property to which organization has a financial interest
Liability
o Third party seeking legal remedy against organization
Personnel
o Individual cannot be replaced depriving organization of their skills
Net income

Risk Management Process
1. Identify loss exposures
2. Analyze (measure) loss exposures
o Begins process for determining appropriate response to risks
3. Examine risk management alternatives
4. Select the appropriate technique
5. Implement the risk management technique
6. Monitor outcomes and revise program

Risk Management Techniques
Risk Control
Avoidance
Loss prevention
Loss reduction
Separation
Duplication
Diversification
Risk financing
Retention
Risk transfer


Risk Control Techniques
Risk control measures are designed to attack:
o The chain of events leading to loss
o The convergence of events that lead to loss
Most effective when targeted to:
o Specific perils (cause of loss)
o Specific hazards (conditions that increase frequency/severity of loss)
Two types of risk control approaches, both which highlight the need of risk management to study
perils
o Engineering approach reviews design
o Human behavior approach modifies behavior
Risk Management Example: Fire Risk Control Techniques
Attack the three elements of fire
o Initial source of heat (e.g., electrical, chemical),
o Oxygen, and
o Fuel
Risk management options
1. Separate heat from fuel (fire wall)
2. Reduce fuel sources (building contents) or choose less combustible construction material
o Wood frame, joisted masonry, noncombustible
3. Fire extinguishment methods (temporarily) cut off oxygen
o Internal or external fire protection

Theft Risk Control Techniques
Three types of theft
o Burglary is forced entry
o Robbery is use of force (or threat) against another
o Employee theft/embezzlement
Risk increases as:
o Value increases
o Size/weight decrease
o Liquidity increases

Risk Control Techniques: Other Perils
Technology requires up-to-date knowledge
Explosions are rapid combustion
o Explosion suppression systems
o Explosion of pressure vessels (steam boilers) are a risk for many companies
Windstorm, flood, and earthquakes
o Cannot control the source
o Building construction, design, and maintenance

Common Insurance Policy Formats
Despite best efforts to prevent losses through risk management programs, losses still occur
Insurance can be used a method for risk financing
Policy format refers to the structure/type of coverage for insureds
Line of business or line is a type of coverage
o Monoline policy has one specific type of insurance policy
o Multiline (or package) polices include several coverages
Insurers may also use standard or nonstandard forms
o Insurance Services Office (ISO) standardizes insurance contract language (some of these
are on the U: drive)
o Insurers and brokers also develop their own

Three Common Policy Formats
Commercial Package Policy (CPP)
Businessowners Policy (BOP)
Output policy
Commercial Package Policy (CPP)
Multiline policy, usually covering at least:
1. building and business personal property (BPP) and
2. commercial general liability (CGL)
Other coverages may be added as needed
Each coverage has its own:
o Declarations form (summary of insured & coverage)
o Coverage form (insuring agreements)
o Conditions and endorsements
CPP combines coverage forms for individual lines plus:
o Common declarations
o Common conditions

Businessowners Policy (BOP)
Multiline policy covering major property and liability issues faced by most small businesses
Analogous to homeowners
o Standardized coverages (unlike customization of CPP)
o Quick, automated underwriting decisions
Some insurers specialize by type of business (office, barber/beautician)

Output Policy
Instead of separating coverages in CPP, an output policy combines coverages under the one form
Often includes property and inland marine, needed during transportation of goods
Useful for manufacturing companies, or others with multiple locations

Common Policy Conditions
Common Policy Conditions are attached to every CPP and apply to all coverage parts to avoid
repetition
Six specific conditions qualify insurers promises
First named insured has a few more rights/responsibilities
1. Cancellation
o Insurer can cancel by notifying first named insured
o 10 day notification for nonpayment of premium
o 30 day notification for other reasons
o State law may require more time or list allowable reasons for cancelling
2. Changes condition
o (First) Insured can request changes through written endorsement
o Though not stated, verbal changes are generally binding
3. Examination of books and records up to 3 years after policy period
o Commercial insurance premiums are often based on self-reported sales, payroll,
inventory , etc.
4. Insurer has right to inspect the premises during policy period
o Determines insurability, rates, and risk control recommendations
o Insurer inspection does not constitute any legal/regulatory or safety inspection
5. First named insured is responsible for paying premiums and will receive any refunds
6. Insurance cannot be assigned to others, except upon death of first named insured

Commercial Property Conditions Form
In addition to common conditions for the overall CPP, each coverage part may its own conditions
Conditions may limit/expand coverage, explain the determination of loss payments, or place
requirements on parties
Property insurance (building and business personal property) conditions
1. Fraud or misrepresentation/concealment by insured will void coverage part
2. If insured had no control over property, insurance is not affected
3. Cannot collect double if two coverage parts apply to loss
4. If policyholder has complied with policy terms, they have two years to legally challenge an insurer
(from date of loss)
5. Liberalization
6. No benefit to bailee
o Insurer may subrogate if bailee causes loss
7. Other insurance
o Pro rata if other policy has same provisions and conditions
o Excess otherwise other insurance pays first
8. Policy period begins at 12:01am and the coverage territory is US, Canada, and Puerto Rico
o Property elsewhere is not covered
9. Policyholder will not hinder subrogation rights of insurer

Other-insurance Provisions
Prevents policyowners from collecting twice from insurance, which violates the principle of
indemnity
Pro rata liability shares losses based on the proportion of insurance relative to the total
Primary and excess insurance provision
o Certain policies are designated as primary until benefits are exhausted
o Remaining losses are picked up by excess policy

Other typical Conditions in Property Coverage
Other conditions may included in each coverage form
o In BPP, see Sections E (Loss Conditions) and F (Additional Conditions)
Valuation basis (determines the amount of loss payment)
o ACV at time of loss standard measure
o Replacement cost (no deduction for depreciation)
o Selling price (for manufactured goods)
Loss sharing provisions deductibles and coinsurance
Insureds duties in the event of a loss
o Notify insurer promptly
o Notify police if laws are broken (e.g., theft)
o Protection against further damage
o Inventory and inspection of property
o May also require: proof of loss statement and examination under oath

Deductibles
With a deductibles, first part of loss accepted by policyowner
Purposes:
o Eliminate handling costs of small claims which reduces premiums
o Also helps reduce moral and morale hazard
Types of deductibles
o Straight deductible (per occurrence) Insured pays for EACH and every loss (most
property coverages)
o Aggregate deductible Accumulates losses over a policy period
o Elimination (waiting) period A deductible stated in days used in business income
insurance (and health coverage)

Coinsurance Provision in Property Insurance
Insured may attempt to lower premium and buy less insurance
o Complete losses are rare
Coinsurance condition requires insured to carry insurance at least equal to a specified percentage of
value (insurance to value)
If coinsurance requirement is not met, insured shares in the loss
80% coinsurance is common, but higher coinsurance requirements get rate discount
NOTE: many ISO forms have examples of coinsurance

Other Property conditions
Appraisal clause is available if there is a dispute on loss payment
Insurer has options for loss payments
o Pay value of damaged property
o Pay repair/replacement costs
Reduced loss payments if buildings are vacant for 60 days
o A landlords building is vacant if 70% of space is not rented
o No coverage for broken glass, theft, vandalism, sprinkler leakage, water damage
o 15% reduction in payment for other perils
Mortgageholders (listed in the declarations page)
o Receive loss payments based on financial interest in property
o May still receive payment even if insurer denies insureds claim
Mortgageholder has responsibilities (pay premium, notify loss)
Similar protections available for other creditors through loss payable provision

Summary chapter 1
Review of the risk management process
Discuss some risk management methods such as risk control and risk financing
Describe the formats of commercial insurance policies
o Mono/multiline
o Standard/non-standard
o Examples: BOP, CPP, output policy
List the common policy conditions attached to CPPs
Describe other policy conditions mentioned in the BPP, including the coinsurance provision