risk report: november 2012
DESCRIPTION
Workplace and Risk Management Topics aimed at business owners, managers and other organizational leadersTRANSCRIPT
with Henriott Group, Inc. Workplace and Risk Management topics aimed at business owners,
managers and other organizational leaders.
NO
VEM
BER
20
12
"Image courtesy of Evgeni Dinev/http://www.freedigitalphotos.net
Henriott
News & Updates
New photography display
Save the Date! December
19th - Business After Hours
Risk Transfer: the insurance game of
“Hot Potato”
The ABC’s of Indemnity
Agreements & Additional
Insured Endorsements
Additional Insured Status
ALERT!!!
MOD Changes
Understanding Primary-Excess Split
Upcoming Changes
How This Affects You
By Rick Davis , C IC , CRM CEO at Henr iott Group, Inc.
One area where businesses “stick their neck out” frequently is entering into
contracts, purchase orders, leases and similar agreements. Examples include
the purchase and installation of equipment, hiring subcontractors,
outsourcing certain business processes/services and many more. While
entering into agreements like this is a common business practice, assessing
the risk placed on the business as a result of these arrangements is not as
common.
The concept of Risk Transfer really can feel like a game of hot potato, but
there is a rationale behind it. From a risk management standpoint, we don’t
want to assume liability or exposure for someone else’s actions if we don’t
have to. It’s through the review and negotiation of contracts and
agreements, along with supporting insurance documentation, that this
important “game” of risk-transfer is played out. Perhaps an example might
help bring this point home:
Company A outsources part of its manufacturing process to Company
B who applies a special coating or paint to Company A’s component
which is then incorporated into Company A’s final product. A month
later, Company A begins to receive complaints about the
performance of their product and determines the cause of the defect
to be the coating process performed by Company B. Without proper
Risk Transfer (including a hold harmless/indemnity agreement,
additional insured status and a certificate of insurance on file),
Company A could be on the hook for the claim, defense costs, time
and hassle of resolving the claim, etc.
Examples like this demonstrate the importance or good risk-transfer practices
to ensure that your organization is attempting, whenever possible, to limit your
exposure to things you can control. We’ve included below some key points
with regard to contractual language you will likely come across as you enter
into agreements with third parties as well as some info on Additional Insured
endorsements. More to come next month on how to win, or at least not lose,
at the game of insurance “hot potato”!
The ABCs of Indemnity Agreements & Additional Insured Endorsements
1. Limited - obligates the indemnitor (the
party paying compensation) to hold
harmless the indemnitee (the party
receiving compensation) only for the
indemnitor’s own negligence.
2. Intermediate - obligates the
indemnitor to hold harmless the
indemnitee for all liability except that
which arises out of the indemnitee’s
sole negligence.
3. Broad form - obligates the indemnitor
to hold harmless for all liabilities,
including the indemnitee’s
negligence.
Understanding your business’s risk
exposures is the cornerstone to
managing them. Whether your
business relies on outside vendors to
provide goods and services, or you’re
a provider of goods and services to
your clients, you should be aware of
how to take contractual precautions
to protect your business against
potential losses or damages. An
indemnity agreement secured by an
additional insured endorsement is a
risk-transfer tool that can help insulate
your business from potential risks.
It is a common practice to enter into
contractual agreements with those
involved in a project to formalize the
terms and responsibilities for all parties.
These contracts often include an
indemnity agreement, also known as
a hold harmless agreement, as a
means to transfer the risk of future
losses or damages from one party to
another.
There are basically three kinds of
indemnity or hold harmless clauses
typically contained in contracts.
Risk Transfer | Rick Davis
Image courtesy of stuart miles/freedigitalphotos.net
To support the terms of the
indemnity agreement, the
contract will often include
insurance requirements.
These spell out the
insurance required by the
various parties entering into
the contract. It is common
for one party to include
another as an additional
insured under its
Commercial General
Liability (CGL) policy. For
example, owners or general
contractors of construction
projects commonly require
those who are actively
involved in the project
operations, such as
subcontractors, to sign a
contract and name them
as an additional insured on
their CGL policy to limit their
liability for damages
caused by the
subcontractor.
Carefully review the indemnity agreement prior to finalizing the contract to
determine the extent of your company’s liability. Once the scope is
understood, you may want to negotiate the terms to limit your exposure.
The application and enforcement of an indemnification agreement does,
however, depend upon the statutory and common law of the jurisdiction in
which enforcement is sought.
When reviewing the insurance requirements section of a contract, pay particular attention to the additional insured requirements. There are numerous additional insured endorsements. The specific additional insured endorsement, required in the contract, must be reviewed in order to determine the scope of coverage.
The Insurance Services Office (ISO) released new additional insured endorsements in 2004. The intent of the endorsements is to provide liability coverage for additional insureds (typically the general contractor or project owner) with respect to damages caused by the named insured (subcontractor). The endorsements do not provide coverage for the additional insured’s sole negligence, but they can provide coverage for the additional insured’s contributory negligence. Make sure that the actual additional insured endorsement satisfies contract requirements.
Additional insured status
Risk Transfer | Rick Davis
What’s in a name?
Don’t be confused—additional insured coverage is different than “additional named insured” coverage. An additional named insured usually is an affiliate of the primary insured. You will not be able to add or be added as an additional named insured. If this is part of the contract, it should be removed.
Understanding your coverage
Understanding the terms of the contract, the extent of liability assumed in the indemnity agreement, and the insurance requirements—including the coverage provided or afforded by the additional insured endorsement—are critical to minimizing future liabilities and exposure to losses.
Keep in mind, the liability assumed in the indemnification agreement of the contract can be broader than the coverage provided under the additional insured endorsement. A comparison of the two should be done to determine what is covered by insurance and what is not.
Image courtesy of stuart miles/freedigitalphotos.net
How Does This Affect My
Organization?
Whether your mod increases or decreases
will depend on whether you have an
above or below average number of losses
under the split point. If most of your losses
are under $5,000, you are likely to see a
decrease in your mod. If many of your
losses exceed $5,000, you should prepare
for an increase in your mod.
Analysts expect the split point change to
result in a wider range of mods across
each industry. Debit mods (those over 1.0)
will tend to gain points; credit mods (those
under 1.0) will more than likely see a
decrease in points. Furthermore, many
employers will see their minimum mod, or
loss-free rating, decrease.
The National Council on Compensation Insurance (NCCI) recently announced its plan to make a change in the experience rating formula. The primary-excess split point will be increased over a three-year transition period. The first stage of the transition will take effect with each state’s approved rate and loss cost filing on or after Jan. 1, 2013.
Understanding Primary-Excess Split In the experience rating process, each loss is divided into a primary and excess portion. Currently, the first $5,000 of every loss is allocated as a primary loss, with everything over and above considered an excess loss. In the experience rating process, each loss is divided into a primary and excess portion. Currently, the first $5,000 of every loss is allocated as a primary loss, with everything over and above considered an excess loss. Primary losses are used as an indicator of frequency, and are counted in full as part of the mod calculation. Conversely, excess losses receive partial weight in the mod calculation. This means that primary losses affect the mod more than excess losses do. The rationale behind assessing primary and excess loss amounts is that “severity follows frequency,” or in other words, an organization that displays a continual pattern of loss has an increased chance of a severe loss in the future. Thus, a company with a large number of primary losses will have a higher mod than a company with the same amount of losses split between primary and excess.
Image courtesy of Vlado/freedigitalphotos.net
The Latest … Henriott News & Highlights
We are happy to tell you about our new artist, who is currently displaying her work in our office. Her name is Cheryl Kaldahl of Kaldahl Fine Art. Based on scientific research, Kaldahl has created an extraordinary series linking the colors used in a painting to specific musical tones and emotions., thus simultaneously creating an original painting and its musical score for a specific emotion/mood.
If you stop by our office, you can scan her QR code and listen to the music while viewing her collection.
Business After Hours On December 19th we are hosting Business After Hours for Greater Lafayette Commerce. If you’re in the area, please stop by from 5-7pm. Cheryl Kaldahl, our featured artist, will be demonstrating her unique technique of painting to music. Please stop by to visit us and experience Cheryl’s work.
Stay Up-To-Date With Us Check out our website blog series for real-life claims or lawsuits that we hear about in our work and make us sit back and say…C’Mon Man…Really?! Did you know that we also issue monthly reports for Employee Benefits and Personal Insurance? For a preview of these, click the following links!
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