Insurance


In the United States we take water for granted.    We turn the tap, open the valve, punch the button and water flows out to meet whatever the demand is.  Not only do we expect the water to come on demand, but we have high expectations for the quality of the water.   When the water doesn’t meet the stringent requirements demanded by government for public safety, the supplier is faced with a potential mountain of cost that runs the gambit of medical coverage for people getting sick, to clean up and production losses, litigation expense and damage to both the providers brand and the customers it provides.  If the provider is smart, they have build back up systems for the back up systems, developed contingency plans for natural and man made disasters and tested both the systems and plans to make sure that everything works according to plan.  Additionally these plans are periodically reviewed to make sure that there are no new systems, technology and/or threats that should be addressed.

Water providers will also look to see how the risks they face can be minimized or transferred as well.  The newest transfer method is through Water Resiliance Insurance offered by AON.   The program is geared to water utility companies and provides not only traditional contaminants insurance, but also forensic analyses, cleaning and flushing of the water system, transportation costs, employee overtime and for third party financial losses.  The first policy was written in for Anglian Water recently.

It’s good to remember that our usable water was not so protected.  In the 1800′s the  water used for the city was usually drawn from a source up river from the sewage treatment area, or the town itself to provide protection from the sewage that entered the water down river.  Unfortunately down river was another town that practiced the same process.    Unsafe and contaminated water was the norm, not the exception. 

In many areas, clean and safe drinking water is the exception.  Managing Business Risk is joining with other bloggers today through blogactionday.change.org  to promote the United Nations efforts to bring clean, safe water to millions of individuals where it is not currently available.  Please join me in supporting this worthwhile cause and sign the petition.

Change.org|Start Petition

Last week the Illinois Supreme court ruled that a law passed in 2005 by state congress could not establish liability caps  limits for pain and suffering damages.  The overturned law capped the the amount for this portion of settlement to $500,000 or $1,000,000 for a doctor and a hospital respectfully.

The law was passed to curb the rising costs of medical liability in the state due to large “discretionary” settlements awarded by juries.  The court held that the cap violated the “separation of powers” doctrine by establishing limits to awards the judges feel appropriate in these types of cases.

My concern over this ruling is the wide ranging impact a decision like this has on the overall health costs and quality of care.   

  1. With the removal of the cap, the insurance company or medical professional will be subject to greater risk via larger potential cost in a law suit. 
  2. In order to offset this risk, a greater reward is required to fund the “pool” of money that must be available to pay for these types of claims. 
  3. To fund the pool (or pay the insurance premium) the costs for Dr. visits, procedures, hospital stays, tests, etc. will increase.
  4. To remove hints of impropriety, or improper medical treatment, more tests will be generated to validate the diagnosis.
  5. More tests lead to more medical charges.
  6. An increase in medical charges, leads to increased medical costs to insurance companies, employers and employees, and the associated increase in consumer goods to pay for the increased medical costs.
  7. Higher costs could limit the number of medical professionals in the state due to the high cost of establishing a practice.

I might be wrong, but the 2005 law reminds me of the Worker’s Compensation (WC)  coverage.  With WC an injury or death is covered at a set amount as established by a state board.  The coverage is provided by the company for the employee and if the employee is hurt while working, the insurance coverage kicks in.  For this coverage, the employee may not sue the employer and the employer may not terminate the employee.

This process makes sense to me.  The programs were established to protect the worker from unjust treatment, and to hold the employer accountable during work hours and unsafe working conditions.  It even protects the employees from those “oops” or “aw shucks”  where they ignore safety rules or make a stupid mistake and get hurt.

The Worker’s Compensation program has been doing an excellent job for a number of years and has helped to keep costs down.  Perhaps it’s time to expand the model to the medical insurance program. 

While I agree we should be limiting the costs associated with malpractice claims, I also think that the medical field should be held to accountable and a national board be established to review credentials, and make sure these professionals remain current and be certified and that the certification must be renewed on a regular basis.

If there is one benefit from the real estate bust that occurred over the past year and a half, it is that the cost for replacing your home of business may have gone down.   While it would affect your total assets, it could drive your property insurance costs down.

There are typically three different ways to look at property value:

  1. Market value - the amount of money you can expect to receive when selling the property under the current market conditions.
  2. Replacement value – the cost to replace any of the structures should a total loss occur.
  3. Use value – the amount of income your company would lose if the structure became uninhabitable or unusable for a set period.

Property insurance is based on the value of the structures on your property and the cost to replace them.  You might ask h0w this is different than the purchase price or estimated selling price?  The important factor is the value of the land.  Land will not burn up, blow away and with the exception of erosion if you are on the bank of a stream or lake will not be lost in a flood, so you have a foundation to rebuild on, or funds from a sale of the land.

With the implosion of the real estate market, it is possible that the value of your property has dropped, and you may be over insuring your property.   This could have occurred because the property was improperly valued initially (based on market value rather than replacement value), established an incorrect modifier to determine replacement value, or incorrectly estimating inflation modifiers when renewing the insurance programs over the course of several years.

In order to be sure that you are being properly covered, I suggest you have an appraisal completed on your property.  The small cost of having a certified commercial property appraiser can be recouped in reduced premiums, and proper coverage in the even there is a claim.

The property appraiser will be able to provide information on the Market and Replacement values.  These values go directly towards the true value of the property as well as the repair or replacement costs associated with to the structure.

The Usage value is something that would be identified by your organization and depending on the role of the structure can be part of your business continuity program, or a separate policy/program to replace rental income generated from the structure if the building was leased to others.

Please note that Personal Property such as copiers, computers, phones, and desks  is different from Real Property that the basic property package coverage and, while it may be rolled into the entire package, requires a separate declared value.

Once you have completed a certified appraisal, you will probably want to continue with this practice every 3 – 5 years.  This will make sure your coverage keeps pace with actual costs, and reduce the risk negative impact from co-insurance clauses in the event of incorrectly valuing the replacement costs to low.

Next Page »