RISKY BUSINESS PLANNING TO CONTROL EXPOSURES AND CUT INSURANCE COSTS

In the past, associations have relied on the traditional method of insurance purchase to manage their risks of accidental loss. Today the condition of the insurance market is causing boards to sit up and take notice, wondering if there is anything they can do to reduce their costs. How often has your association taken measures such as:

• repairing damaged pavement surfaces

• performing regular inspections of roofs, gutters, fences, laundry equipment air

• conditioning equipment storage spaces

• restricting the use of alcohol on association premises?

• restricting the use of swimming pools by unaccompanied children?

These are just a few preventive steps that boards regularly take without realizing that they are applying risk management techniques to minimize insurance claims and hopefully control insurance premiums in the future. If practicing risk management unconsciously yields positive results, think how much better off an association would be if it implemented a formal risk management program.

The goal of risk management is to protect an association's assets by reducing potential for loss. To achieve this goal an association must build a risk management program that includes four basic steps:

1. identifying the risk

2. measuring the potential impact

3. developing a program to treat the risk

4. establishing a system to monitor and control the results.

The first step in a formal risk management program is to identify the risks. The objective is to recognize potential hazards prior to a loss in order to take preventive measures. The most common technique is a physical inspection of the premises. All members of the association can become part of the risk management team by reporting any conditions they have observed which could result in a loss: slip and fall, fire, vandalism, water damage, personal assault, automobile accident, etc. This informal process, of course, should be supplemented by a formal walk-through inspection on a periodic basis. Often insurance carriers offer this service and can provide checklists for follow-up use.

Each contract for services or plan for new activities should be reviewed carefully to determine if an association has accepted any additional risks (ones they may not want). For instance, the lily pond placed in the center green or canal running along a perimeter property line may create a hazard for young children. Something as simple as re-reading the minutes of your last board meeting may reveal a previously unidentified risk. Could a branch fall and hurt someone while a tree trimmer is performing his service? More importantly, will the tree trimmer take full responsibility or can the association be held responsible as well (for the negligent supervision of this contractor)?

An analysis of the association’s legal agreements is an important part of identifying risks. The documents may answer questions about who is responsible, who has the risk, and how has this risk been managed? A review of financial statements or budget might uncover additional risks to be evaluated; owned real and personal property, association dues receivable, guest fees receivable, lease payment on equipment, rental income, or expense for services performed in units.

• During the process of identification keep in mind four major areas of exposure:

• Damage to or loss of property

• Loss of net income

• Loss to personnel

• Liability claims (arising from bodily injury, property damage or professional acts)

A careful review of these four categories during the process of identification will help thoroughly analyze all kinds of property and casualty risks your association faces. Particular notice should be paid to potential sources of third party liability - situations when primary fault lies with someone else. The aggregate value of an association’s ability to raise money from the members could make the association an attractive target for those seeking compensation for injury suffered on association property, regardless of who was at fault.

MEASURE AND CLASSIFY THE POTENTIAL RISKS

The impact of mishaps on your association’s assets depends on two factors - frequency and severity Frequency loss is a term used to identify those recurring events commonly expected as part of the risk of owning property or conducting business. The size of most frequency losses is usually predictable; in fact, an insurance policy’s deductible is usually created to eliminate these claims against the policy. Damage to sheetrock from a faulty water pipe system or grafitti painted on a block wall forming a perimeter fence are examples of frequency, type losses.

Severity of loss refers to events that are catastrophic in nature, which occur rarely and are usually predictable in size or type, such as an earthquake or the crash of an airplane into your complex. Measurement is important because it helps you focus on the best technique to choose in treating the risk. Frequency type risks are susceptible to a wide range of preventive measures; but for severe risks your choice is basically limited to insurance or taking your chances. In addition, to assess the potential severity of an adverse happening, the associations must consider both the immediate and long-range impact.

DEVELOPING A PROGRAM TO TREAT THE RISK

A simple way to classify the techniques available to treat risks is to break them into two major categories: risk control and risk financing:

Risk Control applies to loss prevention and control methods which reduce the potential impact of losses - either by reducing frequency or severity. Typical programs might include: vehicle safety programs for staff encompassing vehicle maintenance and driver’s training; safety training to assist employees in utilizing safe practices on the job; fire protection including removal of hazardous materials or conditions and installation of fire suppression devices such as extinguishers, sprinkler systems, etc.; quality control inspections of products; and proper storage and control of chemicals and potential pollutants.

Risk control techniques are particularly effective in treating frequency losses because the reduced cost of losses can be measured against the cost of the technique used. Most associations regularly undertake risk control maintenance activities. Examples include repair of cracks in concrete walkways; regular servicing of boiler and heating equipment; trimming shrubs to provide unobstructed view for vehicles; installing improved lighting; implementing security systems - all designed to reduce the chance of loss.

Risk control can also be applied to the potential liability of directors, officers, and committees. To lessen these risks, carefully document in your board minutes all decisions made, take any areas of contention to membership for a vote, report results of all actions to the members, and retain copies of all documentation for not less than five years. Risk control can also be applied after a loss to reduce its severity; i.e. immediately pulling up a water-soaked carpet to dry it out before it shrinks or roping off a damaged area.

The second category of risk treatment, risk financing, may be used separately or in conjunction with risk control. Risk financing addresses the means of providing funding to pay a loss after it has occurred. The most common risk financing technique is obviously the purchase of insurance, but there are other alternatives to consider.

The most important is the theory of transferring the risk to another responsible party. Transfer of risk is commonly accomplished by an indemnification agreement in a contract for services, backed up by insurance provisions. For example, many associations contract with a professional landscape specialist to maintain the grounds. Through that contract the association should attempt to transfer as much of the risk arising from the contractor’s operations as possible. It makes sense to include a clause which specifically states that the contractor will hold the association harmless from any claims arising from his negligent acts or the acts of his employees or subcontractors. In addition to the transfer of risk through a legal agreement it is important to be sure there is a source of funds available for the contractor to pay claims. Thus, the contract must specify the contractor’s insurance requirements. The contractor should be asked to carry workers’ compensation insurance and adequate limits of general and automobile liability insurance. Further, he should name the association as an additional insured on his liability policy and have his insurance representative provide a Certificate of Insurance evidencing these coverages along with a 30-day notice of cancellation to the association. These provisions commit a primary financing source, the contractors’ insurer, to defend your interests as well as those of the contractor if a lawsuit claiming negligent acts of the contractor names both of you.

ESTABLISHING A SYSTEM TO MONITOR AND CONTROL THE RESULTS

Protecting the association’s assets equates to controlling the association’s total cost-of-risk (the total expenditure for insurance, self-insurance, risk control, and other risk management related expenses). Thus, one measure of the effectiveness of a risk management program could be a comparison of the total cost-of-risk from last year to this. However, because of premium increases within the past year that would be an unfair evaluation of a treasurer’s or board’s efforts on the last renewal (or the one shortly due). The history of the losses you incur is another measurement. If an association has developed a frequency of claims from a related hazard or risk, appropriate risk control techniques can be applied to avoid recurrence.

Implementing a successful risk management program starts with establishing a process to review your progress on a regular basis. This review should evaluate the risk identification activities undertaken, determine that the risk control measures begun are in effect and still appropriate, review the choices of financing techniques and deductible levels, assure that evidence of insurance is required from contractors, evaluate the performance of your insurance representative, and determine that all board actions are documented and communicated to your members.
A sound risk management program should be in writing. The program should include the following elements: identifying the risks, measuring their impact, choosing the best technique, monitoring the result and tying this all together into a risk management plan for the association. A written plan will outline the basic activities in detail under each step. Along with this plan you should maintain a current schedule of insurance in place and the name, address, and phone number of people to contact to report a claim. A record of important risk management decisions must be kept, including: the nature of decision, reason for the decision, any separate actions resulting from the decision, and name of person recording the item. For instance, if the association chooses to increase their deductible to $5,000 on the property policy, a record should be kept of the acts and reasoning which led to this decision (i.e., premium savings, mandated by insurer), any communications addressed to unit owners and related board resolutions (such as to establishing budget fund to pay claims). The responsibility of developing a sound risk management plan rests primarily on the board, with assistance from the manager. With a well-designed risk management plan the board can feel comfortable that it has taken all possible actions to protect the association’s risky business. The result should guarantee what’s known in the risk management business as a "quiet night’s sleep."

TEN MOST COMMON LIABILITY CLAIMS FILED BY COMMUNITY ASSOCIATIONS

1. Water damage to building convector leaks roof leaks broken and frozen pipes caulking problems over flow of systems water seepage wind driven rain

2. Workers compensation claims

3. Liability claims slip and fall bodily injury property damage to owners’ property medical payments

4. Boiler machinery claims air conditioning claims boiler claims

5. Broken glass claims

6. Fires smoke damage

7. Theft of condominium personal property

8. Vehicular damage to property

9. Vandalism & malicious mischief

10. Directors and Officers claims