Adjuster risk management tools - Part 6: Risk transfer
Risk transfer is a common means of financing a loss.
There are various ways to finance loss from professional mistakes to cyberattacks and other risks. Insurance is one option, but in this series on managing risk, we need to move on to non-insurance management — how to pay for a loss that may occur regardless of how much loss control has been employed.
Risk transfer
When teaching risk management to classes, my favorite way of handling the costs of risk is to: “Stick some other poor schnook with the loss!” This is risk transfer and a common means of avoiding loss. I ask how many in my audience have ever rented something, and most have. Most have also signed an agreement they didn’t bother to read. However, if something bad happened, were they the “stuckee” or the “stuckor”?
Transfer of risk is a common means of financing a loss. Some loss can be written off of the annual income tax bill, transferring some loss to the government. If an adjusting firm rents office space, it will generally be required to sign a lease with various contractual agreements such as hold harmless agreements, indemnity clauses, exculpation, waivers of subrogation and requirements for “additional insured status” under the renter’s policies. Most transfer risk from the tenant to the landlord unless the tenant negotiates.
If the lease says, “The landlord will not be responsible for injuries occurring in the common areas,” and the tenant agrees to this exculpatory phrase; if an employee or visitor falls and is injured on a loose step in the stairway, who is responsible? The tenant contractually agreed that the landlord would not be, and the tenant is the only other party involved. It may be the landlord’s fault, but the tenant, or the tenant’s insurer, will have to pay. If an employee was involved, the adjusting firm must pay workers’ compensation, plus defend the landlord, paying twice for the same loss.
Independent adjusters may represent multiple insurance companies or self-funding entities. Much of this representation is under a contract that requires careful negotiation. Adjusters have to accept responsibility for their own errors and omissions, but if they acted correctly in accordance with the company’s instructions or the policy contract and are named in a lawsuit, the contract should transfer the defense and indemnification to the client company.
Hedging and pooling
There are multiple situations where adjusters, adjusting firms or insurers can utilize risk transfers through hedging and pooling. Hedging usually involves some sort of contractual agreement allowing reassignment of claims to others, such as where the adjuster might end up being assigned both sides of a liability claim, or where following a storm or other disaster there are so many claims that some must be delegated to other firms.
Pooling is common where a number of insureds have a common risk and utilize a risk retention group approach to their risk financing. For an adjusting firm providing their adjusters with vehicles, pooling can be used where one or more vehicles may be temporarily “out of service” and another vehicle is available for use.
Insurance is only one means of loss financing by contractual risk transfer. Ultimately, it is simply the transfer of risk, but only for specific risks and amounts. However, no single insurance policy applies to all risks. Next month we shall explore other means of financing loss that we failed to prevent.
Ken Brownlee, CPCU, (kenbrownlee@msn.com) is a former adjuster and risk manager based in Atlanta, Ga. He now authors and edits claims-adjusting textbooks. Opinions expressed are the author’s own.
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