Adjuster risk financing methods - Part 7
This final installment on adjuster risk management tools examines how to pay for a loss.
The Iconoclast’s favorite method of paying for loss is to stick someone else with it through risk transfer. The most common way is to pay “out of pocket” for minor losses, although larger ones, like a lawsuit, require either a “deep pocket” or a “fat wallet.”
We can anticipate and budget for some losses. Structures and automobiles require routine maintenance, and over several years, average costs can be calculated, budgeted and paid either “out of pocket” or from a “rainy day” account.
However, lacking a budgeted cash reserve to pay minor or major claims, what other methods are available? If we’re on a highway when the car suddenly breaks down and the tow truck arrives to haul the vehicle to a garage, what do we do? Chances are we don’t have enough cash for the repair and tow bills, so we reach for a credit card! Adjusting firms can do this, too, and most maintain a line of credit for larger losses that may not fit an insurance policy. Credit is an immediate means of financing loss but must be repaid eventually.
Last month we mentioned transferring loss to the government by using a tax write-off. There is another way to use the government to pay for loss, although it is less desirable. Many firms have successfully declared bankruptcy and after a brief time, continued in business, reorganized for better planning. By declaring bankruptcy, the firm allows the bankruptcy courts to determine what will happen to debts owed.
For insurers that become insolvent and unable to pay claims, each state maintains a guaranty fund financed by taxing all insurers, with the fund paying off claims against the insolvent insurer. No adjuster wants to be part of an insolvent insurance company (because that guaranty fund may not include payment of a salary), but adjusters can be paid to handle claims on behalf of the fund.
The ‘last resort’
Insurance is a last resort payment method when the cost is so large that the budget, reserves, and the lines of credit are insufficient to meet the risk. Which risks should one insure? For a small adjusting firm with one leased office, most property-related claims may be paid out of petty cash, but the computer systems, employee health and injuries, vehicles and records may require more than the petty cash drawer can supply. Here are several types of insurance needed:
- Employee benefits: Health insurance, disability benefits, life insurance, pensions and other benefits offered to employees usually require an insurer’s involvement.
- Workers’ compensation: Unless the firm is large enough to qualify as a self-insurer, this risk requires workers’ compensation/employers liability insurance by law.
- Vehicle insurance: Lacking the “large number of homogeneous exposure units” needed for self-insurance, auto liability and physical damage insurance is needed.
- Property insurance, including computer equipment: There is generally enough risk to warrant the purchase of property and equipment coverage.
- Crime and dishonesty: Occasionally a dishonest adjuster may cause a major loss, or a cyber hacker will create fraud. This requires crime insurance.
- Professional liability: Also called E&O or malpractice, but for the major screw-up or alleged bad faith claim, one or more excess layers of insurance will provide protection.
- There are many types of insurance to consider, such as directors & officers liability, employment practices liability, computer fraud or cyber risks, etc., including excess layers of liability.
Insurance provides “peace of mind.” Nobody wants a loss so large that insurance is needed, but it is important to understand what coverage is available and how it works, because someday it may be needed.
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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