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CSU Bakersfield
Small Business Development Center
MANAGING
LIABILITY RISKS
in a
SMALL BUSINESS
by
John Pryor, CPCU, ARM
HOUSEKEEPING AND
INTERACTION
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WELCOME
•  Tiffany Bahena, SBDC Program Specialist and Producer
•  Kelly Bearden, SBDC Director and Moderator
•  John Pryor, SBDC Consultant and Presenter
What is Risk Management?
It’s a Six Step Process:
1. Risk Identification and
Measurement
What is Risk Management?
It’s a Six Step Process:
2. Risk Elimination
What is Risk Management?
It’s a Six Step Process:
3. Risk Control
What is Risk Management?
It’s a Six Step Process:
4. Risk Transfer –
Non-Insurance
What is Risk Management?
It’s a Six Step Process:
5. Risk Assumption
What is Risk Management?
It’s a Six Step Process:
6. Risk Transfer -Insurance
What’s the Goal of RM?
To reduce your
Total Cost of Risk
(TCOR)!
What’s TCOR?
It’s FAR more than your
insurance premiums!
What’s TCOR?
It includes other very
real costs any
business will incur to
manage its risks
What’s TCOR for Liability?
Attorney fees and
other legal costs to
defend a liability claim
NOT covered by your
liability insurance
What’s TCOR for Liability?
Legal fees for drafting
hold harmless or other
“risk transfer” elements of
a contract.
What’s TCOR for Liability?
Structural changes
in your property or in your
processes to avoid claims.
What’s TCOR for Liability?
Staff training to
avoid liability claims.
What’s TCOR for Property?
Costs incurred for
security systems,
safes, and fire
prevention
What’s TCOR for Property?
Insurance
deductibles paid
What’s TCOR for Property?
Property losses not
covered by insurance.
What’s TCOR for Workers’
Compensation?
Costs incurred for
safety and incentive
programs
What’s TCOR for Workers’
Compensation?
Costs incurred for safe-
guards installed on
equipment
What’s TCOR for ALL Risks?
Losses or claims not
covered by insurance
What’s TCOR for ALL Risks?
Insurance premiums
paid
What’s TCOR for ALL Risks?
Administrative
costs incurred for
required records and
compliance issues
How Do You Calculate TCOR?
Here’s an example . . .
•
•
•
•
•
•
•
•
•
Uninsured losses paid:
Deductibles paid:
Costs incurred for safety:
Costs incurred for security:
Costs incurred for fire prevention:
Legal defense costs for uninsured claim:
Legal fees for drafting hold harmless:
Administrative costs incurred:
Insurance premiums paid:
Total Cost of Risk (TCOR):
$ 1,000
$
500
$ 5,000
$ 2,500
$
500
$ 10,000
$ 2,500
$ 5,000
$ 20,000
$ 47,000
Here’s How You Want to See
Your TCOR Trend Over Time!
60000
50000
40000
30000
20000
10000
0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Basic Principles of RM
Implement all other steps
in the risk management
process before
buying insurance!
Basic Principles of RM
Remember: Insurance
doesn’t eliminate risk, it
only transfers
risk
Let’s Talk About Liability Risks
What’s the
maximum risk
any business has where
liability is concerned?
Let’s Talk About Liability Risks
UNLIMITED!
“The sky is the limit” as
plaintiffs can sue for any
amount they wish!
Step #1: Identify & Measure Your
Liability Risks
Identify all
legal entities
you own – plus yourself
(and your co-owners) as
an individual.
Step #1: Identify & Measure Your
Liability Risks
Understand that most
liability risks are
unlimited
– unless a statute sets a
dollar amount limit.
What Liability Risks are “Lurking
Out There?”
General Liability
(premises and
operations)
and Product Liability
(including Completed Operations)
What Liability Risks are “Lurking
Out There?”
Vicarious Liability
(from work by
independent contractors)
What Liability Risks are “Lurking
Out There?”
Liability for employee injuries –
aka
Workers’ Comp!
And More . . .
Automobile
Liability
-- plus Watercraft, and
Aircraft Liability
And More . . .
Environmental
Liability
And More . . .
Professional
Liability
And More . . .
Management
Liability
(formerly D&O Liability)
And Still More . . .
Employment
Practices
Liability
And Still More . . .
Employee Benefit
Liability
(not the same and EPL)
And Still More . . .
Fiduciary
Liability
And Still More . . .
Product Recall
Liability
And More Liability Risks . . .
Cyber
Liability
And More Liability Risks . . .
Foreign
Liability
And More Liability Risks . . .
Intellectual
Property
Infringement Liability
And More Liability Risks . . .
Terrorism
Liability
(Really? Yes!)
Step #2: Eliminate the Risk…
. . . and the Risk
Management Process
(for that particular risk)
stops!
Step #2: Eliminate the Risk…
Fireworks show –
don’t “go there!”
Step #2: Eliminate the Risk…
A new operation that’s
high risk
– don’t “go there either!”
Step #2: Eliminate the Risk…
“Broad Form”
Hold Harmless
– avoid at all costs, if at all
possible / permissible.
Step #3: Reduce the Risk
If you reduce risk
through loss
prevention . . .
Step #3: Reduce the Risk
. . . you reduce the
frequency
of claims.
Step #3: Reduce the Risk
If you reduce risk
through loss
reduction . . .
Step #3: Reduce the Risk
. . . you reduce the
severity
of claims.
Why Bother with Risk Control?
/
First and foremost
is the issue of
cost –
Why Bother with Risk Control?
. . . not only direct costs
you incur -- but also the
indirect costs
Examples of Indirect Costs
The major distraction
from your business
productivity caused
by the litigation process
Examples of Indirect Costs
The emotional
drain on all involved
Examples of Indirect Costs
The adverse affect on your
reputation
Examples of Indirect Costs
The counter-productive
effect on
employee morale
Examples of Liability
Risk Reduction
Safety program
for employees
Examples of Liability
Risk Reduction
Driver training
for those who drive on
business purposes
Examples of Liability
Risk Reduction
Good
“housekeeping”
and clear walking surfaces
More Examples of Liability
Risk Reduction
Safe-guarding
of machines
More Examples of Liability
Risk Reduction
Customer access
prohibited to
high-risk areas
More Examples of Liability
Risk Reduction
Require
mediation
as an alternative to
litigation –or even
arbitration
Still More Examples of Liability
Risk Reduction
Use of
quality systems
and processes in products
sold
Still More Examples of Liability
Risk Reduction
Order
driving records
of new employees
Still More Examples of Liability
Risk Reduction
Consider
alternative forms
of organization
(incorporation, LLC, LLP, etc.)
Final Examples of Liability
Risk Reduction
Install
video surveillance
for key areas
Final Examples of Liability
Risk Reduction
Assure that
merchandise
displays
and counters are safe
to public and employees
Final Examples of Liability
Risk Reduction
Use decals or tape at eye
level for
plate glass doors
Step #4: Risk Transfer Other than
Insurance
Include a
hold harmless
(or indemnification clause)
in your favor in any
contract
Step #4: Risk Transfer Other than
Insurance
Avoid any contract
in which you assume the
“sole negligence”
of the other party.
Step #5: Risk Assumption…
You can
totally
assume a risk
or . . .
Step #5: Risk Assumption…
. . . you can
partially
assume with a deductible.
Step #5: Risk Assumption…
A Self-Insured
Retention
is very common in
“claims made”
liability policies
Step #6: Now it’s OK to Talk
about Insurance!
Ask your broker if you’re
eligible for the
BusinessOwners
Policy.
Step #6: Now it’s OK to Talk
about Insurance!
Why? Because it’ll be
lower in cost and
broader in coverage!
Step #6: If Your Business is NOT
Eligible for a Business Owners
That’s OK. It’s just
different –
and a “little” more costly.
Step #6: If Your Business is NOT
Eligible for a Business Owners
You’ll need to draft
specifications
and sign an application
with your broker.
Step #6: If Your Business is NOT
Eligible for a Business Owners
Specifications for liability
insurance are
simple
compared with property
insurance.
Step #6: General Liability
Specifications
The name of each
legal entity
you want protected
Step #6: General Liability
Specifications
narrative
description
of your
business operations
Step #6: General Liability
Specifications
Your
total payroll –
by type of work performed
(clerical, sales, repair, etc.)
Step #6: General Liability
Specifications
Your
total sales
projected for
the coming year
Step #6: Vehicle Liability
Specifications
A schedule
of your cars,
Trucks and trailers
Step #6: Vehicle Liability
Specifications
A list of your
drivers –
and their license numbers
Step #6: Vehicle Liability
Specifications
An indication of the
radius
within which your trucks
are driven
(within 50 miles, from 50 to 150 miles,
over 150 miles.)
Step #6: Vehicle Liability
Specifications
A specific request for
non-owned
and hired cars and trucks
Step #6: Workers’ Comp
Specifications
This is a
more complex
process
Step #6: Workers’ Comp
Specifications
Best solution: ask for an
application
to complete
Step #6: Workers’ Comp
Specifications
It will include a list of
owners –
partners, and officers –
plus any to be excluded.
Step #6: Workers’ Comp
Specifications
It will include
multiplequestions
about your
business operations
Step #6: All Other Liability
Specifications
Most require a
specific
application –
with your signature
Step #6: All Other Liability
Specifications
Many applications will be
attached
to your policy –
and create warranties.
Step #6: All Other Liability
Specifications
Many will shift liability
coverage to
“claims made” –
an enormous difference!
Step #6: A Claims Made Liability
Policy is Very Different
A claims made policy
requires
close scrutiny
of its elements
Step #6: A Claims Made Liability
Policy is Very Different
It will have a
retrospective
date
(nose coverage) a date that should
never be advanced
Step #6: A Claims Made Liability
Policy is Very Different
It will have an
extended
reporting period
(tail coverage) that you may or may
not need.
Step #6: All Liability
Specifications . . .
. . . need to include your
loss history
for the past 3 to 5 years.
Step #6: All Liability
Specifications . . .
Your
coverage history
for the past 3 to 5 years
Step #6: All Liability
Specifications . . .
Plus anything else your
broker
may request
Why Are These Data Important?
For only one reason . . .
So you remain in
control
of the overall process!
Any Questions?
Our next webinar on
insurance and risk
management will cover
property
risk management
Any Questions?
If you have any
other questions
about today’s topic of
liability risk management,
send an email to me at
jpryor@bak.rr.com – or to
info@csub.edu
SBDC RESOURCES
•  Free Consulting Services
•  Free Virtual Training and Education
•  Local and Regional Workshop and Events
www.csub.edu/sbdc
661-654-2856
Contact: Tiffany Bahena
tbahena@csub.edu
Any Questions?
Thank you!