1. Give two reasons why risk management is an important tool for producers? (p. 3)
Using risk management fundamentals, producers can investigate the general nature of the exposures associated with the client’s type of business. General industry information provides some benchmarking criteria for producers to draw on. The risk management may quickly reveal an uninsured exposure that may secure an entire account.
2. There is an important practical point to be considered before starting a risk management survey. What is it? (p. 3)
The producer must be informed as to the client’s insurance needs and requirements. This means asking questions about the nature of the business, assessing and analyzing foreseeable risks, reviewing documents, inspection premises, collecting information for an insurer to properly assess the risk, providing information from an insurer to properly assess the risk, providing information about the available insurance coverage and other risk transfer methods. Producers have a duty to use reasonable care and skill to effect insurance coverage to protect their client’s interests.
3. What points arise in connection with pre-sale preparation? (p. 4)
In meeting with a prospective insured, they should become thoroughly familiar with risk management concepts and practices.
In the sales interview, the producer’s goals are to:
· Sell the risk management concept
· Establish credibility
· Gather information
4. Explain what is meant by the phrase “the producer and the prospect become a team.” (p. 5)
The sales interview becomes a team process as, together, the producer and potential client:
· Define goals
· Develop information to attain the goals
5. What are the advantages of the risk management approach? (p. 6)
Because risk management is systems-oriented, it requires investigation into all aspects of the client’s activities and all phases of the existing insurance program. Concepts and programs are sold rather than just insurance policies. Producers can easily move from one area of insurance to another and sell accounts rather than individual policies. This means more comprehensive treatment of exposures for the client and usually a higher income for the producer. The risk management process is expected to connect the client to the producer.
6. Review the objectives of risk management. (p. 7)
1. Social responsibility
2. Externally imposed obligations -> meeting legal obligations
3. Peace of mind -> retaining only an acceptable level of risk
4. Cost of risk -> overall cost of risk management program is reasonable
5. Survival -> ensure business continuity
6. Operation continuity -> establish a business continuity plan
7. Maintain stable earnings
8. Sustain growth
7. What is meant by “real property” and “personal property”? (p. 9)
Real Property: is land, building and other permanent structures on the land.
Personal Property: is often defined to mean the right or interest that a person has in personal, movable or other property that is separable from real property.
8. What three types of personal property are identified in the study? Given an example of each (p. 10)
Personal property can be divided into 3 classes:
1. Personal property intended for permanent placement
2. Personal property subject to movement but not necessarily intended for frequent movement
3. Personal property intended for frequent movement
Personal property items that are subject to movement but not intended to be frequently moved are generally less bulky than those in the first group.
9. Some types of property are subject to more perils than others. Provide illustrations of this statement. (p. 11)
Personal property is usually subject to loss from more perils than real property. Personal property is exposed to the same perils as real property and also to other perils such as theft.
10. Give two examples of exclusions in fire policies that call for special insurance arrangements. (p. 12)
The basic fire and EC policies are intended to give coverage at specified locations. There are normally restrictions on coverage away from the named locations and on property while in transit.
Also, certain property is excluded from fire and EC policies or only covered for certain risks and special insurance is need for full protection. Excluded are money, precious metals, securities, evidence of debt or title, automobiles and watercraft. There are limitations on coverage provided for vessels under pressure such as boilers. Typically, the hazards of explosion, bursting and cracking require a specialized policy.
11. What types of indirect loss exposures exist for businesses? (p. 13)
Indirect losses are losses that result from direct damage to property. Indirect losses are usually more difficult to identify than direct losses because they are one step removed in the chain of causation. Examples.
· Business interruption
· Contingent business interruption – supplier/customer/leader business
· Extra expense
· Rent
· Leasehold interest
· Building bylaws
· Demolition
· Spoilage
12. Do individuals have indirect loss exposures? (p. 14)
Yes, individuals as well as organizations can have indirect losses. The “business interruption exposure” to individuals is an example of Human Asset Loss Exposures. Coverages for these exposures can be arranged as part of the employer’s or principal’s business interruption insurance.
13. Explain how rent and rental value exposures are linked to the terms of a building lease. (p. 15)
There are usually two relevant clauses in a lease:
1. Rent abatement clause
2. Fire clause
The rent abatement clause says that if the leased premises are made untenantable by fire or certain other perils the rent is cancelled or reduced for the period of time that the building is untenantable, according to whether the premises are wholly or partly unusable.
The fire clause deals with prolonged interruption of tenancy by fire and certain other perils.
Rent insurance indemnifies the owners of a property, if the owner’s rental income is interrupted by an insured peril.
Rental value indemnifies the occupant from the loss of use of the premises.
14. What types of business have an extra expense exposure? Given two examples. (p. 15-16)
Some businesses by their vary nature cannot have a business interruption because their business is such that they must stay in operation regardless of what happens.
An example is a newspaper publisher. If the building or printing presses are damaged by a fire, the business will usually not stop publishing for whatever period of time is required to rebuild. Some alternative means will be employed, perhaps printing the paper in a nearby town and shipping it in by truck. The alternative means employed to stay in operation are sometimes very expensive. The loss exposure involves in the additional expenses incurred.
Another example of extra expense exposure is an insurance agency. If a fire totally destroyed the agency, somehow the agency would be tending to customers the next morning. A bank is another example.
For the most part, a business needs either business interruption or extra expense according to whether it would close down when a loss occurred (business interruption) or continue operations with alternative facilities at increased cost (extra expense).
15. What is meant by leasehold interest? (p. 16)
A tenant in leased quarters may have another indirect exposure known as the leasehold interest exposure. It is the amount of loss between the rent for the damaged building and the rent for substitute quarters. Note the amount of the leasehold interest exposure decreases with time as the termination of the lease approaches, since the coverage extends only to the normal termination date of the lease.
16. Explain the exposures arising from building by-laws. (p. 16)
Another kind of indirect loss may result from the operation of building codes, the laws that establish the minimum standards for fire safety required for buildings. The codes usually apply only to a new construction. The owner may suffer three kinds of loss under the code:
1. A building that is only partially damaged may have to be torn down -> converting a partial loss to a total loss
2. The cost of tearing it down must be paid
3. The new building must be built to code requirements -> increasing the cost of construction
17. Explain what is meant by the liability exposure. Give two examples. (p. 17)
The liability exposure is the possibility that the individual or firm will be held legally responsible for damages suffered by another party. A part of the exposure is the cost of defending against such claims. Liability arises when the rights of one party are violated by the actions or inaction of another so as to result in injury or damage.
18. What is meant by negligence and vicarious liability? (p. 17)
Negligence: is the failure to use that degree of care which a reasonable person in the same situation would use in order to avoid injury to another.
Vicarious liability: Under this concept, one party (employer or a parent) becomes responsible for the actions or missions of another (employee or child).
19. Given an example of an intentional act by an employee. How far does personal injury insurance cover this expense? (p. 18)
For example, when an employee of a store negligently moves some fixtures and in doing so, injures a customer, the employee did not intend to harm the customer. The employer will be liable for the injury and liability insurance is suitable for just such a purpose.
As long as bodily injury or property damage are not expected or intended from the insured’s standpoint, most liability policies will respond. Insurance is generally not available to an insured who intends to physically injure someone or something. Assault is an intention tort and not covered by insurance.
20. What is meant by absolute liability? (p. 18)
Absolute liability is a modification of negligence liability. It is held that engaging in inherently dangerous activities, regardless of the degree of care employed, is sufficient to create liability if a third party is injured.
The use of explosives, for example, is considered so dangerous that persons injured in connection with their use can recover for their injuries even if the user of the explosives used very special care.
21. Explain the premises and operations exposures? (p. 19)
The premises exposure has to do with things that occur on the premises.
The operations exposure is broader than just premises because it includes operations both on and off the premises.
Certainly the distinction between premises and operations is important if a liability insurance policy covers one but not the other. However, the current liability forms usually do not make such a distinction.
22. What is meant by products and completed operations exposures? (p. 20)
A product liability action exists:
1. When physical possession of the product has been relinquished and
2. When the bodily injury or property damage occurs away from the premises.
The completed operations exposure is the counterpart of the products exposure for businesses that sell services rather than or in addition to physical items (products) thus, completed operations exposure relates to services.
23. What is the general rule regarding the liability of an independent contractor? In what circumstances does the situation change? (p. 21)
The general rule is that one is not responsible for the acts of independent contractors. Thus, if the painter drops a bucket of paint on a customer, it is the painter’s problem, not the store owner’s.
Unfortunately for owners, such as the store owner, the acts of independent contractors may be imputed to them, such as when the owner exercises any supervision over the independent contract. If the owner provides equipment or supplies, the courts are likely to interpret the relationship to be employer/employee rather than independent contractor. General contractors may also be held liable for the acts of their subcontractors if they furnish equipment or supplies, exercise supervision over them or delegate very dangerous work to them.
24. What points arise about automobiles, aircraft and watercraft and associated liability exposures? (p. 22)
Liability arising out of the ownership, maintenance, use, loading, or unloading of automobiles, aircrafts, and large watercraft is commonly excluded in the comprehensive general liability policy.
25. Explain the situation regarding Workers’ Compensation and Employers’ Liability. (p. 24)
Workers’ compensation laws were adopted to provide benefits for injured employees regardless of whether or not the employer was negligent.
In Canada
26. Note the chief points about bailee exposures. (p. 12)
A bailee is a person or firm that holds possession of personal property that belongs to another. The owner of the property is called the bailor and the agreement under which the property is held is known as a bailment. Thus it is basically non-owned property in the possession of the insured.
Professional bailees owe a greater degree of care than do gratuitous bailees who hold other people’s property for the benefit of the bailor.
Both types may be held liable if their negligence causes damage to the bailor’s property.
27. What points arise in connection with the transport of property by a) common carriers b) contract carriers c) the insured’s own vehicles? (p. 25)
The liability of contract carriers depends on the terms of the contract. If the contract is silent on the matter of liability, then the contract carrier is liable only if the property being transported is damaged as a result of the carrier’s negligence. If the property is damaged in transit without any negligence on the part of the contract carrier, the loss falls upon the shipper. Thus, it is even more important for the shipper to insure the goods shipped by a contract carrier than it is for good shipped by a common carrier.
If goods are shipped on the owner’s own trucks, there is even less likelihood of recovering for any damage to the goods. The owner’s insurance becomes even more important in such situations.
28. Note the factors to be considered in regard to leased premises. (p. 26)
The lease should be examined to see what is the responsibility for insurance. It may be that the tenant is required to insure the rented premises for the benefit of the landlord in which case a Fire Legal Liability coverage would not be enough since it only operates if the tenant is legally liable for the damage, and not if it occurs through no fault of his.
29. What considerations apply when reviewing human assets loss exposure? (p. 26)
Modern management generally recognizes that trained personnel are an organization’s most valuable resource or asset. The risk management role with regard to this asset is twofold:
1. To protect the firm from economic loss or disruption due to the death or disability of a key person(s)
2. To apply the risk management process on behalf of all employees in order to offer the employee compensation package necessary to maintain a stable, committed work force.
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