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August 1996
In this issue
Risk Management
It is an uncertain world. As psychiatrist R. D. Laing said, "We live in a moment of history where change is so speeded up that we begin to see the present only where it is already disappearing." Recent estimates on the rate of information processed tell us that every few minutes we process more information than was processed in a lifetime by those living in the Middle Ages. No wonder we feel overwhelmed.
A few years ago only a few people had heard of Cyberspace or derivatives or environmental remediation. Today these concepts affect the way we all do business. This environment of change puts all of us at risk every day. New laws are enacted, others are revised, courts change their interpretations, property values go up and down, new financial procedures and new technology alter familiar relationships. New exposures keep coming along to increase the number and severity of the hazards that surround us.
Buying an insurance policy represents only a small part of the risk management puzzle. Risk management involves risk identification, safety and engineering, loss control as well as conventional insurance programs and risk financing techniques such as cash-flow management, retentions, captives and retros.
Each of these strategies must be well executed to assure a viable risk management program. Let's take a look at a few of the more common mistakes.
Insufficient Attention to Loss Control
Skimping on safety and loss control can result in higher insurance costs. Investments in ergonomic studies of job duties, safety rewards, and modified duty job programs can pay off in the long run.
Often, a loss control program does not receive the attention it needs and deserves. It could be argued that the more you invest in loss control, the less time and money they will need to devote to risk financing. After all, anyone can buy insurance. Safety and loss control, however, keep the costs down. The best way to manage risk is to prevent a loss.
Risk Management "Blind Spots"
Failing to recognize loss exposures is a frequently made mistake. Many organizations rely on annual insurance surveys to identify exposures. The problem with these is that they are not that helpful on an ongoing basis. As a result, there is a danger that loss exposures which develop with operational or organizational changes, legislative changes, new product or service introductions, mergers, acquisitions, and similar events will be overlooked until the next survey.
Every organization must develop methods for continuously monitoring changes in the organization and its environment to quickly identify new exposures or increases in the levels of existing exposures.
Inadequate Preparation for Consequential Losses
This mistake involves the failure to consider and plan for the possible "ripple" effects of the loss events. This includes items such as hidden labor costs, loss of reputation, market share loss, contingent business interruption, effects of laws and ordinances, and financial loss incurred from the death, disability, or departure of key employees.
Not all post-loss consequences are immediately apparent. For example, the cost of a claim--even one covered by insurance--can be extraordinary. Aside from retained claim costs via deductibles or self-insured retentions, there is the cost of management time that could otherwise go toward making products or delivering services. The hidden costs of a claim also involve the time wasted by management in communicating with legal counsel, collecting documents, answering interrogatories, preparing for and giving depositions, dealing with the insurer, preparing for and attending trial.
Lack of Creativity
Today more than ever it is important to "think outside the box". This means considering noninsurance, nontraditional options for treating risk exposures. It is important to reach into every corner of the organization, seeking ways to improve safety, efficiency, and profitability. This may mean working with legal, human resources, contracts, facilities, customer service, safety, security, workers compensation, accounting, finance, information systems, and senior management. Creativity is key.
A good risk management program doesn't necessarily cost more. Many times it is a re-allocation of dollars you are currently spending for insurance. In our agency, risk management simply boils down to giving professional advice based on product knowledge and a thorough understanding of your business.
We can help you keep on top of those problems and the information and technology that lead to proper solutions. This is a value added service we offer our customers. The ones who need the services most are those in which the people responsible for the insurance programs wear a number of management hats. These part-time risk managers will be the first to admit that they are not managing the risk as much as buying policies and hoping not to forget anything along the way.
Our risk management services prove beneficial to our clients by providing valuable expertise and potential savings.
ERISA: Avoiding Liability for Investment Advice
With the advent of employee funded 401(k) plans, it seemed natural for employers to give employees the right to choose how to invest their accounts. A typical 401(k) will offer several different investment options from which employees may select one or more. Fiduciaries no longer have responsibility for directing investments and employees feel more in control of their financial futures.
The financial benefit to companies from shifting the funding burden to employees is obvious, but the resulting changes in fiduciary responsibilities are not so obvious. Allowing employees the right to control their choice of investments is not the same as shifting fiduciary responsibility for those investment choices.
The unknown component has been the role of the employer in giving investment advice to participants in 401(k) or similar plans.
The Department of Labor was concerned that many plan participants may not have sufficient understanding of investment principles to make informed investment decisions. On the other hand, some employers were concerned that providing investment advice would make them potentially liable as ERISA fiduciaries for their employees' imprudent investment decisions. According to ERISA, anyone who gives employees specific advice on how to invest their retirement income is a fiduciary. As a fiduciary, they can be personally liable for making up any losses suffered by the benefit plan.
To alleviate these concerns, in December of 1995, the Department of Labor released an interpretive bulletin which makes it easier to teach workers about investment options without violating the Employee Retirement Income Security Act. According to this bulletin, you are liable for employees' investments only when you give them advice on the value of an investment option or recommend investing in, purchasing or selling securities or property. Even then, you are not liable unless you either directly or indirectly
- Exercise any control or discretionary authority for buying or selling investments.
- Regularly provide individual, specific advice to employees that becomes the workers' primary source of information about investment decisions
DOL proposed the following safe harbors that would not constitute "investment advice" under ERISA.
Plan Information
You can provide employees with information on your plan or the benefits of using the plan without liability for their investment decisions. According to DOL, this educational material should emphasize that participants should (1) participate in available plans as soon as they become eligible; (2) make the maximum contribution possible to the plan and (3) if they change employment, refrain from withdrawing their retirement savings and opt instead to directly transfer or roll their plan account into an IRA or other retirement vehicle.
General Financial and Investment Information
Examples include explaining general investment concepts such as risk and return, diversification, dollar cost averaging, compounded return and tax deferred investment. Other acceptable types of education are the effects of inflation, historic differences between stocks and bonds, estimating retirement needs and assessing risk tolerance.
Asset Allocation Models
This safe harbor includes pie charts, graphs and case studies illustrating model investment allocations for hypothetical individuals of different ages and needs. Make sure the models you provide:
- Are based on generally accepted investment theories and reflect the historic differences in returns among investments.
- Clearly state the assumptions on which the models are based (such as inflation and retirement age).
- Clearly identify all options that are listed in both the model and your plan.
- Include a statement informing employees that they should consider the value of other assets when applying a model to their investment decisions.
Interactive Investment Materials
This safe harbor includes questionnaires, worksheets, software, and similar materials which allow a participant to estimate future retirement income needs and assess the impact of different investment allocations on retirement income. These materials must meet all of the requirements listed above for asset allocation models.
The most important thing to remember is never even appear to give employees advice or information that is tailored to their specific financial situation. Make it clear that employees should gather information on their own and that they are free to pursue any option allowed under your plan.
Lost in Cyberspace
As we set our sights on Cyberspace we face the same murky liability and security issues as does every other wayfarer on the electronic superhighway.
All the risk and all the legal and regulatory issues that apply to print, television and other media will apply in Cyberspace.
Intellectual property claims are the greatest liability exposure in Cyberspace. The laws relating to intellectual property (copyright, patent and trade secrets and trademark) are evolving as quickly as the Internet.
Copyright
In one case a newspaper reporter downloaded protected information for the Internet and was sued by the copyright holder (Religious Technology Center v. Lerma, Washington Post, et al.). In another case several free lance writers who sold their stories to the New York Times and other publications years ago are alleging that the publications and the on-line services are violating copyright law because the original license agreements with the authors did not assign electronic publishing rights to the publications. At the time these license agreements were signed, Cyberspace did not exist as a medium for information exchange. (Tasini, et al. v. New York Times, et al.).
Make sure that licenses from third parties to use protected material on a home page assign all "Cyberspace" rights of use as well as all print rights.
Copyright infringement defenses
The fair use doctrine basically says that for certain specific uses, such as commentary, criticism and research you can take small portions of another person's work.
Another defense to a suit for copyright infringement is that the subject matter of the suit is in the public domain. At some point work goes into the public domain, which means that it's no longer protected by copyright, and therefore anyone can use, duplicate, or distribute that work without fear of copyright infringement. The problem is, what is in the public domain in the United States may not be in the public domain elsewhere in the world.
Trade Secrets
Trade secrets can include everything from customer lists and ingredients for secret formulas. Companies have long faced the problem of trade secrets that walk out the door when employees go home.
Unauthorized access to trade secrets and piracy is also a risk in on-line transactions. Information can be uploaded, downloaded, copied and uploaded again in a matter of minutes.
Trademarks
Anything placed on the Internet is distributed globally. Trademarks are national by nature. An advertisement put on the Internet in one country may infringe a registered trademark in the country where it is read. One way of dealing with the problem is to use territory disclaimers. This is a statement setting out specific territories to which the page is directed.
Security Issues and Data Protection
While much concern has been expressed regarding whether the Internet is safe for electronic commerce, you do not have to allow anxiety about security to negate the competitive advantages the Internet offers.
Several companies are developing software products, firewall solutions and security networks as safety measures.
The Library of Congress has established a website called "Internet Security". You can access this site at http://lcweb.locgov/global/internet/security/html. You can find answers to almost any question regarding computer security at this site.
On-line payments can lead to security concerns. Secured transaction software is an important element in a Cyberspace risk management program. Visa and Master Card are collaborating to reduce concerns by announcing a joint technical standard for safeguarding payment-card purchases made over open networks such as the Internet. A single standard means that consumers and merchants will be able to conduct bankcard transactions as securely as they do in retail stores. In addition, several new security software products are available.
For additional comfort, we offer a low-cost insurance policy specially designed for Internet users. The policy covers the replacement cost of the computer equipment in the event of theft, fire or accidental breakage; pays the cost to reconstruct lost or damaged data files, regardless of the cause of loss (even accidental erasure or viruses); and pays the cost of computer fraud perpetrated by customers, suppliers or employees.
If you are still lost in Cyberspace, you are not alone. The rapid expansion of the electronic superhighway has also increased the need for careful risk management. We will be happy to provide a roadmap.
Fleet Auto Safety
Vehicle coverage often is the most expensive item in an insurance budget. However, a well-organized program implemented with sensible follow-up procedures will prevent losses and substantially reduce your premiums down the road.
Driver Selection
Selection of your drivers is the most significant factor in operating a safe fleet. Each driver must be screened carefully before employment. In addition, it is good practice to have pre-employment physicals as well as annual physicals for each driver. A State Motor Vehicle Report should be ordered and reviewed before an employee is allowed to drive a company vehicle. You want to avoid hiring employees with poor driving records.
Driver Training
A sound driver-training program should be implemented immediately to train new and present drivers. Standards should be set (and modified as required) and then monitored. (We invite you to test your own safe driving knowledge by taking our quiz.)
Fleet Maintenance
A planned fleet-maintenance program should become part of your standard operating procedures. Standards must vary to fit the specific equipment and work assignment of the equipment.
Well-trained drivers operating properly maintained vehicles will be involved in fewer accidents over the long haul.
Your initial benefit will be fewer accidents, which in turn will lead to reduced fleet insurance premiums. Lower workers' compensation premiums, because of fewer employee injuries, are sure to follow.
The most important benefit should be increased profits: less down time for each vehicle; less lost employee time; fewer accidents to report; and fewer injuries to the drivers.
Safe Driving Quiz
The following Safe Driving Quiz is courtesy of Advanced Driver Training Services, Inc. ADTS has thirteen years of experience training drivers. They are hands-on educators and they also publish a good deal of information. They recently published The Fleet Driver's Safety Guide. This is a very insightful and easy to ready publication.
- 1. An accident is considered preventable if defensive driving on either driver's part would have avoided it.
- O True O False
- 2. Antilock brakes work poorly if applied too hard.
- O True O False
- 3. Seat belts are most important on long trips at high speeds.
- O True O False
- 4. Locked car doors improve chassis rigidity and so safety in a crash.
- O True O False
- 5. Air bags work equally effectively with our without seatbelts.
- O True O False
- 6. High tech automotive safety devices encourage faster, more reckless driving.
- O True O False
- 7. Most accidents occur at intersections.
- O True O False
- 8. Air bag use reduces injury and death in 35% of serious crashes.
- O True O False
- 9. A preventable accident is one where you are not to blame.
- O True O False
- 10. Air bags cannot harm rearfacing infant seat occupants.
- O True O False
- 11. Antilock brakes work best on dry roads.
- O True O False
- 2. Seat belts frequently cause death and injury by restricting drivers trying to escape damaged cars.
- O True O False
- 13. Seat belts reduce the likelihood of death in a car crash by one half.
- O True O False
- 14. All two car collisions are preventable.
- O True O False
- 15. The majority of accidents occur at speeds less than 30 mph.
- O True O False
- 16. You should be able to see the rear tires of the car ahead of you touch the road at all times.
- O True O False
- 17. When stopped at an intersection, turn your front wheels into your planned turn.
- O True O False
- 18. It is dangerous to merge onto a highway at a rate well below prevailing traffic.
- O True O False
- 19. Limited access, multi-lane highways are probably safer than secondary roads.
- O True O False
- 20. Head rests are safety devices.
- O True O False
- 2 1. Checking your speedometer as you change speeds is an important safety precaution.
- O True O False
- 22. Backing out of a parking space is safer than backing into it.
- O True O False
- 23. Starchy foods and sweets make you sleepy.
- O True O False
- 24. Before proceeding into an intersection, you should scan right, left, right.
- O True O False
- 25. If your car has "ABS," you should "pump" your brakes to stop.
- O True O False
- 26. Over the counter medication can impair your driving ability.
- O True O False
- 27. Airbags are a substitute for seatbelts.
- O True O False
- 28. You should increase your driving distance in bad weather.
- O True O False
- 29. After stopping, count to two prior to entering the intersection.
- O True O False
- 30. The most dangerous maneuver at an intersection is to make a left turn.
- O True O False
- 31. Driving with your headlights on at all times, will reduce your chances of having a frontal crash.
- O True O False
- 32. When you are stopped in traffic, you should be able to see the rear tires of the vehicle in front of you.
- O True O False
- 33. Making eye contact with other drivers will help avoid conflict at intersections.
- O True O False
- 34. You should take a glance in your rearview mirror, when stopping at an intersection.
- O True O False
- 35. Always use at least a two second following distance.
- O True O False
- 36. Car jacking is a crime of opportunity.
- O True O False
- 37. The majority of drowsy driver accidents occur between midnight and 6 a.m.
- O True O False
- 38. Impatience is not a typical trait of a "Type A" personality,
- O True O False
- 39. If you run into the rear of another, you are almost never at fault.
- O True O False
- 40. Auto theft deterrents such as "The Club" and alarm systems will decrease your chances of being car jacked.
- O True O False
How did you do?
Answer key to the safe driving quiz:
- TRUE
- FALSE
- FALSE
- TRUE
- FALSE
- TRUE
- TRUE
- FALSE
- TRUE
- FALSE
- FALSE
- FALSE
- TRUE
- TRUE
- TRUE
- TRUE
- FALSE
- TRUE
- TRUE
- TRUE
- TRUE
- FALSE
- TRUE
- FALSE
- FALSE
- TRUE
- FALSE
- TRUE
- TRUE
- TRUE
- TRUE
- TRUE
- TRUE
- TRUE
- TRUE
- TRUE
- TRUE
- FALSE
- FALSE
- FALSE
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SOLUTIONS is a service of The McLaughlin Company and Creative Risk Management, Inc.—offering you timely and creative solutions to all your INSURANCE and RISK MANAGEMENT needs.
THE McLAUGHLIN COMPANY
CREATIVE RISK MANAGEMENT, INC.
1725 DeSales Street, NW
Washington DC 20036
Fax 202-857-8355 - 800-233-2258 - 202-293-5566
