When talking about business liability and ways to manage legal risk someone will invariably say in a matter of fact tone, “we have insurance coverage.” What tickles me is they way they say it. They make it sound like insurance is Harry Potter’s invisibility cloak, something they can safely wrap themselves up in and snuggle behind safe in the knowledge that nothing can harm them.
Insurance is certainly an important tool in your risk management arsenal. But overreliance on it can defeat the goal of protecting your company. It’s a flawed strategy, not a magic solution. Let me explain
Let’s take employment practices insurance. When it was first introduced as a new insurance product in the early 1990s it was a relatively inexpensive way for companies to protect themselves against unwanted sexual harassment claims and other employment related claims. Instead of addressing the underlying behaviors that gave rise to such employment claims, many companies fell into the trap of using this cheap insurance as a Band-Aid.
As insurance companies gained more experience with employment claims, however, one thing became clear: employment related cases and sexual harassment cases in particular weren’t cheap. The average jury verdict was above $1 million. Insurance companies were losing money. Some responded by dropping the product. Others simply passed on the cost by doubling or tripling their premiums.
Risk and the cost of insurance go hand in hand. Unlike other products, you don’t get discounts on insurance by making lots of claims. You might get it for buying lots of policies, but not for making claims. Think about it. The insurance skyscrapers that prominently dot city landscapes weren’t built by paying out claims to you and me. Our premiums helped build those towers.
For insurers, a “good risk” is someone with a clean record and a low likelihood of becoming a risk. For us, the insureds, it means we’re really on our own to do the right thing and not trigger a claim. Insurance is a safety net for unexpected events. It’s not a substitute for managing risky behavior.
That’s one reason companies began to reassess their internal practices once employment insurance costs went through the roof. They started to focus more on the source of the risk.
Now before someone jumps to the conclusion that I’m suggesting we eliminate risk let me clarify that that’s not the case. I appreciate that business and life are all about taking risk – calculated risks that is.
I merely wish to point out that insurance is not the bulletproof security banket many of us would like it to be. If we really want to protect our businesses it helps to be mindful of insurance exclusions and costs as well as the fact that some business activities are simply uninsurable.
When the Enron and WorldCom accounting scandals were unfolding, for example, their directors’ and officers’ insurance policies were nullified on the grounds that the insurance applications referenced financial statements that were fraudulent. Those cases help illustrate that the onus of managing risk is always on us. It’s how we conduct business on a day-to-day basis that matters.
Balancing business risks is without a doubt a high wire act and insurance is undoubtedly a safety net. But the best protection against any holes in that net, or having the net pulled out from under you, is having your act together.
The best way to achieve that is by educating and empowering your employees about the legal do’s and don’ts of your business and industry, as well as setting up processes to serve as an internal safety net. It’s a process that a lawyer can help you with and is the best way to keep your business on a sure footing so more things go right than wrong.
Yes, you’ll have fewer insurance claims which will make the insurance companies happy. But your excellent claims record and internal processes should also buy you some bargaining power the next time you negotiate your insurance rates. Now that should make you and your chief financial officer happy. So the next time you hear someone say “we have insurance,” sit back and smile.