Proactive risk management

by lgrant@solagroup.com

There is risk in everything we do as contractors. These risks can adversely affect you, your company, employees and projects. Taking actions to manage these risks protects the investment you make, in your business, in money, time and energy. Getting an insurance policy in place is not managing risk; it is putting the ambulance at the bottom of the cliff. Managing risk is building a barricade at the top of the cliff. This is the first of a four-part series about risk management that will help you develop simple risk management tools that not only create the barricade, but also provide an ambulance waiting, engine running, just in case.

The first step in creating a risk management tool that you will actually use, is to assess your risk. Each builder is different and thus has different risks to mitigate. Risk is even different on every job we undertake. As we begin to list the risk we assume, each and every day, let’s think about each of them in terms of our ability to prevent the risk, avoid the risk or transfer the risk: Prevention, Avoidance and Transference (PAT).  

Prevention is simple things we can do to prevent or attempt to prevent the risk from being part of our processes.  
Avoidance is the choice we make to not take on a risk or to reduce the risk. 
Transference is our ability to transfer the risk to others.  

Throughout this series of articles we will discuss more about PAT in regards to these key areas of risk management.  

1.    Insurance
2.    Jobsite selection
3.    Human resources
4.    Business operations
5.    Contracts
6.    Jobsite safety
7.    Product liability 

Most builders focus their entire risk management efforts on a single part of risk transference through purchasing insurance. Insurance is an important part of any risk management plan, but it is the ambulance at the bottom of the cliff. A single coverage of insurance is not sufficient and so we normally purchase three different policies of insurance: General liability, builder’s risk and worker’s compensation. However, even insurance does not transfer all the risk to the insurance carrier. For example: Worker’s compensation will cover the cost of an employee-related jobsite accidents but it will not cover penalties and fees assessed by OSHA, nor the cost of preparing for and participating in litigation related to a worker’s claim.  

Utilization of any insurance is the ultimate rate multiplier. You use it and they will bump your rate. Insurance is a regulated industry and most carriers file two to four rate tiers with the state insurance department. They price their customers, based on the risk they take, in a given pricing tier. If you’ve utilized your insurance you are much more likely to get priced into a more expensive tier. Additionally, worker’s compensation has a “modification factor” that either provides a discount from the filed rate or applies a surcharge. Based on your claims history your rate could be 30 to 40 percent more expensive than it should be.  

Another challenge with insurance is the fine print. Policies are typically large and complicated and may not actually assume the risk you think you are transferring. It is imperative that each policy be reviewed in detail to ensure it actually has the correct endorsements and coverage you require for your business. Look at the list of the risk you are trying to transfer, make sure the policy covers these risks and list all of your business entities, including any DBA you might be using. 

Although insurance is the most commonly focused on tool of risk transference, it is really only one and other risk transference tools actually provide a broader range of protection. Of all the risk management tools, insurance is the one that only utilizes transference. It does not provide any prevention or avoidance. 

As we continue this series, we will focus on the prevention and avoidance of risk, building a large secure fence at the top of the cliff. This being said, insurance is absolutely necessary. Even with your best efforts, your systems in prevention, avoidance and even other transference will not be perfect and may not always be successful. Insurance fills in and protects against these eventualities.  

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