Hot Potato, Hot Potato...
When you were a kid, did you ever play the "hot potato" game? You know, the one where you had to get rid of the item considered the "hot potato" fast and not be the one caught with it? If you didn’t, don’t worry, because now that you are all grown up, you get to play a much more expensive version of that same game, only this game is called protecting yourself from liability claims. In modern society, it seems just about anything we do can, and sometimes does, carry some sort of liability with it. Let’s take a look at a few common situations.
Let’s look at Joe. He’s a nice guy, just out of school and embarking on a promising career. One day, he and his buddies are playing softball in an open field and Tom just happens to be sitting in his back yard minding his own business. Joe hits the softball...it hits Tom in the head and puts him in the hospital. Ooops, that field wasn’t rated for softball so Tom sues. Not only does he sue Joe, the pitcher and all of his buddies, he also sues the field’s owner.
Ok, maybe that example is a bit far-fetched, but it could happen. How about if we put Joe on a golf course? He tees off and hooks the ball right into Tom’s plate glass window showering Tom with glass. When Joe’s insurance company gets the bill for the window, medical bills and Tom’s pain and suffering, could he be held liable? After all, Tom built that house after
the course was five years old. Why should Joe pay for Tom’s decision? The answer is, we don’t know why Joe should pay, but it happens.
Here’s a final question. Let’s say Joe owns a grocery store and Tom is in the frozen food aisle buying ice cream. Little Timmy just happens to walk by and spill some juice on the floor behind Tom and Tom slips on it. Do you think Tom will sue you? In this case, he won’t, because Timmy is his son and Tom’s a reasonable guy, but there are a lot of not so reasonable guys around also.
While it may seem that none of these cases should cause Joe his life savings, the fact is they could. So what can Joe do about it? He could go hide in his house for the rest of his life, but if a neighbor slips on his driveway in the winter, he can even be sued for that! So, what is Joe to do if he chooses to engage in life? Aside from being cautious, Joe should look into the various forms of liability insurance available to him, if there is any available. That’s what most of us business owners and advisors do in our own businesses. This tactic is, however, becoming a major concern for business owners in general.
What kinds of insurance are available and what should you buy? Well, that depends on your business. First and foremost, if you are in business, you should at least have a general liability
policy. This is a policy that protects you from a broad array of risks like someone falling over a wire in your office or a shingle falling from your roof and pounding a good customer on the head. But, there are also other kinds of insurance you may need.
Non-owned vehicle insurance,
in addition to the traditional insurance you may have on company vehicles, is another policy you should consider almost mandatory if you have any employees driving on company business. Simply put, if Janet is delivering payroll checks to a branch office and rear-ends a highly excitable Tammy, Tammy can sue Janet and she can sue you since she was on the clock at the time. Non-owned vehicle insurance can be a lifesaver in such instances.
Have you ever heard of directors' and officers'
insurance? Chances are good that you have if you are a director or officer of a company, but not so good if you aren’t. Did you know that there was a time in the 1980s that it was almost impossible to find good D&O insurance? That’s because just about everyone who served on a failed bank was being sued by the FDIC and there were a lot of insurance companies taking baths on policies they issued.
If you are in the mortgage lending business, banking business, securities or other business that depends heavily on you or your employee’s judgment and performance, you probably need some form of errors and omissions
insurance. This protects you and/or your employee(s) if you fail to dot an "i" or cross a "t" in a particular transaction. Let’s say you are the title company in a transaction and you are required to file a first mortgage on behalf of a lender, and you forget. The borrower goes bankrupt and sells the property before the lender can get their money. Who do you think is going to make the lender whole when the borrower skips the country?
Are you a professional? Make sure you carry some form of malpractice
insurance. Oh, don’t worry if you have never violated any of your profession's rules. The fact is that even if you are in the right, defending yourself can cost a fortune.
insurance is another invaluable coverage if you are in the manufacturing business. Just think of all the claims filed against toy manufacturers and clothing companies.
Don’t forget about employment practices
coverage either. With the load of employment claims against employers on the increase, you really do not want to become another case where a lawyer says - gotcha!
All of these types of insurance are presently available to many business owners, if they can afford the premiums. Unfortunately, the growth nature of the premiums over the years does not necessarily make such insurance available to everyone. So what’s a business owner to do to control insurance costs and, hopefully, remain protected?
There is really only one thing you can do to limit the cost of your liability insurance - do everything you can to control your own risks. Insurance companies are in the business of protecting you against risks, but they need you as their primary partner in protecting you. For example, in the accounting business, we answer a long questionnaire designed by the insurance company to see how much risk we take. Did you ever wonder why we give engagement letters on so many things? It’s not simply that we like to write letters, rather, it’s that we use the letters to create an understanding between our clients and us to limit our liability. If we use an engagement letter for everything, our insurer loves us.
So how do you create a liability unfriendly climate in your business? Here is a very short list of possibilities:
- Do everything possible to warn potential plaintiffs from harming themselves on your premises like placing warning signs on appropriate doors, wet floors, etc.
- Limit where customers can go in your offices. Don’t allow them to go somewhere that could be more dangerous than normal, like the air conditioning room, electrical room, storage rooms, etc.
- If there are particular hazards, like theft in a parking lot, use signs and other methods to warn users that you are not liable for particular risks.
- Place warning signs on products if their use is limited or to make sure toys are purchased as age appropriate.
- Create a personnel manual that establishes proper and improper behavior.
- Create a procedural manual to be certain employees follow appropriate standards for your industry in documentation, activities, etc.
- Make regular inspections of your premises for possible hazards and document the results and any remedial action taken.
- If premium costs warrant it, engage a risk management company and follow its recommendations.
- Consult your insurer or agent and seek their input on limiting liability.
These are just a few things you can do to minimize the costs of liability insurance. The key is to be proactive in protecting yourself. Make sure you get your accountant, attorney, insurer and its agent as well as other necessary experts involved in the process of helping you control your risks. Control your risks, show your insurer that you are being proactive and you may be perceived a better risk. The better the risk, the less an insurer must charge to cover the risk.
With the ever-increasing costs of insurance and the ever-widening spectrum of risks your business is exposed to, the best way to minimize your costs is to establish a comprehensive risk management program. If you have never done so, give us a call and we will be glad to kick some ideas around with you. Given the litigious nature of our society, a liability suit is one hot potato that you don’t want to be stuck with.
Have a great March!