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Managing economic crises before the boom goes bust.

Risk managers often focus most of their crisis management efforts on natural disasters such as earthquakes, storms and fires, with little or no planning for what might be the greatest loss exposure of all: economic crises. Yet today's economic environment has forced businesses to lay off employees, downsize or close facilities and sell property to cope and, in some cases, to simply survive. As a result, employees, under mounting pressure to be increasingly productive, are suffering from more stress-related illnesses, leading some of them to take to the picket lines.

This recessionary activity increases the likelihood of workers' compensation, liability and property losses. Therefore, it is crucial that risk managers identify and address their companies' exposures through appropriate loss control and claims management techniques. Certainly, every business needs a contingency plan in the event of an economic crisis. This way, no matter how bad the economy eventually becomes, management will have a set of guidelines to see them through risky times.

Workers' Compensation

Involuntary personnel reductions through layoffs, downsizing and plant closings result in increased workers' compensation costs. Employees who are laid off often file claims because they see the system as an income source until they find new jobs. Although it is impossible to totally prevent such claims, a risk manager who knows of impending job eliminations can institute a loss control and claims management program designed to contain these costs.

During a downsizing or plant closing, management should consult safety professionals on hazards and accident-producing situations inherent to their plants. Management should also be aware that certain aspects of its loss control program may be inappropriate during this time of turmoil. Increased supervision may be necessary to prevent an onslaught of injuries resulting from employees' inability to concentrate on the job. Extended severance pay and other incentives for managers and supervisors who stay until the facility closes ensures proper supervision throughout the downsizing period.

Open lines of communication between management and workers are essential to keep a lid on rumors and reduce the stress of uncertainty. To the extent that workers have a sense of security, they are less likely to suffer from stress, be prone to accidents, feel antagonistic toward their employers and seek income supplements through workers compensation claims. But when the claims are filed they should be promptly and thoroughly documented and investigated, with questionable, possibly fraudulent, situations given top priority by the claims-handling firm.

The cost of a pure stress claim averages $15,000 or almost twice the average cost of a pure physical claim, according to a 1988 report in Workers Compensation Monthly Where company stress management programs exist, employees should be encouraged to participate in them. If none exists, consideration should be given to putting one in place during the downsizing. The savings achieved by preventing stress-related workers' compensation claims could more than offset the cost of implementing a short-term program.

Pre-employment physical examination records help bring to light old injuries and disabilities and can strengthen defenses against fraudulent assertions of occupational illness. If the business has limited health hazard exposures, pretermination medical exams can also be beneficial. By documenting employees' state of health prior to termination, employers can reduce the likelihood of occupational illness claims and strengthen a defense against fraudulent claims that are filed.

Usually a benefit limited to senior-level personnel, outplacement is another effective claim prevention tool, but only when it includes the entire affected work force. Indeed, a freight elevator operator should have as much access to outplacement as a vice president, since he or she may have more difficuIty finding a job and therefore be more likely to file a claim.

When a claim comes in following a reduction in the work force, support from the insurer and insurance broker is critical. Insurers should play an aggressive role by being highly visible to claimants. Techniques such as frequent activity checks, photographic or video surveillance, weekly contact with lost-time claimants and required medical exams can discourage claimants from thinking they have found a way to easy money. The broker's claims professionals can monitor the carrier's performance and conduct audits to ensure that claim costs are reasonable. They can also help the employer establish claims management programs and train the claims-handling staff.

Property and Plants

In recessionary times, management, whether to free up assets or scale down operations, often finds itself forced to sell some company property. However, selling property does not relieve the seller of potential liabilities. On the contrary, the chain of liability can extend back as far as the person, or company, who introduced hazardous wastes onto the site.

Furthermore, liability may be imposed by common law, as well as federal or state statute. New Jersey, for one, has implemented the Environmental Cleanup Responsibility Act, which requires filing a site remedial action plan as a condition for closure, sale or transfer of any industrial facility; other states have similar legislation or are proposing it. To alleviate concerns regarding liability for contamination and cleanup from past operations, an environmental site assessment should be performed prior to any sale. Even if management believes the facility is free from environmental hazards, a site assessment should nevertheless be conducted as a defense against possible allegations.

From a security and fire protection standpoint, risk managers should know that idle or vacant plants pose significant problems. Losses from fire, burglary and vandalism are common. However, they can be minimized using guards, sprinklers and alarm systems. Guards' rounds should be recorded on a 24-hour basis, and local alarm and fire protection systems should be linked to a central station at an off-site location. The alarm service should be periodically reviewed to verify that sprinkler-control valves, fire pumps, building temperature and water flow are being monitored and that the detectors function properly.

If the facility is expected to be idle for a long time, equipment and materials must be properly stored and protected. For instance, processing machinery that remains in idle plants should be cleaned to prevent corrosion, and finished goods, raw materials and packing supplies should be removed from the plant. Heat should be maintained in areas where pipes are prone to freezing. Where no heat is maintained, water lines and pipes should be shut off and drained. In addition, openings to the building, such as windows, doors, skylights and stacks, should be securely closed and protected from outside entry - Other procedures to consider in an idle plant include removing flammables, combustibles, acids and reactive chemicals; cleaning dip tanks, ovens, spray booths and processing machines of combustible residue and possible ignition sources; and controlling grass and other vegetation close to the building to eliminate a potential ignition source or an attractive nuisance that might invite children. In addition, electrical power and equipment, with the exception of that needed for security measures and general access lighting, should be disconnected at the source. Except where necessary, gas and oil supplies should be shut off at their entrance to the building.


Strikes present another potential source of violence and property destruction. Strikers have been known to vandalize buildings, overturn or firebomb vehicles and attack people believed to be scabs. Combating this behavior requires police protection and private supervision of the striking workers. As arson often occurs in these situations, sprinkler-control valves should be padlocked in the open position even if service to a central station is maintained.

During a strike, extra security personnel should patrol fences, parking areas and other exterior sections. For a large facility, a mobile task force should be kept at the security control center and dispatched to trouble spots as needed. Anyone entering or leaving the plant should be identified and their visits recorded in a logbook. In addition, there should be adequate lighting in parking areas and other sensitive places.

Workers' compensation claims, environmental liability and strikes are just some of the risks that increase when the economy takes a downturn. On top of this, risk managers often have added pressures during a recession to lower and eliminate unnecessary costs. But there is also added tension from the worker's point of view in feeling uncertain about his or her future with the company. The key to keeping morale up is to remember that everyone faces a bad economy together. However, it is up to the risk manager to prepare for layoffs, plant closings and asset liquidations before the economic boom becomes a bust. Michael Harrigan, [.D,, is vice president and group manager of the claims services department of Alexander & Alexeander of New York Inc. Harry W. Shirley, CSP, is assistant vice president and senior casualty loss control consultant and Joseph W. Willis, CPCU, is a property loss control consultant with the company's national los
COPYRIGHT 1991 Risk Management Society Publishing, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1991 Gale, Cengage Learning. All rights reserved.

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Title Annotation:strikes and protests, workers' compensation claims
Author:Harrigan, Michael; Shirley, Harry W.; Willis, Joseph W.
Publication:Risk Management
Date:Mar 1, 1991
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