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Risk management, insurance, and the property manager.

In today's climate of rising insurance costs and uncertainty over the stability of many insurers, managers should work to minimize risks and stabilize insurance costs--without cutting down on vital levels of financial protection.

At its most basic level, risk management can be divided into five distinct options, or steps:

* identify risks;

* avoid or eliminate them;

* reduce or prevent the events that cause risk;

* assume the risks; or

* transfer the risks to an insurer.

All of these techniques can be useful in controlling property and liability insurance premiums.

Defining and avoiding risks

Most property managers can identify the elements in their properties that are high-risk--those with potential for claims and accidents. Although these will vary by property type, experience, education, and observation can help managers to pinpoint the factors that warrant extra concern and attention.

Option two, avoiding or eliminating risk, usually involves a conscious decision not to engage in specific actions associated with that risk. As an example, managers could choose not to rent a store for a use that carries added risks (like a gun shop) or to a tenant whose integrity is in question.

Reducing or preventing risk-related occurrences is another phrase for loss control, Option 3 in this exercise. By engineering, inspection, planning, and follow-through, managers can reduce the potential for losses. Steps like adding sprinklers, smoke sensors, and water flow alarms, patching cracks and potholes in walkways, and using appropriate signage, such as "Caution--Slippery When Wet," are examples.

Assuming the risk

Assuming all or part of a risk is a fourth alternative. Often, managers will see a relationship between the historical frequency and size of claims made; full insurance coverage can be impractical, for instance, because of the high cost of covering the "first dollar" of loss. A more economical solution is to find an affordable deductible and an appropriate premium credit. (An alternative to this is, simpoly, not to buy insurance on certain classes of risk.)

Before deciding on a risk-assumption plan, managers should compare the level of self-retained coverage with the premium reduction or the out-of-pocket exposure. It is foolhardy to risk a large loss for an insignificant saving in insurance cost. In addition, managers should evaluate the potential impact of an absorbed or uninsured loss.

Transferring the risk

The fifth option is to transfer the risk, through some form of contract document, to another party. In leases, these documents sometimes are called "hold harmless" agreements.

Managers may use three types of hold-harmless contracts. First is a basic agreement in which party A (the tenant) hold B (the landlord) harmless for losses stemming from A's negligence. The second is an intermediate hold harmless that requires A to hold B harmless for A's negligence and claims for which they are jointly negligent. And, finally, a "sole negligence hold harmless" requires A to hold B harmless for losses stemming from B's sole negligence.

When legally permissible, the "sole" negligence agreement flowing from the tenant to the landlord should be utilized. If it is well-written and mutually understood, it will eliminate costly legal disputes.

Regardless of the quality of an indemnity provision, however, the agreement will mean little unless it is funded by adequate insurance protection. The lease document must clearly specify the coverage the tenant is to carry and the evidence of that coverage that must be filed with the owner.

Buying insurance

The last risk-management technique is the traditional one: purchasing an insurance policy. This is a swapping of a known cost (in the form of an insurance premium) for an unknown loss potential. However, because insurance costs can add up, managers should keep the following guidelines in mind:

Many property managers will work with an independent insurance broker to find the best coverage for their property. To keep costs in line, managers should select a broker with proven experience in reducing premiums. A broker also should be prepared to be review claims status and loss experience regularly.

Managers should demand service from their broker. Choosing an organization to help address insurance concerns is the most important risk-management decision a manager will make. Supplying this broker or agent with organized data is the second most important step.

Next, managers must make sure that the insurance carrier they select is reputable and in good financial condition. Many experts are warning that the insurance industry could be headed for a financial crisis along the lines of the savings and loan debacle. Thus, until the government provides substantial changes in regulation and financial safeguards, managers must take extra measures to ensure that their insurer will be in business long enough to cover any claims.

Finally, managers should establish an effective claims-filing procedure with their broker and carrier to reduce the number of unnecessary claims made. Obviously, managers will want to be certain that they are not being charged for tenant claims, and so should arrange to report all claims directly to the insurance company or the broker.

Risk management involves risk control. Control involves the reduction of hazards, both to people and things, before loss occurs. By employing the right amount of control, managers can reduce both the frequency and the severity of loss, thus reducing insurance costs.

Harold J. Carlson, CPM[R], is president and chief operating officer of Harold J. Carlson Associates, Inc., AMO[R]. Active in property management since 1954, Mr. Carlson produces a monthly newsletter on shopping center management and has served as a contributing author and reviewer for several IRM publicatons. He also holds professional designations from the Appraisal Institute, the International Council of Shopping Centers, and the American Society of Real Estate Counselors.
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Title Annotation:Insurance Insights
Author:Carlson, Harold J.
Publication:Journal of Property Management
Date:Jan 1, 1992
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