Getting Down to the Basics: Risk Management 101

BigStock Photo

No matter which facet of the hardwood flooring industry you work in, managing risk is an every day, all day project. Let’s take a look at risk management techniques (“tools”) that you and your company can begin adding to your risk management plan (“toolbox”).

Risk Avoidance
The best way to manage a risk is to ensure the risk never happens in the first place. That means that you and your staff are ensuring the safety of yourselves, your customers, and the public as a whole.

On a job site, in an office, or in a warehouse, you must be diligent about inspecting the area on a regular basis to make sure there are no potential hazards. Whether it’s an electrical cord that someone could trip on, or a large box of materials barely hanging on to the top shelf, regular inspections can make sure the “bad thing” or injury doesn’t happen in the first place. Safety should continue to be the top priority, and any complaints of safety problems or issues should be investigated promptly.

Risk Shifting
One of the most effective ways to manage risk is to shift risk to others. An example of risk shifting is indemnification. The concept is that the company shifts risk to the party that can best control the risk. For example, if your company is hiring another company to do a floor installation, the risk is that the installation will be improper or someone will get hurt. In this case, the company can shift that risk to the installer by asking it to indemnify the company in its contract with the company. The indemnification language states that the installer will indemnify and hold the company harmless (from a financial standpoint) from any claims due to the installer’s negligence. Here’s a sample indemnification clause: “Installer shall indemnify, defend, and hold harmless Company, its officers, directors, employees and agents and each of them (collectively “the indemnitees”), from and against any and all claims, demands, actions, judgments, costs, and expenses, including costs of defense thereof, incurred by any of the indemnitees caused by or arising from the negligence, gross negligence, or intentional misconduct of Installer, its officers, directors, employees, agents or contractors.”

With this clause in place, should the installation be improper or someone gets hurt as a result and sues the company, the company can invoke its rights under the indemnification clause and have the installer hire lawyers to defend the lawsuit on the company’s behalf right from the beginning and to pay any damages awarded against the company.

Indemnification clauses should be part of every contract as there is always the possibility that the good or service that is being purchased will cause harm to someone and the company will be sued. By having indemnification in the contract, the company knows that it will be protected in such circumstances.

One last note on indemnification: it is essential to have the company’s lawyer draft or review each indemnification provision as this is the type of clause in which one word can make a difference in the scope of the protection.

Risk Retention (Insurance)
Another way an organization can cover its risk is through risk retention. When a company purchases insurance, it agrees to “retain” the risk (up to the dollar amount of the deductible). Everything in excess of that deductible is covered by the insurance company.

General commercial liability insurance is often referred to as GCL or CGL. This insurance is the backbone of any organization’s insurance coverage as it protects against personal injury or death, among other things. For example, if an organization is sued by a customer who tripped on a loose board at the job site, this liability insurance would cover the cost of defending the lawsuit along with paying any damages that are awarded against the company.

Note that liability insurance coverage should start at $2 million. While many organizations may have $1 million of coverage, this amount is not sufficient in today’s dollar terms given the cost to defend a personal injury lawsuit.

As with the indemnification provision, it is important to have the company’s lawyer and insurance representative involved in the review of liability insurance to ensure the company is getting comprehensive coverage. Of particular concern is the list of exclusions, which includes those items not covered under the policy. If the company needs coverage for those exclusions, it will need to purchase an endorsement to override the exclusion and be covered for that peril.

Conclusion
Now that you have an understanding of the risk management “tools,” you can begin drawing on them from your “toolbox” to minimize the risk to your company.

Barbara Dunn O’Neal is a Partner with the Associations and Foundations Practice Group at Barnes & Thornburg where she concentrates her practice in association law and meetings, travel and hospitality law. Barbara serves as General Counsel to the National Wood Flooring Association, and can be reached at 312.214.4837 or barbara.dunnoneal@btlaw.com.
This article shall not be considered legal advice. In all cases, groups should consult their legal counsel.

©Copyright 2017. Barbara F. Dunn O’Neal, Esq., Barnes & Thornburg LLP. All rights reserved under both international and Pan-American copyright conventions. No reproduction of any part may be made without the prior written consent of the copyright holder.

Leave a Reply

Your email address will not be published. Required fields are marked *