Liability and Risk Management - Essay Example

MANAGEMENT 3 LIABILITY AND RISK MANAGEMENT Introduction There are 2 basic kinds of risk management, that is’ “dynamic” and “static”. Dynamic risk management deals with risks that can result in making or losing money. (Classifications of Risk 2000-2011) For example, the location of a hotel, its amenities and fame can all influence its occupancy rate and therefore its profitability. In contrast, a static risk is one in which only a loss can result, never a profit. Examples include risk of damage to the premises such as by fire, earthquake, etc., and risk of liability claim payments to customers, the general public and staff. Since the management of dynamic risks and static risks require very different skills and mindsets, they are nearly always performed independently by different personnel even though they carry the same designation as risk management. Unlike financial institutions which are required to safeguard their customers’ money and investments, hotels must take all reasonable steps to protect the well being of others along with the safety of the premises. Therefore risk management and liability with respect to hotels is mostly concerned with static rather than dynamic risks, and is the reason I will be discussing only the former in the balance of this essay. One final point I would like to make in this section is because static risks LIABILITY AND RISK MANAGEMENT 4 never make money they are often neglected. Description of Agency/ Position For the purpose of this essay I will assume I am the Account Manager for Best Western Hotels and work for a worldwide insurance broker, Aon Reed Stenhouse. It is possible Best Western may employ a staff Risk Manager, but it is more likely this function is performed by an insurance broker since only some of the very largest corporations have an in house Risk Manager. Regardless of whether done by staff or an outside agency, the functions are very similar. At this point a distinction must be made an insurance agent and an insurance broker. An agent serves only 1 or a very few insurance companies and is paid a commission by them for business referral. In contrast a broker has access to the entire insurance market and therefore place coverage with any insurer or group of them in the case of subscription policies for physical damage on behalf of a client such as Best Western. Because their remuneration is derived from their client rather than insurer(s) they are usually more attune to their customers’ needs than an agent is. While brokers do place insurance coverage their function is much broader than that. Especially if Best Western does not have a staff Risk Manager, the brokers’ function is to supervise the hotels’ static risk management. For example as Account LIABILITY AND RISK MANAGEMENT 5 Manager for Best Western I would be responsible for liaising with them to ascertain the risks they face and advising them on the most efficient ways of dealing with each one whether by insurance, transfer to subcontractors, reduction through preventative safety measures, retention, or avoidance. To assist me, I would have a site inspector make at least annual inspections to identify and decide how to minimize perceived hazards. I would probably also have the services of a Claims Manager who would monitor Best Westerns’ claims and if they felt an insurers’ position was wrong, go to bat for the hotel, or conversely if they agreed with the insurer try to convince the hotel their decision was right and in accordance with policy terms. In a nutshell my role would be to assist and advise Best Western in all maters related to static risk management. Risk Identification Although there may be slight variations in the risks associated with individual properties due to such variables as differing amenities provided or specific locations, most static risks are common to all. They include the physical risks of damage to the property itself such as by fire, smoke, earthquake ( especially in California), flood, water damage due to leakage from plumbing and fire retardant equipment, explosion, ( either accidental such as LIABILITY AND RISK MANAGEMENT 6 by natural gas or deliberate criminal explosion of some kind of incendiary device), windstorm cyclone and hurricane and in some locations hailstorm. While most of the above are beyond the control of Best Western, they could face exposure to liability claims if they failed to provide legal and/or generally accepted safeguards to reduce the possibility of the occurrence of these events and/or minimize their impact if they did. For example, they could face liability exposure if they failed to have a working sprinkler system in place and/or fire retardant material where appropriate and this failure is considered to have allowed the fire to spread resulting in more casualties and damage than would have been the case otherwise. Similarly, while of course Best Western cannot prevent an earthquake, they can lessen the likelihood of resulting injuries and death by ensuring their buildings at least meet the local building code standards and, thereby, reduce the probability of structural collapse. These are examples of cases where Best Western has both risks of damage to its” own property and liability exposure to others based on negligence and failing to meet the standard of care required of them even though they did not cause the event. They are required to at least meet legal and community standards to safeguard their customers, staff and the public that may be affected. There may also be liability risks with IABILITY AND RISK MANAGEMENT 7 no physical damage to their premises. For example, if there is a swimming pool and a guest drowns because of failure to have lifeguard services during operating hours the hotel risks a liability claim. Most hotels provide a restaurant and a bar. If the restaurant serves tainted food even unknowingly they could risk a liability claim for a customer who eats a meal and becomes ill. Under the doctrine of strict liability they do not have to prove precisely what food caused the illness, only that a doctor confirmed that the meal at the Best Western have caused food poisoning. Under host liquor liability laws the hotel also faces risks beyond the direct consequences of a negligent action. For example, if a bartender serves liquor to a person obviously intoxicated and he or she then drives his or her car causing a serious accident, the bartender could be considered as contributing to the mishap and Best Western or its’ insurer could have to pay a portion of the claims for resulting injury and damage. The hotel also has financial risks, but only static risks of loss such as employee theft and conversion would be under the purview of the brokers’ Account Manager. These are a few of the risk exposures a hotel chain such as Best Western has to address. Risk Evaluation LIABILITY AND RISK MANAGEMENT 8 A person charged with the responsibility for static risk management for Best Western Hotels must consider what risks are most likely to affect the firm in terms of both severity of loss and frequency of possible occurrences and make plans suitable to such situation. For example, unless specifically targeted by an arsonist, the likelihood of fire damage is remote. However, the consequences if it does occur could be so devastating it likely needs to be insured probably with a deductible reflecting the amount Best Western can comfortably absorb. However if there is an arsonist loose in the neighborhood, it might be prudent to lower the deductible before a loss occurs. There is no precise formula for predicting risk evaluation. It is a judgment call based on past experience and current trends. The key questions to be decided are how much can be absorbed in any one loss and what are the maximum number of losses anticipated to occur, and then judge what insurance coverage is required to ensure the company will not be severely financially impacted. The next step is to reduce the likelihood of occurrences and lower the financial impact if they do by one or more of the steps discussed in the final section of this paper. The same principles could be applied to other types of physical damage losses such as those listed in the previous section. LIABILITY AND RISK MANAGEMENT 9 With regard to liability risks they are more likely to occur frequently but are usually smaller although they can be very significant on occasion. This is especially true with regard to slip and falls, particularly in areas prone to winter conditions of snow and ice. Many people advance such claims with little merit. That is, they fell because they were not watching where they were going rather than because of a particular hazard. In many cases liability is difficult to determine as there appears to be elements of claimant and hotel negligence along with bad weather conditions making it difficult to evaluate to what extent a hotel is responsible. Also there is the issue of economics as it may be cheaper to settle on a relatively token basis without any admission of liability rather than not offer anything and incur extensive defense costs. It is usually best to insure liability risks with little or no deductible and let the insurer decide on how best to deal with each claim. Another benefit for the hotel in such cases is a public relations one, that is, they are removed from the insurer and if the claimant is unhappy they can truthfully say it was the insurers’ decision, not theirs. While frequent, such risks can also be reduced by steps detailed in the last section. Finally, employee dishonesty losses are generally infrequent especially if there is good morale. With widespread credit card use, thefts are usually small. However there is a LIABILITY AND RISK MANAGEMENT potential for conversion and for that reason it would be wise for Best Western to have a fidelity bond. Case Precedent I found a case involving a Best Western hotel. Although it occurred in Middlesboro UK and did not involve an ill customer per se, it does illustrate the importance of proper hygiene in the kitchens of their restaurants (News from Middlesboro Council 2011) An Environmental Health Officer found mouse droppings and lack of cleanliness and fearing a serious risk to public health, closed the restaurant and imposed a fine of 16000 pounds (over $20000) plus costs. This was upheld by the local court. If people had become ill after eating at this Best Western, it would have resulted in several successful claims under the doctrine of strict liability, even if the illnesses were not proven to be caused by the unsanitary kitchen conditions. The importance of the broker risk management plan including regular inspections of such facilities and insisting on the immediate rectification of hygiene issues cannot be over emphasized. Slip and falls have been mentioned above as a source of liability risk for hoteliers. While most are minor although frequent and LIABILITY AND RISK MANAGEMENT 11 many of questionable liability, the following case illustrates they can be very serious, and liability is accentuated if a hidden danger is involved and/or a building code requirement is violated. An elderly woman was fatally injured when she fell down the wide staircase of a Tucson hotel. (2011).The center handrail had been removed contrary to the building code and a new carpet had camouflaged the stairs. A judgment of $3M was awarded to the lady’s estate. This case shows risk management plans must make hotels safe for visitors of all ages and abilities, free fro hidden dangers and at a minimum consistent with building code requirements. . Another important area of risk management concern is host liquor liability. In most jurisdictions courts and legislatures have imposed contributory liability on commercial hosts including hotel bars that over serve alcoholic beverages so that the customer becomes intoxicated, drives, and is involved in a car accident. The theory is that the seller of alcoholic beverages is negligent in over serving and is liable because driving and becoming involved in a an accident is a foreseeable risk of this situation. While the 1971 California decision of Vesely v. Sager involved a public tavern, LIABILITY AND RISK MANAGEMENT 12 later legislation has confirmed the same principle applies to all commercial sellers of alcohol.( Tippie 1979) In this case the customer was served for 7 hours and had to leave by a narrow mountain road and collided with an oncoming vehicle.. The implication for a risk management plan is that hotel bartenders must be trained to stop serving any patron who begins to show any Sign of intoxication and try to ensure they get a safe drive home. Risk Treatment Generally speaking, risks that have the potential for serious loss that cannot be handled comfortably by Best Western should be insured if at all possible at least to some degree. However these and other risks can be managed by the following techniques .For example, carrying a deductible on fire and other direct damage insurance is a form of risk retention or self insurance. The deductible should reflect what the hotel can absorb in one or a maximum estimate of anticipated losses. If one does occur, it could cost the hotel up to the maximum amount of the deductible, but it save on premium. If the hotel can absorb the maximum possible loss from a a particular peril perhaps they should not insure it at all. Some strategies can be applied to further reduce risk. For example, safe storage, especially of oily rags, use of fire retardant LIABILITY AND RISK MANAGEMENT 13 materials where possible, working and well placed fire extinguishers, etc. should reduce the risk of fire. .Clean kitchens and floors should reduce food poisoning and slip and fall cases respectively. This could be done at minimal cost. Risks should be transferred to any contractors working on site by insisting they carry proper liability insurance in the event of any loss arising from their work. If a hotel is considering installing an outdoor swimming pool but notes that competitors are having problems maintaining them without frequent incidents that could result in liability claims, they may consider it prudent to avoid building one even though without this amenity they may lose business. On the other hand if they already have such a pool and they are having similar problems it may be wise to close it. However if they do so they must have it drained and filled in properly, especially if not fenced in, so that it does not become an attractive nuisance for playing children. Also they may consider closing their bar even though it may result in some business loss if they are having issues with patrons drinking and becoming rowdy, etc. Conclusion Unfortunately like life itself the operator of a business such as a hotel inevitably involves risks including static ones. The good LIABILITY AND RISK MANAGEMENT 14 news is that with careful thought and appropriate steps they can be minimized. This can be done by employing one or more of the risk reduction techniques described above. LIABILITY AND RISK MANAGEMENT 14 References 1). Australian Risk Services 2000-20011 Classification of Risks Static and Dynamic. Retrieved from www.ausiriskservices.com.au 2) Tippie, Alan C. California Liquor Liability Cole v. Rush Revived Loyola of Los Angeles Law Review Vol. 12 p.388 and 382-394 (1979) Retrieved from digitalcommons.lmu.edu/cgi/viewcontent.cgi?article=1328…llr 3) tumblr.garrisonlawfirmblog Jury Awards $3M Judgment in Wrongful Death Suit Retrieved from www.tumblr.com (2007) 4) Middlesborough moving forward Hotel kitchen closed over serious health risk. Retrieved from www.middlesborough.gov.uk (2011) Read More