The Loss Unforeseen

This is the first of several articles that will highlight some technological advances and their potential for harm. In these articles, we will highlight the activity or technology, discuss how it could affect your organization and offer some practical solutions for handling the potential trouble.

Risk or loss retention refers generally refers to those exposures to loss that an entity doesn't transfer to another party or more simply put it is uninsured and is paid out of pocket. One of the most common reasons for loss retention is that a company never saw the loss coming! This is called passive retention. Passive retention has caused individuals who handle insurance matters within a firm to be fired or reassigned. Passive retention is the cause of numerous lawsuits between insureds and brokers, insureds and insurers and even between brokers and insurers. Passive retention is not a good thing.

There are many reasons for passive retention, but it mostly occurs due to ignorance. This happens when the people involved simply do not know enough to identify and analyze the potential threat to the organization. Advances in technology, changes in business practices, and accompanying legislation have continued to hit the American business community. If the risk managers, ad hoc risk managers and the insurance community do not educate themselves on these developments and plan for them, passive retention will flourish.

Advances in technology created by (1) cell phones with new technology imbedded in them, (2) wireless networks, (3) radio frequency identification (RFID) technology, (4) telecommuting in the workplace, and (5) identity theft legislation have created new perils and hazards. To handle these exposures effectively, we must examine each technological advance carefully. Many of these new exposures require specialized knowledge to be correctly analyzed. Some of these exposures are either difficult to insure or are just not insurable.

As an example, let's discuss cell phones. They are commonplace in our society. Many companies do not mention them in their employee handbooks or have guidelines for their usage. Many companies view them as a valuable tool their employees need in order to function effectively. Yet, as effective as they are, cell phones have caused both individuals and companies great harm. A woman in Florida was awarded $20,000,000 when she was hit by a salesman while he was driving and talking on the cell phone at the same time. The driver's cell phone records indicated he was making a business call at the time of the accident. The employee/driver and his employer were both held responsible.

Cell phones have been used for espionage, and for the purposes of taking pictures of people in dressing rooms, lockers, bathrooms when they least expect it. These pictures are then often posted on the worldwide web or passed around. In Europe and Asia, cell phones are used for social networking, match making, etc. The user posts a profile and when a match is found, the service facilitates the exchange of cell numbers between the pair. While very successful, it has been misused to the detriment of several young women, even resulting in death. It is the cause of a sexual harassment suit in Europe. These activities have led to litigation against both small and large companies on the behalf of those who were harmed.

Do you know how the new laws regarding identity theft that are in force in many states could affect your company? Many of these laws mandate full public disclosure of any event that could put the personal information of your clients, patients or employees at risk. Failure to disclose these events can cause a business to face hundreds of thousand of dollars in fines and penalties. When you add in the public relations costs to handle these types of situations, the total costs incurred can be large enough to bankrupt some companies.

This is not an overstatement, either. Let's use an average value of $300 as the amount each person in a lawsuit is awarded to redo or change his or her financial information. If you are a small firm with several thousand clients and you keep their credit information on file, under new legislation for identity theft, companies can be responsible for their clients' losses - both real or imagined. Multiply $300 by 1,000 clients. That is $300,000 of uninsured losses. At 10,000 clients, the uninsured losses could total $3,000,000.

Does your firm recognize any of these new exposures to loss? Have you taken any steps to help identify them? Have you sought to transfer any of these risks to others?

-- Terrence P. Coughlin, CPCU

RETURN TO INDEX OF EXCERPTS