Insights

Good risk management can prevent many insurance claims

In brief - Your insurer will love you if you take risk management seriously

Know your own business, know the laws that affect it, keep good records, have a robust credit risk approval system and take risk management seriously.

Foresight is better than hindsight in preventing insurance claims

As an insurance litigator and former senior claims manager of a large Australian insurer, I have seen many professional indemnity and Directors' and Officers' insurance claims land on my desk that could have been prevented.

And I've shared the stress and sleepless nights of clients or insureds as we have worked through the allegations together and launched the process of collecting evidence to put together a defence.

On many occasions, whilst interviewing and discussing those claims with senior managers and executives, it has become apparent that some simple risk management techniques might have resulted in preventing those claims altogether or at least put those companies in a better position to be able to respond to those claims or defend them.

Over the past 20 or so years in the insurance industry, I've lost count of the number of times I've heard the words "with the benefit of hindsight, we would have done X".

What those people were really saying was "we should have taken the time to understand risk and taken steps to minimise claims."

Importance of risk management

Why is managing risk important? Because claims can have a personal, financial and reputational impact on companies and personnel that is often not appreciated until a claim occurs.

For example, a director or officer might be personally named in a claim and have to defend it, or litigation could result in an adverse court judgment and/or negative publicity. Additionally, such claims increase the cost of insurance for your company.

Eight simple steps to managing risk

While risk management is a broad and complex discipline, following a few simple risk management techniques can make all the difference in preventing or defending claims.

1. File notes 

Employees and managers across the organisation should be instructed to take detailed file notes of all important conversations, telephone calls and conferences. These contemporaneous records are imperative in managing claims, disputes and litigation. Follow up those discussions with a letter or email to further bolster the content of those discussions or conferences.

2. Keep the originals 

The original files notes should be kept in a secure and easily accessible location.

3. Document management 

Strict protocols should be implemented across the organisation to ensure that documentation is properly maintained and managed. This includes client contracts, supplier contracts and terms of business.

4. Directors and officers 

Directors and officers should ensure they are well aware of their duties. New directors should attend courses to learn about those duties. Organisations like the Australian Institute of Company Directors and Women on Boards run courses for aspiring directors.

Awareness of your company's operations and key business activities is imperative, as is knowledge of the various laws and regulations which govern areas like OH&S, environment, consumer protection, privacy, tax and corporations law.

5. Growth and expansion 

If you are expanding your business, ensure that a properly thought out risk management programme is implemented across that growth.

6. Develop a credit policy 

Avoid risky customers and transactions by developing a credit risk approval system and credit policy. More and more these days, customers are making cross claims alleging breach of duty on the part of companies as a way of avoiding paying their bills.

7. Adopt a risk management programme 

Senior managers, directors and officers should ensure that their company takes risk management seriously and should implement a risk management policy across the organisation.

Individual managers should adopt a challenging mindset and ask questions about risk. Don't make assumptions. If you are a small organisation without in-house counsel, get external advice. Get the right insurance coverage in terms of both quantum and business activities. Find an insurance broker to help get the right cover.

For companies implementing a risk management policy for the first time, Australian/New Zealand Standard 4360:2004 Risk Management published by Standards Australia and Standards NZ 'provides a generic framework for establishing the context, identifying, analysing, evaluating, treating, monitoring and communicating risk.'

8. Work with your insurer and get advice early

Your insurer is in the business of insuring risks and providing peace of mind. It goes without saying that your insurer will love you if you are a good risk or if you do everything possible to manage your risk.

And if something goes wrong, or looks like it might go wrong, don't wait. Notify your insurer immediately and get early advice.

This article has been published by Colin Biggers & Paisley for information and education purposes only and is a general summary of the topic(s) presented. This article is not specific legal advice. Please seek your own legal advice for any questions you may have. All information contained in this article is subject to change. Colin Biggers & Paisley cannot be held responsible for any liability whatsoever, or for any loss howsoever arising from any reliance upon the contents of this article.​

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