Risk Assessment: Evaluating Coverage from a Loss Perspective



A Sample Loss Scenario

Let’s say your client operates a manufacturing plant. A fire destroys two-thirds of the shipping department and causes heavy smoke and water damage to the rest of the facility, including the general offices. Here are some of the conditions that could exist following the loss:

1. The client’s ability to produce goods is diminished by 80 percent. Nothing can be shipped or received.

2. Finished goods in the warehouse are partially damaged.

3. The phones are out.

4. Employees might have to be laid off.

5. The local building department becomes involved, along with environmental inspectors searching for hazardous materials (asbestos, toxic wastes, etc.)

6. Competitors are telling your client’s customers that the fire has put the client completely out of business.

7. The client might not be able to rebuild on the same site.

8. Lack of production at the damaged facility affects production and sales at another location that depends on the former for product.

9. The client had recently increased inventory because of a new product line due out this month.

10. The insurance company intends to take the salvage, but the integrity of the client’s product is so important that less- than-perfect merchandise cannot be put on the market with the client’s name or label on it. Furthermore, previous agreements may prohibit the selling of that product in a specific geographic area.

11. A tenant who occupies part of the building is making demands on the client.

12. The client’s newly installed production equipment had just arrived but wasn’t included on the last insurance valuation.

13. There was an extensive investment in in-house labor to reconfigure the plant. Much of this cost was expensed and does not appear on the books.

14. Because all lines had been working 24 hours a day, seven days a week before the loss, making up lost production is a problem.

15. Raw materials are not readily available and those that have been shipped cannot be received.

Questions and Dialog

The conditions described above set the stage for a number of questions which, when answered, will help determine the coverages needed and how they would respond to a given situation. The resulting dialog will also help identify potential problem areas. Here are examples of some of the questions that might be posed:

“Besides providing the client with a better understanding of their insurance needs, risk assessment allows the broker to demonstrate an interest in the client’s business that is significant irrespective of the insurance purchase transaction.”