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"HOLD THAT BALLOT UP TO THE LIGHT"
Election Brouhaha Has Risk management Lesson

Before the fact / After the fact. Only a one word difference, but a difference that could start wars.

Was the US Supreme Court really talking about poker when they debated the course of the election? Perhaps they were actually discussing insurance!

A single basic principle is at the core of all three: you can't change the rules in the middle of the game.

Before an election you can easily get both sides to agree on recount procedures; after the voting nothing could be harder, and for good reason:. after ballots have been cast, the results can be manipulated by a changing of the rules. A dealer in a poker game can set the parameters before the cards are dealt. It doesn't much matter what they are. Rule changes after the deal are - in the words of Jesse James-"inappropriate."

Insurance is like elections and poker, but in the extreme.

Your company's fate can depend on whether you acted prudently vis-a-vis your insurer before the fact; after the fact (i.e. the loss) your hands will be tied.

The only way to get the insurance coverage you need is to negotiate for it (standard forms will not do the job). Before a loss this is feasible. The coverage you ask for will be priced at a certain level, and after give and take there will be an agreement. The insurer deals in large numbers. There will be losses, but the underwriter doesn't know from where specifically. Thus your risk is as good as any other.

The terms you negotiate will be documented via the insurance policy. The policy will (inevitably) be issued with errors, and (before loss) these errors can be corrected. Written documentation is paramount in insurance.

THE SCREW TURNS

When you have an insurance loss the atmospherics will change. This is now "after the fact." It's as though the election has been held or the cards have been dealt. Negotiations with the insurer were doable; now they're impossible. The parties are nervously eyeing each other across the card table. Ballots are now being held up to the light.

The language of the insurance policy, accurate or not in representing the agreement, will now be memorialized. Contract law generally allows only "outward expressions" of intent into evidence. The parol evidence rule normally excludes all other evidence (oral agreements or side letters, etc.) which are offered to contradict the terms of the written agreement. Now the policy's exclusions are like ballots – every one "must be counted." Phrases, words and punctuation marks are examined like chads. Everyone's hands must stay on top of the poker table. It's too late to say "what I meant was...

" The point is the event has happened and the rules are set. An insurer will fight harder on this score than anyone else you deal with. Why? Mathematics:

Generally speaking an "average" premium for insurance can be around 1/10 of 1% of the insurer's maximum possible payout, i.e. the policy limit. This applies to both property and liability insurance. This means that the insurer could suffer a loss equal to 1000 times what you would have paid for the insurance. This negative leverage makes the insurer more passionate about the "sanctity of the contract."

Do you have any chance after loss of discussing true intent vs.policy terms? Yes. If the loss is small enough or you litigate long enough.

LESSONS FROM CHADVILLE

Do everything you need to do before the fact:
a.. Understand your needs and negotiate for them
b.. Document your negotiations
c.. Read your policy and have it amended to conform to the actual agreement
d.. Hire professional risk management help to do these things for you

Write the rules in advance, or try to change them later. Which position would you rather be in?

Those in Florida may take a chance. For all others I recommend prospective action.

Contact us for help in risk management strategy and implementation.

Licata Kelleher is a risk management consulting firm. The firm does not sell insurance, but does counsel clients on the effectiveness of insurance, on reducing the cost of insurance and on the risk management process.

The above is intended to be general information, and should not be construed as specific recommendations.

For more information, contact Debora Wu, at DWU@LicataRisk.com

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Winter 2004 WORLD TRADE CASE UNVEILS INNER WORKINGS OF INSURANCE BROKER

 Fall 2003 A RISK MANAGEMENT APPROACH CFOs (AND THEIR ACCOUNTANTS) CAN LOVE

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Winter 2003 COMPUTER SECURITY IS NOT A BLACK HOLE

Fall 2002 "LET'S BE CAREFUL OUT THERE

Spring/Summer 2002 WHAT WARREN BUFFET KNOWS ABOUT INSURANCE COMPANY FINANCIALS

Spring 2002 OPPORTUNITIES ABOUND IN DEVELOPMENT OF CONTAMINATED PROPERTIES

Winter 2001 "YOU CAN'T PAY US THIS MONTH? WHAT DO YOU MEAN 'NEW DEVELOPMENTS?"

Fall 2001 WORLD TRADE TERRORISM -- REPERCUSSIONS FOR INSURANCE MARKET

Summer 2001 ENERGY AVAILABILITY: CURRENT REALITY OR FOND MEMORY?

Spring 2001 "HOLD THAT BALLOT UP TO THE LIGHT"