Cut ‘n Run? What to Tell Customers Before They Slash Liability Coverage
Faced with shrinking revenues, many business owners have been forced to re-evaluate their expenditures numerous times over the past year, each time looking for yet another way to cut costs. Along with slicing payroll and curtailing business travel, executives have cut back on liability insurance coverage, reasoning that they no longer need as much insurance now that their top lines are smaller.
Paring liability insurance limits should not be done without thoroughly examining the company’s long-term exposures. Businesses should apply the same principles when evaluating insurance coverage that they use when balancing revenues with the costs of doing business.
Failing to undertake a long-term exposure review could create a scenario in which short-term cost-cutting creates long-term financial risks.
Business owners need to look past the immediate relief to the bottom line and gauge the impact of cutting costs on the long-term survival of the company. For example, when a company decides to cut staff or reduce wages, it first must gauge where the pruning must end to leave the organization enough talent to survive and hopefully, in time, thrive again. The company has to take care that it is not shedding or prompting the departure of its most valuable revenue-generating employees. Similarly, before restricting business travel by executives and sales personnel, a company should have the requisite technology and systems in place to maintain effective lines of communication with customers, suppliers and business partners.
Likewise, business owners should consider the long-term effects before reducing their liability coverage. On one level, the rationale for reducing insurance limits when sales are sliding may seem logical. After all, it could be reasoned that with everything else being equal — including product mix, customer base, management style and risk management — a smaller company generally does not need as much insurance as a larger company.
Future Impact
However such reasoning fails to take into account a company’s potential exposure for the volume of products sold in previous years when sales were booming. Even if revenues are down, a company’s liability exposure might be no less than it was when revenues were high because the products sold in previous years remain in use. Thus, the liability exposure the company had when it sold those products has not been diminished and may require at least the same level of insurance coverage.
Of course, a company might be confident — and deservedly so — in its products’ integrity, based on many years of product performance data. Years of minimal product problems, however, do not take into account two risk factors that could result in costly problems for a company in the future.
Product Misuse
One risk over which a company has limited control is product misuse. For example, consider the claim filed by the family of a child who was injured while using an automatic baseball pitching machine. The injury was not caused by the machine’s pitching arm slipping out of place and hurling a hardball directly at the child. Nor was the injury the result of the machine throwing several errant balls at the child at one time. It happened when the child and a group of friends decided that the pitching machine would be a lot more fun if they loaded it with rocks and flung them at each other.
Another claim over an injury resulting from product misuse was filed when a child was hurt while playing on a trampoline. The trampoline’s surface material did not fail and cause the child to fall through the jumping surface to the hard ground below. Nor did the trampoline’s frame collapse and thereby cause the child to fall to the ground. Instead, the child was injured when she fell off the trampoline because someone had removed its protective cage.
While both cases are clear examples of product misuse, both claimants actually did recover damages. Even if a company feels that it has listed every conceivable misuse scenario within its products’ warning section, it should not assume that it will not be held liable for the listed product misuse by a court of law. In today’s litigious society, even an activity such as loading rocks into a baseball pitching machine, which most people would consider a less-than-smart activity, can be a source of liability for the manufacturer that had nothing to do with the rocks going into the machine.
A New Liability Emerges
The second risk factor that a business has to consider is the next great liability. Thirty years ago, corporate America and its insurers may not have been concerned about pollution and asbestos liability. Over the past generation, however, those issues have sorely strained many companies — from the high-tech to the insulation industries — sinking many of them. Fifteen years ago, builders may not have been concerned about a synthetic stucco product, the exterior insulation and finish systems (EIFS), that provided energy efficiency and was easy to maintain. Then water intrusion problems in homes began ruining EIFS, which generated massive claims for builders across the South.
Of course, no company can predict with any certainty where the next great liability will emerge or in what way a product will be misused. However, as with death and taxes, it’s a safe bet that new liability issues will emerge and that people will misuse products. Having a liability insurance policy, with its defense coverage provision intact, can improve a company’s chance of surviving both of these risks. Ignoring these risks presents a third: that a company may survive the economic downturn only to be overcome by uncovered liabilities that manifest themselves after the return of better economic conditions.