It’s important to understand insurance companies to understand why the insurance industry views snow removal as it does.
Okay, let me put this out there right up front: The insurance industry views snow and ice management as unprofitable.
Likewise the insurance world has reacted to paying out historically huge slip-and-fall claims in the snow removal business by practicing their own type of risk management – avoidance. If carriers choose not to write contractors that remove snow, logically they won’t pay out on the high slip-and-fall claims.
It’s not a perfect or a fair system. However, until industry attitudes change in both insurance and snow removal, and tort reform efforts take hold, this is the world in which we do business.
Therefore, it’s important for snow contractors to know how insurance companies make money, why the insurance industry views snow removal as it does, and why you pay the premiums you pay. Likewise, it’s as important to understand the role insurance plays in local, national and even world economics. Perhaps I can dispel some misinformation and convince you we are not an evil industry at our core, but an important and vital business partner that can help you grow and sustain your business.
Basic concept
Historically, insurers charged a small fee to landscape companies who engaged in winter snow removal. However, over time, as snow removal evolved and grew into its own, insurance companies came to understand the risk associated with snow and ice management and developed ways to absorb the costs associated with the major form of risk – slip-and-fall claims.
Essentially, insurance companies charge snow contractors for insurance in the hope that the amount of money collected is greater than the amount paid in claims. And while they may lose money on some snow removal contractors, overall an insurance population still comes out ahead by having enough people purchase insurance who don’t end up needing some or all of it in the end.
Insurance companies earn revenue by underwriting new business – selling new insurance policies – and earning income on their financial investments. Subtracted from this revenue are expenses associated with running the business and any claims that are made by insurance policy holders – snow contractors. The remainder is the adjusted underwriting profit.
The adjusted underwriting profit, according to the Investopedia, is a measure of success for an insurance company. It is important for an insurance company to successfully manage its financial investments so it can pay out on the insurance policies they’ve sold. So if it practices prudent underwriting procedures and responsible asset-liability management (ALM), it should be able to generate a gain. Or, if it underwrites policies it shouldn’t or fails to match its investments (assets) to its future insurance policy liabilities, it will not be as profitable.
Now, consider the fact that the typical slip-and-fall claim would bankrupt the average small business owner. Whether it’s a legitimate insurance claim or not, very few small businesses could afford to write a check to a person who sued them for slipping on the pavement in front of a retail establishment.
Insurance companies justify the use of insurance scores by citing studies that show a positive correlation between credit scores and insurance claims. At some level, this may seem to make sense. At the level of minor traffic accidents, for example, it is reasonable to argue that individuals with poor credit are more likely to file claims, if for no other reason than the fact that they lack the funds to make repairs on their own.
The insuring agreement
Remember, an insurance policy is a legal contract. Your contractual partner will explain what types of claims are covered, as well as who is insured and the definition of an occurrence. There is a lot of case law attached to this very concept of both who is an insured and what is the definition of an occurrence. Your contract starts strong with a broad insuring agreement, but then becomes restricted by a series of exclusions.
What this means is that when a claim occurs, the insurance carrier looks to see if it fits within the insuring clause and then runs down the list of exclusions. If the “claim” makes it through this obstacle course, then it’s the contractual duty for the insurance company to defend and pay damages on your behalf.
Think of an “incident” as a participant of that popular TV game show “Ninja Warrior.” The “incident” is the wacky guy dressed like Elvis who is going to try to get through the “insuring agreement” and then face all the spinning “endorsements” and punishing “exclusions.” And if this claims gets through this near impossible process, it will become a covered claim, or the next Ninja Warrior.
My mentor would always tell me, “Read the policy- its amazing what you will learn.” The terms and conditions of your contract will be modified by endorsement, which includes modifications by endorsing exclusions on your contract. This may sound confusing, but modifications by endorsing exclusions simply means changing your terms by adding wording to your contract that takes away coverage.
Since an insurance policy is a contract it may be considered a contract of adhesion. This is a contract – often a signed form – so imbalanced in favor of one party over the other there is a strong implication it was not freely bargained.
An adhesion contract can give the little guy the opportunity to claim in court that the contract with the big shot is invalid. This doctrine should be used and applied more often, but the same big guy-little guy inequity may apply in the ability to afford a trial or find and pay a lawyer.
Insurance rates are designed to predict future losses
This sounds like a fair concept, right? The customer needs the insurance policy, so he may give the contract a quick glance or simply sign it in good faith.
From that point on, the customer is legally bound to the terms of the adhesion contract, even though he may not have had any input into those terms. This may not appear to be problematic for the weaker party, since he is receiving the promised benefit of insurance coverage.
The key concept here is that the particular behavior or activity of the insured does not determine coverage. Rather, the type and cause of loss incurred by the third party controls the coverage.
The legal difficulty with an adhesion contract often begins when the stronger party appears to violate the contract terms. The language of the entire contract, including the fine print not examined by the weaker party, often protects the stronger party from any legal ramifications. An adhesion contract for an insurance company, for example, may have a clause prohibiting class action lawsuits. There may also be restrictions on where a lawsuit can be filed, or the customer may have unknowingly agreed to use a professional arbiter, not a judge. Clauses which protect the stronger party are quite common in an adhesion contract, which is why the weaker party needs to understand the entire document before signing.
Fortunately for the weaker party, US courts have formed strong opinions on legal enforcement of an adhesion contract. In general, the terms spelled out in the original contract are considered valid and binding, but the weaker party can argue the terms are ambiguous or completely unconscionable. If the court agrees that a condition is ambiguous or impossible to enforce legally, then the weaker party may prevail in a court proceeding. This is why entities which use standard contracts employ legal professionals to make sure their terms are legal and reasonable.
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5 Tips...
To avoid slip-and-fall lawsuits
Slip-and-fall claims are a constant concern for professional snow contractors, but it is a manageable risk if certain precautions are taken into account and followed.
Risk mitigation consultant and Snow Magazine columnist Julius Pereira III offers five simple things you can do to help avoid being involved in a personal injury law suit attributed to winter property maintenance operations.
1. Understand the adopted ordinances, codes and applicable industry standards that affect winter property maintenance in the municipalities you are working in. Winter property maintenance is a seasonal requirement of property maintenance. The standards that affect the property manager may also affect your work.
2. Identify and address with the owner/property manager existing physical conditions that affect your work. While site defects, including roof and site drainage are typically the responsibility of the owner/property manager, during periods of freezing weather, the conditions will be hidden under the snow and any icy conditions created by freezing temperatures will likely be attributed to your work.
3. Understand your client’s expectations regarding the timing, extent of and quality of your work. This will avoid unnecessary misunderstandings later should someone get injured.
4. Clearly document these expectations and the responsibilities of the parties in your agreement. Particular consideration should be given two identifying who is responsible for follow-up inspections. Many winter injuries are caused by icing due to melt and refreeze, not the initial clearing work.
5. Post clearing sign-off and photographs. Having the owner/property manager to sign off on your completed work and taking post clearing photographs documenting that you completed what you were contracted to do go a long way in avoiding unnecessary involvement in a premises liability based injury claim.
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Underwriting income
Underwriting income is derived from the difference between how much money is collected for all policies sold versus how much money is paid out in insurance claims for those policies in any given time period.
For example, Insurer A may collect $1 million in premium for polices issued or renewed in a given year. If they pay less than $1 million in claims, they have made a profit. If they pay more than $1 million in claims, they suffer a loss.
Insurers have a unique way to earn massive amounts of additional profit. Unlike many other types of businesses, insurance companies collect huge sums of cash throughout the year and may not have to pay on claims on those policies for many years.
This unique situation allows insurance companies to invest that money while it’s not being used. As a result, profits can be reaped or lost.
This is why Warren Buffet formed the Berkshire Hathaway Insurance Co…so he could generate capital to invest in the stock market.
In fact, insurance companies can knowingly charge too little for insurance policies and plan for an underwriting loss if they believe they can make a profit from investing the money they receive before having to pay claims. In the early 2000s, when the stock market was booming, this practice was taking place.
On the flip side, insurance rates may be raised to make up for stock market losses.
Additionally, some insurance companies may enter a new line of insurance or a new state and purposely charge less than their competitors, causing an underwriting loss, simply to make a name for themselves. Then, the following year, raise their rates and hope to hang on to some of the business they wrote.
Taking all of this information into account, it is recommended that you shop around to be certain you are getting the best coverage at the lowest rate available to you.
Most of us see insurance as a necessary evil. We rarely, if ever, see the benefits of purchasing insurance other than making insurance companies and executives filthy rich.
For one reason or another, many people believe they shouldn’t have to buy it, or perhaps think it’s a waste of money, and probably wouldn’t buy it if it weren’t made mandatory by state law.
But the reality is, without insurance, much of the financial world as we know it would grind to a halt, and we would only own the things we could afford to buy in cash…if there were even companies around to pay us a salary or sell us anything.
To understand its value, look at some of the basics of how insurance adds to our society. While paying for insurance is nothing but a pain to most people, there are a few reasons insurance helps society as a whole.
Believe it or not, we’d all have less money in our pockets if it weren’t for insurance.
Taxes
First, insurance reduces the money we have to pay for uncompensated victims of accidents. Without insurance, many who are injured in an accident would become a drain on state and federal agencies as a result of not being able to pay their medical bills. In short, your taxes would increase to pay for rehabilitation or care of the sick and injured.
The reality is, we all pitch in a few dollars, in the form of insurance premiums, and let the insurer pay out the huge bodily injury and property damage costs that result from car accidents and other various liability and property damage that occur in the U.S.
Insurance helps the economy
The second benefit has to do with capitalism, or business pursuits. There would be fewer businesses if there were no companies to insure them.
Ask yourself how any business would survive if it suffered from a loss? If a tornado struck your town and destroyed much of the property, how would the affected companies reopen? Unless they had enough cash in the bank to completely rebuild, they would be bankrupt.
What if the bank was destroyed? Where would their cash be? Who would pay for the restoration of the bank’s credit system? This is all covered by insurance.
Also consider that the typical “slip-and-fall” claim would bankrupt the average small business owner. Whether it’s a legitimate insurance claim or not, very few small businesses could afford to write a check to a person who sued them for slipping on their property.
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Drainage leaders
This sounds like a children’s board game, but it’s certainly an issue snow and ice management professionals shouldn’t take lightly.
You typically cannot see into drainage leaders. You can see the edge of gutters and any overflow onto the ground. Gutters are placed on buildings, especially over door, to prevent drainage from falling onto the entrance and exit walkway below. Even when covered there is a propensity for leaves twigs and other debris to collect in gutters. If clogged, overflow and leakage is only an inconvenience to pedestrians walking into the entrance during warm weather. Telltale signs of problems may be seen from the ground if the gutter is one story above the entrance. For higher conditions binoculars may be required.
This is the property manager’s concern. So what does this have to do with snow removal and ice control? In the winter icing of this debris will freeze and affect the drainage the flow of drainage in the gutter. This may cause drainage to overflow the edge of the gutter and onto areas below. There may also be leakage at the gutter attachments. Do these conditions affect your liability? If this uncontrolled drainage due to clogged gutters and leaders falls on a pedestrian walkway, especially at an entrance, the resulting icy walkway is a preventable hazard.
At a minimum, these types of conditions should be documented and brought to the attention of the property manager. You can then discuss with the property manager if the condition will be corrected or if additional winter property maintenance services, such as a formal ice watch program, is required. This information can then be addressed in your winter property maintenance contract.
While these conditions are the responsibility of the property manager, and you are not the property manager’s inspector, it’s your liability, manage it as you will.
Risk management consultant Julius Pereira III owns Pereira Consulting, Chadds Ford, Pa., and is a frequent Snow Magazine contributor.
Share your experience
If you have experienced site design conditions that potentially affect your liability, share htem with your fellow snow professionals. Send a high-res digital photograph and the condition along with a short description to edit@snowmagazineonline.com.
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Matt Peterson is a principal at Mills Insurance and a frequent Snow Magazine contributor.