Risk Management at Churches and Religious Properties

This work is intended to introduce the basic elements of risk management and provide an overview of the types of insurance applicable to a church and related operations. I hope this outline will help ministers, church trustees and administrators to assess their churches and their own personal overall risk exposures and insurance policies. I hope it will encourage them to seek further information about this complex and rapidly changing field.

I urge each one of you to seek out an insurance professional to help you with all your insurance needs. Listen to this person and ask questions. Read the insurance contracts. If you do not understand something, ask your agent to explain it so you can. Start a long-term business relationship with an agent that will serve your professional needs. Do not buy insurance because it is cheap… nothing is inexpensive about being under-insured or exposed to risk, for which you have made no provision. Educate your insurance agent about your ministry and your operations. He or she must know all you do in order to assess your total risks.

Choose wisely, when you select an agent and a company. Check references and check the financial rating of the insurance company. Not all agents or companies are equal. There is no such thing as a standard policy… each is custom designed and written to your unique needs. Only do business with someone who is committed to serving your unique needs and is willing to invest the time to learn exactly what those needs are.

The Basics of Risk Reduction

Any business will profit from developing a risk management policy… and make no mistake; a church should be run as a business. Risk management encompasses a wide variety of topics from liability insurance to boiler maintenance to employee health and retirement plans. As you read you will notice that certain assumptions and attitudes are consistent in all situations where your objective is to control the potential for loss.

Risk, broadly speaking, is simply the chance of financial loss to your organization: but what I am calling the risk management process deals with a special category of risk called “pure risk” (risk incurred by the very nature of your operations) to distinguish it from more ordinary incidental risks that a church, like any business, may undertake.

Typical “business risks” to a church are the decisions to locate in a certain area, to start a daycare, or to operate a food booth at a fair. Such deliberate undertakings are not subject to risk management. Risk management consists of protecting your assets… persons, property and capital… from loss in the course of essential operations. It is a process of anticipating what might happen, how bad it will be, and when it may occur. It proceeds from the assumption that any incidence of loss will come at the worst possible time, and it involves all levels of planning for that contingency.

Managing such risks is like landing an airplane. A landing is nothing more than a controlled collision with the earth. Risk management is basically the attempt to control inevitable vulnerabilities. It is a procedure for dealing with catastrophe in the best possible way… by anticipating it and preparing for it.

Three general principles should guide you in your risk management program:

1. Do not risk a lot for a little.

2. Do not risk more than you can afford to lose.

3. Consider the odds.

Given these three axioms, the following possibilities, in some combination, will describe a good risk management program for your organization. Fundamental to all of them is this advice; do not treat the symptoms; identify problems and know what the risk of loss is.

1. If possible, eliminate all risk. This generally is not practical, but it is possible. It is the most certain way to prevent any chance of loss. It is the best alternative when dealing with an action that violates the axioms listed above. An example is volunteers working on elderly or poor congregation member’s automobiles. It is a great risk for little gain. It may be more than you can afford to lose. The odds are high of the cars being damaged or that the car could be at fault in an accident. You could eliminate the risk by not doing it or giving the person a little money to go to a service garage.

2. Prevent the risk. Preventing loss through controls and before-loss planning includes, for example, smoke or heat detectors, burglar alarms, fire extinguishers, panic-hardware on exit doors, first aid kits and not storing combustibles in the furnace room. Assume some risk. Decide how much you can afford to assume and do so either through deductibles or through actual self-insurance. This entails setting money aside in a contingency fund to cover possible loss. Actively participate in risk management with your insurer; you will receive credits to lower your premium costs.

3. Transfer risk. The most common way to do this is through insurance. However, other methods of transferring risk (such as contracts and “hold harmless” agreements) do not involve insurance.

4. Manage your risks, even those you transferred. This is a complex topic involving several diverse areas. Chief among them is claims control, control of settlements or at least the attempt to influence the settlement of claims handled by the insurance company.

A final element of risk management is to evaluate the risk annually, especially in areas where a non-insurance alternative for risk control has been selected.

The entire subject of risk management may seem to be impossibly difficult and complex to those who do not work with it every day. The fundamentals of risk management, however, are largely the use of common sense in dealing with risk. The process begins with a conscious effort to develop an awareness of the activities or conditions that could result in loss or injury. The average individual is quite capable of doing most of the things that are required to identify these exposures. Furthermore, there are outside sources that can be of assistance in suggesting procedures and answering questions.

Once awareness exists and exposures have been identified, risk management becomes a matter of treating the risk to eliminate or reduce it and thereafter deciding whether to accept the remaining risk or to insure it. If insurance is the option you elect, there should be good communication with your insurance agent or broker, including solicitation of his advice about the best ways of insuring.

At every point, it is good to share experiences with other church leaders and their counterparts in the larger business world who are similarly working out strategies for identifying and coping with risk. At seminars and workshops, problems as well as solutions can be shared to everyone’s benefit. If a problem arises unexpectedly, a call to a business associate may help in working out a more thoughtful solution.

A good risk management program is crucial to your organization. It begins with someone’s awareness of the advantages to anticipating and preparing for the many kinds of loss your church is likely to sustain. Once conceived, however, the program cannot exist without the backing of the board of trustees and all the employees and volunteers. These groups must support both the general concept of a risk management program and the particular elements of the program adopted by your house of worship. There should be a policy statement. The statement should include a precise description of your churches risk management policy, what it covers and what deductible levels are acceptable without board of trustee review.

Risk Identification: Developing a Risk Management Policy and Determining Insurance Coverage

Risk management is more complex than insuring everything. In fact, insurance is the last alternative that a church should turn to in the risk management process. For every $2.00 you pay to an insurance company, only about $1.00 comes back to you in claims.

Your history of losses dictates your premiums and the premiums of others. Insurance rates are derivative of claims paid by insurers in your local area, nationwide and worldwide. Insurance is a global industry. You can retain risk often with less expense than transferring it to an insurance company.

This shows the need to develop a comprehensive approach to protecting your church, one that avoids duplication and gives you good value for what you spend.

I. The Risk Manager and a Risk Management Policy

Fundamental to an effective risk management policy is a single office and a written policy backed by a top officer of the organization. Often the position is no more than a part time activity until there is a loss. It is not unusual in a denomination, diocese, conference, jurisdiction or local church, that has not established a formal program, for property insurance to be handled by one officer, liability by another, claims by yet another, and benefits and workers’ compensation by the yet another. This results in extreme confusion, and it is certainly not in the best interests of the organization as a whole. Once a major loss is incurred, the value of centralization is obvious.

If dealing with all areas of risk management becomes one individual’s job responsibility, many benefits will accrue. This can usually be accomplished on the denominational level but it is nearly impossible at the local church level. Local churches are less businesslike… they are run by committees on a part-time basis. Denominational offices have hierarchical order imposed that provides the structure necessary to construct a more professional management team approach.

Setting risk management policy at the denomination level requires good communication with other levels. This communication must be two-way… listening is always required.

Centralization has several important consequences:

1. It minimizes the chance of a gap or a chance of an overlap in insurance. It is unwise to buy double coverage. Overlapping policies are expensive and unnecessary, but they are often the only choice in organizations with no concerted risk management program. Still, having duplicate coverage is better than not having any coverage because each individual officer thought that another was responsible for the purchase.

2. It promotes communication between committees. If risk management is centralized, each member of the organization will know where to turn if there is a problem or an idea that relates to the risk management process.

3. It allows you to get more value for the dollars you pay your agent and the insurance company. A constant complaint is that the agent is not doing the job you pay for. Centralization will give you more buying power than a division of policies throughout the organization. Commissions get the broker’s attention. If one person in your organization is responsible for buying all policies, that person can use the increased number of policies and the increased commissions to entice an agent and an insurance company to do a better job. In addition, it is becoming increasingly difficult and expensive to place some liability coverages alone without the insurance company having several profitable and some less profitable policy forms, in a single package.

4. Centralization allows the religious organization to take better advantage of its past dealings with insurance companies in other areas of insurance. A risk manager accumulates experience in dealing with all such matters. Centralization may mean your company will be more likely to be awarded borderline claims. Insurance companies may be less likely to non-renew or cancel a less profitable account with a full package of insurance than one with only a monoline policy.

5. It promotes a more logical philosophy of risk management within the company. It eliminates a situation where there is Special form coverage on one property and a simple fire policy on another or a policy with a larger deductible in one area and a smaller in another. Centralization leads to a constant and logical approach to your insurance needs.

6. It provides for greater control of the risk management process. Unless one officer or individual is responsible for implementing the techniques for controlling risk, everything from the imposition of safety standards to handling claims is more likely to be mishandled

7. Finally, centralization is the only way that an adequate information system can be established. This is one of the strongest arguments for centralization as this is where money can be saved. Records can be kept on insurance purchases, actual losses, premium increases, positive safety discounts, negative experience debits and insurance company loss control recommendations.

Primarily, the risk manager should be responsible for determining and evaluating all levels of risk. This is the hardest part of risk management and also the most critical. It should be a part of strategic planning for the organization. This means that the risk manager should be involved in all major planning decisions.

Secondly, the risk manager should be responsible for risk financing. Insurance is only one mechanism for financing a risk. It is also the most expensive. Because only about half of all premium payments come back in claims, the security that a commercial policy will give works out to be fairly expensive. It is the risk manager's duty to see to it that this money is spent wisely and that no other mechanism is appropriate.

As an aspect of this duty, the risk manager should keep track of all aspects of buying insurance. He should control the amount spent and the kind of coverage obtained for items within the church as well as for items that leave the church premises. He should keep track of certificates of insurance and should know what insurance exists for every item within the churches custody. He should likewise keep track of the risks that are retained as well as those transferred through insurance. It is vital that he know how much those risks represent in dollars.

Thirdly, the risk manager should administer all claims within the churches insurance program. He should see to it that negotiations with the insurance company are handled appropriately, that all necessary evidence is provided, and that any claim that falls within the deductible area is correctly handled.

Loss control is a fourth aspect of the job. In the church administration field, this covers a broad range of techniques, including general safety and security as well as employee benefits and a host of other very technical areas. The risk manager need not be an expert in each area, but he should be able to coordinate the efforts of each.

Fifthly, the risk manager should review all agreements and contracts on a systematic basis. Anyone within the organization who has the power to sign a contract should know that it must be reviewed by the risk manager, so that the risk manager will know what liabilities are being assumed or given up. The risk manager should also review all capital appropriations. The best way to understand what the risks are is to know where the money is going.

Finally, the risk manager is responsible for reporting the cost of the risk management program to the board of trustees or full governing body. It is vital for them to know what the total cost is and how that money is distributed throughout the major components of the program: general administration of insurance policies, loss control, claims handling, etc.

It is important that a written risk management policy exist. It should be a broad statement of goals and it should include guidelines for determining what losses are retained. It should specifically assign authority to the risk manager to achieve the goals set forth. It is a means of giving that person line authority and encouraging cooperation with him throughout the church body. A periodic review of the policy is essential. A six-month interval is an excellent idea.

A risk management manual is also an excellent way to keep control of the risk manager's function. The manual can be either extremely simple or intricate. If there is no such manual within your organization now, it might be started immediately and completed over a period of time. The first year only claims handling procedures might be included, then a schedule of insurance. The next year could add the self-insurance philosophy and so forth. This will reduce the administrative load and will make the decision-making process easier. Meetings with the various groups that make up the church at large will stress the importance of the risk-management program and will involve other members of the organization.

II. Identifying Risks

It is important in the risk management area to establish a systematic approach to exposing those risks that may cause a loss. The first step in this identification is to recognize those assets of the church, headquarters, clinic, ministry, shelter, pantry, etc., that if they were damaged or lost, would require you to shut down or seriously curtail activity. These resources fall under four basic headings.

1. First, there are human resources.

These include all employees, particularly those who are specifically skilled.

2. Secondly, there are physical assets.

This category includes the buildings, vehicles, boiler, air-conditioners, pipe organ and so forth.

3. Thirdly, there are natural resources.

An example of this type of exposure would be a church located in a particularly valuable area for real estate or on a particularly beautiful site. If something should damage the environment, it could cause the shutdown of church or make it less popular.

5. Finally, there are financial resources.

Examples of this kind of asset would be donations obtained from a single source, special event, special collection or tuition from students. Another risk to financial resources would be the possibility that the community, in which the church operates, might suffer a financial setback.

Once the critical resources have been identified, it is necessary to examine the exposures to accident or loss of these resources. If these risk exposures can be identified, plans to avoid disruption of church operations can be established.

Risk exposures fall into several categories:

First, there is a natural disaster. This includes hurricanes, earthquakes, floods, etc. Obviously, these disasters cannot be prevented; however, it is wise to be aware of them and to establish a disaster contingency plan. Where will you hold services? Will there be an auditorium available when you need it? Where can you store furniture and equipment? How will you handle evacuation? Is your building to be used as a shelter in emergencies?

Secondly, there is a direct exposure to loss. This includes such catastrophes as fire, theft, vandalism, and vehicle damage. To some extent, these should be within control, and you should be able to develop a safety plan that would minimize the possibility of their occurrence. Are fire extinguishers inspected annually? Do you practice fire drills? Should you increase outside lighting to prevent vandalism? Is the church van kept in a garage? Is the church locked?

Thirdly, there are indirect losses. These are exposures resulting from a time element: you can replace these assets, but the time it would take you to do so would be costly.

a. The most important among these is business interruption. This includes losses that are sustained because of physical damage to the facility, which causes you to close your doors to the public. If a tuition fee is charged to attend a church run school, the loss sustained might be of the business interruption type: the loss of revenue from no tuition payments. Teachers salaries would need to continue even if the school is closed for a period of time.

b. An extra expense exposure might result from the same type of loss, however, this risk is that extra expenses will be accrued because the church must remain open but at additional cost in order to continue the operation after a loss. There could be increased expenses for renting buildings to continue while the church is being repaired.

c. There is a contingent business interruption exposure: something happens to someone else that affects the churches operation. An example would be if you rely on a particular traveling choir or speaker to perform at a advertised time. If that outside speaker suffered a loss, how would it affect your operation, and how could you avoid the loss?

Fourthly, there are what we can call human losses. Theft and employee infidelity are obvious exposures here, and the risk of them can be discussed in more detail elsewhere. Included also in this category of human exposures might be third party or liability losses. In our present social climate, people are suing more frequently and this is an exposure that should be examined carefully. Is playground equipment well maintained? Are stair railings secure? Are two signatures required on large checks? Are audits performed on a regular basis?

There are workers' compensation exposures. The cost of this exposure is often regulated by statute, and risk managers do not feel they have much flexibility. This does not have to be the case. Additional coverage can be acquired for extending benefits outside the United States. Group policies can be written for entire conferences to save money and make sure everyone is covered. On the job safety programs can keep claims down to reduce modification debits.

Now that some of the categories of exposures, which might apply to a church related organization, have been examined, the question becomes where information can be found to identify these exposures within a given church or denomination. There are both internal and external sources that will help describe the exposures that are important to you. Internally there are loss records. This is a primary source and will certainly be of benefit. If losses are consistently arising out of one particular area within the organization, and this fact is recognized, the church is much better equipped to avoid future losses than it might have been.

Secondly, there are internal support and balance sheets. If these are completed in depth, they will outline almost everything that has happened within your institution. Likewise, operating and capital budgets will point out things that might have been included in the budget that the risk manager had no idea were involved at all. The risk manager should review the minutes of the Board of Trustees to find out about exposures. It is important to take time to do a physical inspection of the facility and to talk to employees and volunteers. Moreover, it is extremely important to review all contracts and leases to determine whether or not there are hold-harmless clauses and assumed liabilities that may not have been expected and otherwise covered.

The external sources of exposure analysis for churches are more limited. The most obvious one is other churches. It could also be that other non-profit organizations such as hospitals, museums, schools and municipalities would have similar problems and could guide in analyzing church exposures.

Finally, it is important that listed exposures are audited on a regular basis so that if there have been changes within the organization the risk manager is not caught unprepared.

Once the exposures within the church have been identified, the question becomes how to evaluate these exposures or how to put a dollar sign in front of them. Because of the types of risk involved in churches, assigning value to them is a difficult problem and can only be analyzed on an individual basis; however, some approaches that should be considered are the following:

1. "Market value" describes the amount for which church buildings and personal property could be sold.

2. The term "book value" is an accounting term for amortized value, and it is probably not applicable to your type of loss exposure. Be careful of it within an insurance policy.

3. Perhaps the most appropriate term that could be used in a policy would be "replacement value." This means exactly what it says-the cost to replace your building and contents.

4. Some policies are written with an “actual cash value" clause. This means replacement cost less depreciation. The concept could be dangerous for you. You might only receive a small potion of the money necessary to replace a damaged building or article of contents. Your congregation will have to make up the difference to complete repairs or supply the labor.

Ultimately, the risk manager should be able to forecast risk. In risk forecasting, the important words are frequency and severity. Frequency relates to the number of losses you may sustain over a period of time, while severity relates to the dollar values of those losses. You may have three losses totaling $150,000 or twenty losses totaling $20,000. When you know in what areas you are likely to sustain losses, you need to establish how serious they might be and how likely it is that they might occur.

III. Risk Financing
Risk financing is the last step in the risk management process and within that process, insurance is a significant if expensive alternative. One argument for insurance is that it provides protection for unpredictable, large, catastrophic losses. It makes it possible to budget for such losses and to fix the price of the risk without extreme fluctuation. Often large corporations will spend more than is necessary on insurance policies because they are unwilling to take the financial risk of a loss that could occur at a bad time. For a nonprofit organization, tax deductibility is probably not an important consideration; but in for-profit organizations, the fact that insurance premiums are tax deductible is another advantage in purchasing coverage.

One of the biggest advantages is the fact that with the policy come services from both the agent and the insurance company with whom you have placed the policy. In many instances the services are more important than the coverage. A good example of this is boiler and machinery coverage where 60 per cent of the premium dollar is allocated to inspection and loss control. Systems and Equipment Breakdown Insurance includes boiler coverage but also includes coverage for all electronic, motorized and mechanical equipment within the building. The coverage fills the gap to include artificial current… such as surge damage.

Among the disadvantages is the fact that you are paying with your premium for insurance company expenses. The company also holds your money in reserve to pay out for future losses. For example, if someone suffers a bad injury on your premises or in your activities off premises, the insurance company may set aside many hundred-thousands of dollars to cover that loss over the next ten years. By buying the insurance you have lost the prerogative to use that reserved money within your own organization and to come up with it later when it is actually needed.

Perhaps the best way to judge when insurance is appropriate is by analyzing how much of a loss you are willing to sustain. Losses basically fall into three categories. There are the small, predictable losses that probably should be retained. An example of this would be damage to plate glass. Then there are losses that are too large to be absorbed in one year. Perhaps insurance is appropriate here, but each case should be analyzed separately based on the finances and the flexibility of the budget within each organization. Finally, there are serious large losses which would either put you out of business or which would certainly halt your operations for a significant period of time. Insurance is usually the answer here.

Even if insurance is chosen as the means of handling a loss, there are options as to how much of a loss should be retained. These are in the form of deductible amounts. It should be determined where to draw the line between what is insured and what is to be self-insured. There are many formulae to solve this dilemma used by risk managers (such as 1/10th of 1 per cent of total assets and so forth) but this dogma is really not applicable in the church setting.

The best guideline is to stop self-insuring when the insurer stops making it worthwhile in the form of premium credits. The greater the amount of the deductible or self-insurance, the greater should be the credit on the premium.

The next time policies are up for renewal, and especially if they are out on bid, it is wise to ask for several deductibles in order to determine where this price break occurs. On workers' compensation, however, there is virtually no price advantage to be gained by self-insuring. This is also true in automobile liability and general liability. Automobile physical damage, however, is quite a different story. A lot of money can be saved by either taking high deductibles or totally self-insuring the physical damage exposure for your fleet.

Fidelity insurance provides practically no credit for self-insurance. This is probably because so many fidelity losses are small ones and would fall within the deductible limit.

Any insurance purchase will involve a agent; and, because 10 to 25 per cent of the premium dollar will go to an agent, it is a good idea to have a clear sense of what to expect from this person.

Agents should do at least the following things:

1. They should notify the church of each renewal and should let the appropriate officers know what to expect from the insurance company with whom the church is presently insured vis-à-vis that renewal. They should also evaluate the status of the insurance industry and the marketplace and advise you about possible advantageous changes.

2. They should notify you of any changes that will be made in the policy and should ask about changes in the churches operations that would necessitate changes in the policy.

3. They should conduct frequent physical inspections. The frequency of inspections should be determined by the size of the operation and the types of changes that you might be effecting.

4. They should assist in delineating policy specifications.

5. They should give loss control assistance and, if requested, they should introduce you to the carrier and underwriter. This last step can have many long-term benefits.

To obtain maximum service from your agent, ask him for a summary in writing of what you may expect if you place your coverage with him. Alternatively, you can outline in bid specifications what you expect of the agent who will eventually get the business.

It is important that you evaluate the carrier's financial resources, particularly in today's market. Your broker should be able to do this for you by referring to a publication known as A. M. Best's Guide. You should ask the agent for the insurance carrier's rating and how to interpret it.

Historically, the insurance industry is cyclical. There have been times when there is much competition for very little business. Insurance companies invest their reserves in the same markets everyone else does. Downturns in the stock market can cause insurers to increase premiums to cover claims. Losses in claims can be offset by gains in the market. Political conditions can make insurance difficult to secure. Companies with above average losses must compensate by charging more premium or they will fail.

This situation raises several questions: should your organization take advantage of this situation? If so, how can that best be done without jeopardizing your relationship with your agent or broker and with your company? Has your broker or agent advised you of the status of the marketplace, and is he working to get the best company and premium for you?

Many take insurance coverage for granted. The fact is that at certain times insurance is difficult or even impossible to get. Being insurance worthy is like being credit worthy. Those who have been canceled by two or more companies may find it impossible to find a company that will submit quotes. This situation can place your organization in a position where it must cease operations completely.

There are some pitfalls to putting a program out to several different brokers for a bid. For one thing, do not put the program out on bid too often. If it is done every time the policies renew, you may find that you save money the first few times; but soon you get a reputation as an organization that will put its policies out on bid every renewal.

The underwriter has no defense mechanism except to build into the premium the company's startup and administrative costs. You will end up losing money in the long run.

Secondly, do not take advantage of the incumbent agent. Give him every benefit of the doubt, particularly if you have a good working relationship with him now. One of the most common ways in which the incumbent broker is abused is when a client who is anxious to put his policies out on bid invites several new brokers in to examine the existing policies with the idea that if a new firm can do better they will then enjoy the business. Nothing could be more unfair to the current broker and shortsighted for you. Anyone can beat your current program if they are knowledgeable about what you have.

Once you have determined that now is a good time to market your policies, however, here are some suggestions for the best way to go about it:

1. Draw up the specifications for the policy you want.

2. Collect all the loss data and other underwriting information.

3. Let it be known that this is not a process that you intend to pursue every year.

Specifications should include the limits desired, the appropriate endorsements, the coverages you need, and the deductibles suitable for a defined limit of self-insurance. If you have difficulty defining these specifications, several organizations might be of help: a risk management-consulting firm, your local university, or other churches. In particular, if it is difficult to decide upon a deductible because you do not know what the effect will be on your premium, consider asking for several different bids with varying deductibles.

Loss runs are required by underwriters to secure a quote. The premium quoted is dependent on accurate information. Some carriers require 3 years of history others might require 6 years. Misstatement of facts can cause cancellation or higher rates.

Insurers want to know they will have the time necessary to average claims to premium. Jumping from company to company for low rates will not work long term.

Churches make buying insurance a group decision. Ask agents to make written quotes. Review the quotes carefully together well in advance of your renewal dates. Give yourself time to make a considered decision. Ask selected agents to present the proposal to your board. Presentations should not be scheduled all in one night. Give the agent and yourself the time necessary to ask questions. It is not proper to have prospective agents attend each other’s presentations.