Risk retention is a common approach used by businesses to manage loss potential. It’s when a business decides to retain a portion of the risk instead of transferring it entirely to an insurer. Retaining risk has both financial and non-financial implications, especially when it comes to legal matters. Understanding the legal implications of risk retention is critical for any business that wants to manage risk successfully. Here are some key points you need to know.
Duty to Disclose
When you choose to retain risk, you become responsible for disclosing potential risks to investors, partners, employees, and other stakeholders. This duty to disclose is a legal obligation that you must take seriously. Failure to disclose relevant information can have severe consequences and result in litigation, loss of reputation, and financial penalties. Therefore, it’s essential to be transparent and forthcoming about the risks your business is exposed to and the measures you’re taking to mitigate them.
Risk retention can trigger a clause in your insurance policy, which requires you to notify your insurer when retaining risk. You should review the contract carefully to understand your obligations and make sure you comply with them. For instance, some policies may require you to obtain consent from the insurer before retaining any risk, while others may restrict your ability to retain risk at all. In any case, you should seek legal advice to ensure that you understand the terms of the policy and can comply with them.
Liability and Coverage Gaps
Retaining risk means you’ll be financially responsible for any losses that occur. In other words, you’ll be self-insured. However, this comes with certain limitations. For example, your insurance policy may only cover losses up to a predetermined limit or exclude certain types of risks altogether. This can create coverage gaps that could leave you exposed to significant losses.
Moreover, retaining risk can have an impact on your liability. For instance, if you’re self-insured for a specific risk and someone is injured as a result of that risk, you’ll be liable for any damages awarded. This can be costly, especially if you haven’t set aside adequate funds to cover potential losses.
Risk Management Strategy
Risk retention should be part of an overall risk management strategy. It’s not a standalone approach. It’s critical to analyze the risks your business is exposed to and determine the most appropriate way to manage them. Retaining risk may not always be the best approach, and it’s essential to consider other options such as risk avoidance, risk reduction, risk transfer, or risk sharing.
Risk retention is a valuable tool for businesses that want to manage risk effectively. However, it’s crucial to understand the legal implications of retaining risk and take measures to ensure compliance with contractual obligations, disclosure requirements, and liability issues. By doing so, you can maximize the benefits of risk retention while minimizing potential legal risks.