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Retailers should be prepared for risks including theft and credit card fraud.

Suzanne Sharma on January 19, 2011

‘Tis the season for retailers to prepare for the biggest holiday shopping event of the year–Christmas. In fact, Canadians spent an average $1,218 on gifts, decorations and entertainment in 2009, according to Statistics Canada.

While the holiday shopping season is great for retail business, the influx of consumers, heightened inventory levels and additional staff create higher risks, including more chances for theft or slip and fall accidents. The increasing numbers of holiday shoppers making purchases online also heightens the risk of credit card fraud.

“In addition to the in-store risks of holidays past–such as large crowds, slips, trips and falls, and theft–a recent study reflects that 69% of consumers plan to do some holiday shopping online this year,” says Armand Fernandez, chief risk engineering officer, Zurich Services Corporation. “Credit card fraud is a 365-day-a-year exposure that escalates during the holiday season.”

Retail Exposures
According to Zurich HelpPoint for the Holidays, an online risk guide, one way retailers can mitigate the risk of online credit card fraud is by manually reviewing daily transactions prior to shipping. Retailers should pay close attention to declined transactions, multiple transactions to the same address with different credit card numbers, out-of-country shipments, and IP addresses that are not the same as billing addresses.

One way to protect retail clients against seasonal exposures is having a peak season clause built into the wording of a policy. It automatically increases the stock or contents limit for a defined percentage and/or amount for goods stored at the insured’s location, explains Brent Helm, commercial underwriting manager at Optimum West Insurance Company.

Brent Helm, Optimum West Insurance Co.

“It should be determined for each insured if this clause is adequate enough to cover their increased exposure,” he says. “If not, then the stock or contents limit should be increased accordingly so they will not only be able to recover fully from a potential total loss, but would also avoid any possible coinsurance penalties built into the wording should a partial loss occur.”

While the risks that retailers face are heightened during the holiday season, they still exist the rest of the year.

Sandra Gora, assistant vice president of Complex Risks in the Specialty Commercial Lines group at Aviva Canada, says risks can be divided between property (including fire, smoke and water damage), and liability such as injury to customers from slip and fall accidents.

“Property is tangible, easier to quantify and thus easier to predict the cost of potential claims,” she says. “Goods are damaged by an insured peril; as a result, there may also be loss of income. General liability is intangible, and as a result, more difficult to quantify and predict the cost of potential claims.”

For example, slip and falls are the most frequent type of general liability claim for retailers, according to Gora.

“The financial impact of a slip and fall accident can range from minor inconvenience to massive liability, depending on the circumstances,” she says.

According to the National Floor Safety Institute, the average cost of a slip and fall workers’ compensation claim is $4,000. The average liability award for injury to a customer or third party runs from $60,000 to $100,000 per claim.

Slip and falls have many variables that can affect the cost of a claim, adds Gora. These include emergency and long-term medical attention, aggressive lawsuits and litigation, or in some cases, loss of reputation and a loss of income as a result.

The majority of slip and fall accidents occur on flooring, staircases, ramps and parking lots, she says, and are usually the result of improper floor material or finish, uneven surfaces, potholes, inadequate lighting, or poor maintenance.

An effective risk management plan with a strong maintenance and slip and fall program is the key to mitigating these exposures.

“Retailers know they are going to have claims on their premises and by being proactive rather than reactive, they can better manage their risk and minimize loss of goods, as well as minimize injury to customers,” says Gora.

From an underwriter’s perspective, Helm says the physical risks that are taken into consideration when creating a policy include the quality of the retail location, as well as the protection that is in place to prevent possible losses.

“For example, is the store located in an older building, and if so, has this older building been updated with a new electrical service including circuit breakers? Has the plumbing system been updated to help prevent potential water losses? The updating of these items should reduce the potential for losses,” says Helm.

He adds that retail stores are a target for theft-related losses, both burglary and robbery. That makes it important to know what type of burglary protection the insured has, and what type of protection the building has if the unit is located in an enclosed mall.

Retailers that sell perishable goods also have an increased potential for loss due to spoilage.

Premium rates in the retail insurance sector have dropped 25% in the last five years.

“Losses to perishable goods can be a result of property perils from mechanical breakdown of an electrical, refrigeration or heating system, or be a result of an off-premises power or service interruption,” says Helm.

Dean Cox, vice president of Alternative Risk Solutions for the Global Corporate Division at Zurich also notes that retailers that assemble products for their customers (for example, IKEA) have added exposures. “They can be held liable as a manufacturer if the product causes injury or damage,” he says.

Policy Options
Sonja den Elzen, owner and designer of Thieves Boutique, an independent clothing and accessories store in Toronto’s Queen Street West, says when she was shopping for coverage, one thing was certain–she wanted the works.

The owner of Thieves Boutique in Toronto's Queen Street West says when she was shopping for insurance she wanted full coverage.

“I wanted full coverage,” she says. “Most importantly, I needed something that would cover the inventory, protecting against theft. I also wanted coverage for equipment and computers, commercial property, liability, as well as special coverage for when I’m out doing tradeshows.”

Meanwhile, larger retail businesses focus their efforts on risk management and loss prevention, and therefore select larger deductibles (risk retention), according to John Chippindale, vice chairman at HKMB Hub International. “This keeps their premium to insurers as low as possible by avoiding the trading of dollars on a cost-plus basis with insurers.”

Premium rates in the retail insurance sector have dropped 25% in the last five years, adds Chippindale.

Optimum’s Helm explains that rates are dependent upon several factors, specific to the insured. Some of these include: the type of products sold by the store and the amount of sales, the importing of international products, perishable goods, property information including age, the location of risk, prior experience in the retail business, and prior loss history.

He advises that each retail policy should include coverage for: all risk property damage (including tenant’s improvements), equipment breakdown, peak season, loss due to spoilage, extra expense, business interruption, general liability, automobile (including heavy hauling for deliveries), and crime.

Brokers must be well versed in policy wordings, including limitations for various products such as jewelry, alcohol or tobacco products. Brokers should also have the ability to develop customized coverages for their retail clients. This can include built-in warranties such as a burglar alarm warranty, and locked vehicle warranty, says Helm.

John Chippindale, HKMB Hub International

“Also, know what extensions of property coverage are included with each package, how these extensions differ in coverage, and what limits apply to each,” he says. “Know what business interruption coverage is included, what limit is provided, and what extensions of coverage, if any, are applicable. Lastly, know what crime coverage is included and for what limits, and what liability limits are included.”

Brokers should be wary of the selling intricacies that come with the retail industry.

“Understand the operations of the retail business to enable a productive discussion around the ’cause and effect’ of claims and the most suitable insurance program structure to fit the business (limits, deductibles, coverage scope),” says Chippindale.

Retail Risk Mitigation

Your retail clients can limit their business exposures by being proactive in the following areas:

Theft

Have adequate burglar alarm systems for the risk which protect not just the perimeter but the premises.
Remove contents from window displays when closed to help prevent smash and grab type losses.
Put bars on windows and doors if they sell either high-theft-target stock or are located in an area more prone to theft losses.
Have high-theft-target stock further protected by keeping it in an alarmed and locked room when the store is closed, and only have a limited amount of stock on the store room floor when open.

Water

Store stock on shelving, skids, or racks instead of directly on the floor. This will keep the stock raised up and potentially reduce the amount of water damage suffered should a sewer backup or water loss occur.
Have one-way valves installed in sewer lines to help prevent water from entering through drains.

Spoilage

Have refrigeration units and freezers serviced on a regular maintenance schedule by an approved contractor.
Have a monitored temperature alarm installed in refrigeration units that contain large amounts of perishable goods.

Fire

Have a fire alarm (preferably a monitored system) installed that measures both smoke and heat.
Ensure the location has an adequate electrical system. Do not use extension cords for freezers, refrigeration units, or other appliances.
Have heating systems checked and maintained on a regular maintenance schedule.
If the risk contains cooking equipment, ensure the equipment and ventilation system are cleaned on a regular basis, and maintained by an approved contractor.
Have the appropriate number and type of fire extinguishers maintained on a regular basis by an approved contractor.

Liability

Ensure floors are dry and free of slipping hazards. Grocery and vegetable type stores in particular are prone to slip and fall losses when stock has been spilled on the floor.
Have proper entranceway carpets installed to reduce water accumulation from getting onto the floors (due to snow melting).
Have railings installed on stairs and stairwells and ensure stairs are visible through markings.
Ensure adequate lighting is in place, including emergency lighting.
Keep aisles and floors clear of boxes and clutter–items stored in aisles pose a tripping hazard.

Source: Brent Helm, commercial underwriting manager at Optimum West Insurance Company

Common Retail Claims

Theft – caused either by break-ins or robberies.
Water (including sewer backup) and fire losses – similar to other property lines.
Spoilage to perishable goods — caused by either property perils or mechanical breakdown.
Signs — damage is either caused by a weather-related incident, vehicle impact, or vandalism.
Liability — slip and fall losses caused either by wet floors or poor housekeeping.