While recent comments by Federal Reserve Chairman Ben Bernankesuggest that the nearly two-year-long recession may be nearing anend, the economic downturn is likely to remain a force behindadditional and potentially uninsured risks for a long time.

Even if a company survives the recession relatively unscathedand does not have to materially alter its operations, it stillfaces two common sources uninsured risks.

o First, key business partners might be affected by therecession, which in turn may impact their ability to fulfillcontracts.

o Second, to counter falling demand for its main product, acompany may branch out into less familiar production areas--openingit up to unforeseen, and uncovered, liability.

To ensure they are not inadvertently creating insurance coveragecomplications, business owners should frequently re-evaluate theirrisk exposures so they purchase the most appropriate coverage,including excess and surplus lines coverage. Throughout theeconomic downturn, excess and surplus lines insurers continue tooffer a coverage safety valve for the toughest and most uniquerisks on the market--like new and unfamiliar products--as well ashigher limits of excess liability coverage.

Since it is not always easy to recognize the different riskscreated by business partners or in-house revenue-generatingefforts, business owners should reach out to their insurance brokerfor assistance in the review process.

A FALSE SENSE OF SECURITY

To illustrate how a business partner's financial trouble canimpact a company, consider a product distributor that is anadditional insured via a vendors' endorsement on the generalliability insurance policy purchased by the product'smanufacturer.

In a stronger economy, the distributor may not be concernedabout whether its own liability limits would sufficiently cover itfor a third-party product liability claim that names thedistributor as well as the manufacturer. In today's economy,however, the distributor should reconsider relying on anothercompany's insurance coverage to protect its own assets.

If a claim arises after the manufacturer has gone out ofbusiness and the manufacturer's insurance policy has expired, thedistributor might have to bear the financial burden of that claim,making the distributor's coverage limits far more important.

A review of a business partner's operations and contracts alsomight reveal that even if the partner does not fold, itsindemnification guarantees from counterparties might not be allthat sound. At the same time, the company's own coverage might beinadequate, due to some insurance purchasing decisions designed totrim short-term coverage costs.

For example, consider a hotel or a retailer that retains anoutside security firm. Under its contract with the security firm,the hotel manager or retail business owner might have negotiated astipulation that it would be named as an additional insured on thesecurity firm's professional liability insurance policy.

Meanwhile, in negotiating its own general liability insurance,the hotel or retailer decided to lower its premium by rejectingpersonal and advertising injury coverage. After all, it reasoned,exposure to slander and libel exposure is minimal, since the hotelor retailer does not have any broadcast or print media operationsand its advertising never mentions competitors.

What the hotel or retailer failed to understand is that personaland advertising injury insurance also often provides coverageagainst third-party claims of invasion of privacy, detention andfalse arrest, unless otherwise excluded--all risks to which thesecurity firm may expose the hotel or retailer. Other insuringprovisions of general liability insurance typically do not coversuch claims.

Personal and advertising injury coverage would be a vital--andrelatively inexpensive--protection if the security firm's coveragefor a loss proved inadequate or if the security firm folded and aclaim was filed after its professional liability coverage hadlapsed.

BRANCHING OUT

Over the past year or two, business owners might haveinadvertently created additional potentially uninsured exposuresfor themselves as they responded to the recession's impact onrevenues by offering new products or services or by broadening thecustomer base for existing offerings.

Consider a company that has assembled garden rakes for manyyears and is very knowledgeable about the quality of handles, tinesand fasteners that are available from suppliers. To replace lostrevenue resulting from a diminished demand for rakes, the companybegins to assemble hammers as well.

The assembler is far less familiar with the hammer partssupplier industry and, therefore, faces a learning curve inevaluating price and quality. As a result, the assembler could beat far greater risk for product liability claims.

A manufacturer producing a new product is especially susceptibleto leaving itself exposed to new product liability risk if itpurchases liability insurance from both the surplus and thestandard admitted lines markets to cover risks in differentoperations.

For example, the manufacturer's surplus lines insurance policymight cover third-party liability claims arising from just one ofits products--rollercoaster cars--while its standard admitted linesinsurance policy covers third-party liability risks associated withthe manufacturer's remaining product lines.

If the manufacturer begins producing the chain that pullsrollercoaster cars up a track's first incline, there is noguarantee that either policy covers third-party risks associatedwith the new product.

New product liability exposures could arise even if apolicyholder does not add an item to its product mix but onlyoffers an existing product to a previously untapped customersegment.

For example, a plumbing parts manufacturer that previouslyfocused solely on commercial and industrial accounts tweaks aproduct to make it suitable for residential use. As a result, thenumber of sales for the part soars--and so does the manufacturer'sproduct liability exposure.

Following a product failure, flooded commercial and industriallavatories frequently will not generate nearly as big a loss asflooded home toilets, where costly flooring and carpeting could bedamaged or ruined in thousands of homes, creating the potential forclass action lawsuits.

A service provider could also find itself in similarcircumstances.

Consider a concrete contractor that has worked on onlycommercial projects during its many years in business. Due toshrinking revenues, the contractor has picked up some residentialconstruction projects as well.

While the nature of the contractor's work--pouring concrete--isunchanged, residential construction work can create differentexposures than does commercial work. Therefore, liability policiesfor commercial contractors often exclude construction defectcoverage for residential work.

An insurer might agree to remove or modify the exclusion in somecircumstances, but the underwriter may first have to be informedthat the contractor has begun working on residential projects.

As astute business owners devise ways to survive, and eventhrive, despite current economic conditions, their E&Sunderwriters and brokers should be part of any business planmodification. To help keep their businesses thriving for the longterm, business owners need to ensure that potential liabilities areproperly covered.

Robert Lala is senior vice president-primarycasualty for Liberty International Underwriters, a specialty linesdivision of Liberty Mutual. Mr. Lala is based in Chicago and he maybe reached at [email protected].