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    August 2020

    Charge Back the Cost of Risk in Higher Ed

    Liability claims could cost your college or university immense amounts of time, effort, and money. But individual departments — even those responsible for the claims — may be unaware of their financial impact.

    Typically, the risk management or finance department administers the claim and pays related institutional costs from its own budget. Some institutions hold departments accountable by charging back a portion of claims or premium costs to the department. Your institution should develop a chargeback system that works for its culture.


    What Chargebacks Should Include

    Chargebacks may include a portion of:

    • Insurance premiums (often auto, property, or general liability)
    • Claim deductibles
    • All or part of a settlement

    Costs are paid from general department budgets, usually as a specific line item allocated for these expenses.

    Use chargebacks to: 

    • Reduce risky behavior. When departments see the impact on their budget, they are likelier to understand the consequences of their behavior and avoid it in the future.
    • Distribute expenses. Sharing the cost of insurance and claims with the department originating the loss helps all areas of your institution understand the costs of risks and the risks and challenges colleagues and other programs face.
    • Encourage early resolution of claims. Usually, the longer a claim takes to resolve, the greater and more lasting the financial consequences for a department. Concrete financial impacts may encourage departments to seek early settlement opportunities where appropriate. 

    Develop a Chargeback System

    Your institution’s size and type influence the setup of any chargeback system. Take these steps if you plan to chargeback costs:

    • Determine your institution’s culture and risk tolerance. Chargebacks may be inappropriate if you have a tightly controlled, centralized administrative structure. Decentralized institutions may be more comfortable placing risk ownership throughout.
    • Determine whether to charge departments for premiums, deductibles, or both. Smaller institutions may find it easier to track only a single chargeback amount. Larger institutions also may consider charging back settlement amounts that insurance doesn’t cover.

    Evaluate the Impact of Chargebacks

    Finally, consider the potential impact across campus by asking these questions:

    • How will departments budget for chargebacks costs arising throughout the fiscal year? What happens if a unit doesn’t have money to meet its chargeback obligation?
    • Will the institution make exceptions to charging back costs? If so, when?
    • Will all charges be included, or will the institution use a per-claim or aggregate limit per fiscal year?
    • Will departments expect more involvement in defending or settling claims if they bear some financial responsibility?
    • How will the institution handle a department’s reluctance to make difficult decisions that could lead to claims, such as terminating an employee to avoid incurring costs?
    • Should the decision to charge back occur on a case-by-case basis considering the severity of a specific claim or the department’s claims history, for example frequent auto accidents?
    • Will instituting a chargeback system promote risk management or create resentment when some incidents may be beyond the department’s control, including inclement weather or theft by a third party?

    By Heather Salko, senior risk management counsel


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