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    May 2017

    Charging Back the Cost of Risk

    Liability claims cost institutions 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 any related institutional costs from its budget. However, many institutions hold departments accountable by charging back some claims or premium costs to the department. Each institution should develop a chargeback system that works for its culture.

    What and Why to Charge Back?

    Chargebacks range from a portion of insurance premiums (often auto, property, or general liability) to the claim deductible to part or all of a settlement. They are paid from general department budgets, usually as a specific line item allocated for these expenses. 

    Institutions use chargebacks to: 

    • Reduce risky behavior. Departments are more likely to understand the consequences of their behavior and avoid it in the future when they see the impact on their budget.
    • Distribute expenses. Sharing the cost of insurance and claims with the department originating the loss helps all areas of the institution understand the costs of risks and the risks and challenges faced by colleagues and other programs.
    • 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. 

    Developing a System

    The institution’s size and type influence the setup of any chargeback system. First, determine the institution’s culture and risk tolerance. Chargebacks may not be appropriate for institutions with a tightly controlled, centralized administrative structure. Decentralized institutions may be more comfortable placing risk ownership throughout the institution.

    Next, 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 may also consider charging back settlement amounts that insurance doesn’t cover. 

    Finally, consider the potential impact across campus by asking:

    • How will departments budget for potential chargeback costs that arise throughout the fiscal year? What will happen if a unit does not have money in its budget to meet its chargeback obligation?
    • Will the institution make exceptions to charging back costs? If so, under what circumstances?
    • 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 your institution handle a department’s reluctance to make difficult decisions that could lead to claims, such as terminating an employee to avoid incurring costs? Will your administration force the department to make a decision or let it deal with the consequences of inaction?
    • Should the decision to charge back be made on a case-by-case basis, considering the severity of a specific claim, or the department’s claims history, such as frequent auto accidents?
    • Will instituting a chargeback system promote risk management or create resentment when some incidents may be beyond the department’s control, such as inclement weather or theft by a third party?

    Charging back costs related to risk is worth considering because it can promote awareness of claims expenses across campus and strengthen risk management.

    By Heather Salko, senior risk management counsel


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