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On any business day, shopping center owners and managers face liability risks that range from ordinary and manageable to horrifying and out of their control.
The ordinary exposures, primarily slips and falls, almost can be eliminated with a strong loss control program. But even the best risk management strategies can only lessen the potential liability from a natural disaster, violent crime or act of terrorism.
Shopping malls present the greatest source of public liability in the real estate industry, partly because of "the sheer volume of people" visiting them daily, said Brian Ruane, executive vp and director of the real estate and hotel group for Willis Group Holdings Ltd. in New York.
Stephen Bushnell, product director, real estate innovation team at Fireman's Fund Insurance Co. in Novato, Calif., said 80% of liability-related incidents at shopping malls are slips and falls, and 80% of those happen on the exterior of the property.
Inside shopping centers, typical liability risks include: wet or slippery floors, especially near entrances; beverage and food spills in the food court area; changes in level from one corridor or area to another; and entertainment features, such as an indoor playground or amusement park rides for children.
Severe mall exposures include assault, fire and even unlawful imprisonment if a customer is incorrectly detained by mall security, said Scott Bayer, senior vp general liability division for Liberty International Underwriters in New York.
Security "has and will continue to be more of an issue," including not only crime but also the risk of a physical or biological terrorist attack, said Tim Bunt, vp and corporate risk officer for CB Richard Ellis Inc. in Stamford, Conn., which manages retail shopping centers around the world.
If business declines at a mall following an incident, tenants may bring an action against the property owner or manager, said Mr. Bushnell, who noted that real estate errors and omissions coverage would address that risk.
If there are security- or safety-related incidents, companies that brand mall complexes with their names also risk harm to their reputation, Mr. Ruane said.
A separate policy generally would have to be purchased to cover reputational risk.
Mary Pipino DeMaiolo, area president and niche managing director, shopping center insurance, for Arthur J. Gallagher Risk Management Services Inc. in Youngstown, Ohio, said, "As an industry, (owners and managers of retail centers) do an excellent job of making sure they provide a safe and comfortable shopping environment. But sometimes things happen that are beyond anyone's control, and they get blamed."
"One little piece of negative publicity overcomes all of the good things and is blown out of proportion," Ms. DeMaiolo said.
A major change in liability issues springs from mixed-use properties with residential components, said Steven Sachs, senior vp and managing director of the national real estate practice for broker Hilb Rogal & Hobbs Co. in Columbia, Md. Mixed use facilities require "everybody stepping back and looking through expected crises and issues," Mr. Sachs said. A determination must be made where mall security ends and residential security begins, which he said can be problematic if residential and shopping center parking are in the same lot.
From the perspective of many risk managers, brokers and insurers, overall U.S. mall claims frequency is stable or declining. But others say severity is increasing. Geography, demographics and the litigiousness of the region all affect the frequency and severity of claims against shopping malls, Mr. Sachs said.
And "as our society ages, the frequency of claims will increase," said Ms. DeMaiolo.
"We're anticipating claims costs to increase," said David Grinblatas, director of middle market industry solutions for Hartford Insurance Co. in Hartford, Conn. Baby boomers moving into urban locations are luring retail centers to those busier areas that have a higher potential for large losses, he said.
"It's the less frequent stuff with the higher potential value that drives you to have excess coverage," said Eamonn Cunningham, chief risk officer for Sydney, Australia-based mall owner/operator Westfield Group.
Mr. Cunningham, who oversees a global risk management program followed by 121 branded malls worldwide, said the company aims to "engineer risks out of operations." Westfield's risk management culture is supported by large financial investments in loss control with hundreds of millions of dollars spent each year just on the security aspect, he said.
But, Mr. Cunningham said, "I don't see appropriate discrimination (by insurers) between insureds that live and breathe risk management and those that don't have a risk management culture. We don't get the value for the effort we put in."
And though the market is softening, policyholders are still accepting significant retentions (see related story).
Another part of Westfield's effort is training. "Our people are trained to deal with incidents," Mr. Cunningham said. The company also operates with the philosophy that well-treated customers are less likely to sue for as much as possible, he said.
HRH's Mr. Sachs, who was a risk manager for Rouse Co., a shopping center owner and manager acquired by Chicago-based General Growth Properties Inc., said companies must determine a strategy to reduce risk; agree upon performance standards, such as how often inspections are conducted, and have someone accountable for meeting those standards; and develop metrics to evaluate how well processes are working. "If you have those three things, you can move the numbers" in terms of incidents and costs. "But what we're really talking about is people not getting hurt," Mr. Sachs said.
A regimen of inspection, documentation and correction can help reduce slips and falls from defects, Mr. Sachs said. The security force can be used for inspection, inspecting one zone daily for problems and then getting them fixed. "A five-year plan to resurface the parking lot doesn't take away the need to fix defects (such as potholes) when they occur," he said. "It's the same with cracks in the sidewalks."
Mr. Bunt of CB Richard Ellis agrees that a comprehensive risk assessment is the first line of defense against liability exposure. "Once you understand where the gaps are (in your loss control program), you can begin addressing those gaps," he said, whether the solution is more visible security, surveillance cameras or having a plan in place to shut down the ventilation system in an emergency.
In addition to managing the risks that the shopping center owner or manager must assume, "risk transfer (to contractors) has always been a cornerstone" of a program to limit liability, Mr. Bunt said.
Shopping center owners and managers must not jeopardize the risk transfer by appearing to have risk management oversight over contractors and their workers.
"The way you give direction is in the scope of the contract," Mr. Sachs said. "Benchmark a number of objectives" in the contract, he said.
What risk managers must do, he said, is provide the structure to achieve risk management objectives.