HOW TO PREVENT PROPERTY DAMAGE AND PERSONAL INJURIES THROUGH PROPER RISK MANAGEMENT METHODS
https://sites.google.com/site/metropolitanforensics/how-to-prevent-property-damage-and-personal-injuries-through-proper-risk-management-methods
Consider this case:
A massive oak tree, owned
by an insured, is leaning towards the neighbor’s dwelling. The tree is located along the boundary line
between the two properties. The tree
looks healthy. The neighbor, worrying
for his safety and potential damage to his home, asks on a number of occasions
the insured to take it down. The insured
refuses.
Then, during a wind event,
the tree falls, and crushes the neighbor and the neighbor’s dwelling. The neighbor dies.
This is in fact an actual
event. See picture below.
The neighbor’s insurer will
most definitely subrogate against the insured that owned the tree and refused
to cut it down to reduce the risk of causing personal injury or property
damage. A $3,000 cost to cut the tree
has now resulted in a very significant liability.
Consider
this case:
A company
and its contractors are drilling for oil offshore. They are behind schedule and budget. The investors and company continue breathing
behind the back of the on-site managers and employees/contractors for results. Being pressured, the employees and contractors
try to find faster ways of completing the well;
at the same, the drillers continue to receive direct evidence that they
are losing drilling mud (a well sealant used to keep open the walls of the
borehole) at alarming rates. Ignoring
well finishing guidelines calling for terminating a well in a tight (e.g.
shale) formation, the workers terminate the well at the interface of a
sandstone and shale - this is a no-no in the oil and gas drilling
business. The employees/contractors perform
“modeling” that shows that they can use smaller number of casing stabilizers
than originally required. They later
delete all this evidence.
The
contractors also come up with a new type of cement mixture to try to plug the
leaking well, but warned the oil company that cement strength analysis had not
been completed. The oil company
nevertheless continued the sealing of the flowing well without knowing the
actual strength of the cement mixture.
Then, the
well explodes, killing many workers and causes the largest oil spill in the US
history. Apparently, a Blowout Preventer
device that is supposed to be fail safe, failed to operate and to prevent the
explosion. Instead of spending more time and tens of
thousands of dollars to properly finish and/or seal the well, and to assure
that all proper testing and risk control is done, the company created an actual
liability of more than $40 billion dollars.
This is also
an actual case. See the explosion below
of the BP’s Deepwater Horizon in 2010.
All these
deaths, personal injuries and property and environmental damages could have
been prevented through proper risk reduction and risk management methods. Risk reduction and risk management are much
more than insurance.
RISK MANAGEMENT DEFINITION
Risk management is the acceptance of responsibility for
recognizing, identifying, and controlling the exposures to loss or injury which
are created by the activities of the business. By contrast, insurance management involves
responsibility for only those risks which are actually insured against.
Some
definitions are in order:
- Risk is uncertainty of loss.
- Peril is a source of loss (fire, windstorm, embezzlement, etc.).
- Hazard is a condition which increases the likelihood of loss (e.g., using an untrained or unskilled worker to perform skilled labor).
With these
definitions in mind, we can discuss the principles of risk management as they
apply to the Business. However, because
of the diversification within the Business, it is impossible to make one
statement which will fit all situations equally.
Purpose
All businesses are exposed
to the perils of fire, flood, theft, earthquake, burglary, work-incurred
accidents, and liability for injury to the public. Some of these businesses also have exposures
involving possible loss of valuable papers and records, accounts receivables,
loss of income and extra expenses to continue operations.
Therefore, an intelligent
approach to risk management and insurance is necessary. Insurance is not purchased out of desire, but out of necessity. It isn't a commodity which is enjoyed or
displayed or sought after by its owner. It is like bottled water prior to a storm, or aspirin,
or spare tires; i.e., bought with the hope that they will never have to be
used. Insurance should be the last line of defense and available after all
other precautions or safeguards have failed.
Businesses should not leave
these things to chance, but follow good judgment and established procedures to
control the risks and their costs.
The purpose of the
following guidelines is to provide at least the basic pattern for managers to
follow in managing the Business' risks.
A PLAN FOR ACTION
A function of risk management is to organize and carry out a plan
to control or reduce the risks to which the Business is exposed. Businesses that have a well-defined and well
organized risk management program, they can follow certain procedures to
control risks adequately and to form and execute an objective loss prevention
program. These steps are:
- Recognize and appraise the risk
- Estimate the probability of loss due to the risk.
- Select the optimum method of treating the risk.
- Implement a plan to carry out the selected method.
The main concerns of most Businesses are the risks to property and
people. Some examples of losses include:
- LOSS BY DESTRUCTION - Property may be destroyed by fire, earthquake, flood, wind, breakage, or deterioration.
- LOSS BY CONFISCATION - Property may be confiscated by an act of crime such as theft, embezzlement, robbery, burglary, forgery, and conversion.
- LOSS OF USE - When property is destroyed or confiscated, the loss is often increased because of the indirect loss, e.g., loss of income, interruption of activities and extra expenses to continue operations. Much greater than the loss to physical property, is the loss of records and data which are vital to the operation of the Business.
- LOSS BY NEGLIGENCE - Liability claims are incurred when persons are injured or property of others is damaged or destroyed due to negligence.
- LOSS OF EMPLOYEE/PUBLIC GOODWILL - Discrimination, sexual harassment, libel, slander, bad faith and unfair dealings will create liability situations and poor employee/public relations issues.
METHODS FOR TREATING RISK
There are established and tested
techniques by which risks may be controlled.
1) AVOIDING RISK - A risk may be
avoided by not accepting or entering into the event which has hazards. This
method has severe limitations because such a choice is not always possible, or
if possible, it may require giving up some important advantages. Nevertheless,
in some situations risk avoidance is both possible and desirable.
2) SPREADING RISK - It is
possible to spread the risk of loss to property and persons. Duplication of
records and documents and, then, storing the duplicate copies elsewhere is an
example of spreading the risk. A small fire in a single room can destroy the
entire records of a Business’ operations. Placing people in a large number of
buildings instead of a single facility will help spread the risk of potential
loss of life or injury.
3) LOSS PREVENTION OR REDUCTION OF RISK - "An ounce of
prevention is worth a pound of cure," according to an old saying. Today,
this statement provides the guide for the control of risk. Risk may be reduced, eliminated, or certainly
controlled by using a well-planned loss prevention program. These are some of the points a Business should
consider in its efforts to reduce loss:
A. Utilize the services of the Insurance/Risk Management programs,
Environmental Health & Safety programs, or other risk management programs available
within the business.
B. Establish a system of accountability. Identify the causes and
costs of losses and claims; study trends and patterns of repetitive accidents;
form a safety or review committee to study incidents in order to better
understand and control risks; include loss control as one of the more important
goals and objectives of Businesses.
C. Secure protection of money and records by preventing access to
your accounts or computer systems, protect and safeguard codes and personal
identification numbers, use high quality safes, vaults, and filing cabinets. When facilities are available for the storage
of money or valuable equipment, access should be limited to as few people as possible.
Cash handling procedures are reviewed by
our internal auditors. Any large amounts of cash or checks must be deposited
with the Cashier. Safe-keeping arrangements should be made for any other
valuable equipment or materials. Change locks, and combination numbers when
necessary to protect the integrity of access to secured areas.
D. When selecting a site for storing valuable property, a number
of items should be reviewed to reduce the possibility of loss. They include:
(1) High water level - Avoid basements and areas where flood history exists.
(2) Heating system - Steam can be more damaging than water. (3) Construction of
building - Safeguards and loss preventive systems built into the facility at
time of construction (fire sprinkler system, security alarms, etc.) (4)
Exposure - Surrounding area should be checked for hazardous exposures such as
storage of flammable materials and chemicals.
E. Housekeeping - Preventive Maintenance and good housekeeping
procedures include, but are not limited to: (1) Educating and training staff in
maintaining good housekeeping habits. (2) Arranging for preventive maintenance
of equipment, tools, and building. 3) Controlling neatness and traffic flow
patterns internally.
F. Establish a safety program. There are basically two approaches
to accident prevention: (1) Engineering risks, and (2) Personnel administration
or human relations. The Engineering
approach emphasizes mechanical causes of accidents, such as defective wiring,
improper disposal of waste products and unguarded machinery. Safety engineering is an essential part of any
accident prevention and loss reduction program. Yet, many times neglect, work attitudes, poor
judgment or just plain carelessness by employees are the major causes of
personal injuries and property damage. An
effective program of education, training, and performance evaluation will aid
in responding to the human element of accident prevention. Worker's
compensation, disability and health insurance programs act as a cushion to the
financial loss that may result from an accident to employees. There is, however, no way to truly compensate
for the pain, suffering, dismemberment, and lost earnings or disfigurement and
lost earnings that may result. Looking for ways to prevent injuries is the key.
Risk
Management Oversight
Boards of Directors have a
huge responsibility regarding risk governance and oversight; therefore it is
understandable that they would delegate certain risk areas to other committees.
The problem with that is certain risks might not be considered in aggregate or
in relation to other known risk facing the company.
This becomes tricky because
it is the full board that is ultimately responsible for making sure that the
company is within its risk appetite so that interrelated risks will not be
overlooked between committees. Although the full board should remain responsible,
it is helpful to assign more focused on risk-topics to committees while still
requiring review by the board in its entirety.
Directors should confirm
with management the point at which certain operations become unacceptably risky
and how management will respond if an unacceptable risk level is reached. The
planned response should include discussions about how the risk is being
mitigated, monitored and managed.
Directors should also
develop a process to understand the potential impact of smaller risks in aggregate.
Certain risk may be acceptable within themselves; however when added to other
risks, they could prove crippling to the company. Instead of taking
management’s word that risk is being appropriately managed, directors should
request supporting evidence for management’s assertions about risk. ( NACD
Report on Risk Governance: Balancing Risk and Reward October 2009 )
4) RETENTION, ASSUMPTION OR ACCEPTANCE OF RISK - These methods are
of particular interest to an operation as large as the Business. Constant
vigilance is needed to avoid accepting risks unintentionally through
unawareness of the exposure. Some risks have to be retained because insurance
cannot be purchased or the cost of insurance is not economically sound.
Therefore, some risks should be retained, assumed, or accepted. Examples of these types of risks would be:
earthquake, war, flood, accidental breakage, wear and tear etc. The importance and economic value of risk are
reviewed in relationship to the size of the operation, the probability and
severity of loss. Before accepting a
risk, consideration is first given to the potential amount of the loss and the
effect the loss may have on the operations of the Business.
Risk
Monitoring
There is not correct format
for effective risk monitoring. However, the structure and content of risk
report to executive management team and to the Board of Directors should align
to the following practices to support effective risk oversight ( NACD Blue
Ribbon Report on Risk Governance: Balancing Risk and Reward 2009)
1) An organization should
address the comprehensive range of risks facing the organization as determined
by the organization’s strategic and operational goals. The report should span
the range of material risks that the company has identified as relating to the
organization’s goals and objectives
2) Capture and align
information at a level that is consistent with the organization’s risk
management needs and goals. Risk exposure data should be presented using
metrics that were determined appropriate for that risk type.
3) Link risk information to
risk appetite and risk tolerance.
4) Current organizational
risk exposures or positions should be presented alongside historical data and
explanations of trends.
5) Update at a frequency
consistent with pace of risk evolution and severity of risk.
6) Utilize standardized
templates to allow for consistent presentation and structure of risk
information both between risks and over time.
5) TRANSFER OF RISK TO INSURANCE CARRIERS OR OTHERS - Risk may be
transferred contractually to others. For example, when leasing facilities from
others, the lease could require the lessor to assume all property and liability
losses. Contracts to be entered into by the Business must be reviewed by the
appropriate Business offices, e.g., procurement, sponsored projects, Legal
and/or Risk Management. Only named
individuals, approved by the management of the firm or delegated by a senior
officer, may sign contracts or obligate the Business under any written
agreement. Many risks can and should be
transferred to an insurance company. By
doing so, that part of the risk is reduced to a certainty; i.e., the amount of
the premium and deductible. The purchase of insurance is a tool that is used to
help solve problems. However, we recommend insurance only as a last method to
solve a problem, not the first.
METROPOLITAN RISK MANAGEMENT SERVICES (MRMS)
Metropolitan Risk Management Services
(MRMS) is professional service firm that specializes in outsourced risk
management and insurance advisory services. Based in the East Coast, the firm
has several offices in the Northeast and Midwest, with clients throughout the United
States, Canada, Europe and Latin America. While our clients are diverse businesses and
organizations, each share a common approach - - a genuine desire to prevent and
mitigate losses. Invariably, our clients
value high quality professional advice, whether that advice is from safety
consultant, engineers, attorneys, CPAs, or risk management and insurance
advisors. Their goal is to obtain the best assistance available, fully
recognizing the cost of identifying and confronting problems before they
develop is always less expensive than addressing an issue after it is out of
control.
Risk Management
Services at Metropolitan
·
Serve as an
integral part of the business management team as an outsourced risk manager
·
Overview current
loss prevention and loss mitigation processes
·
Provide project
management services to ensure critical processes are completed in a timely
manner and consistent with overall needs
·
Provide an
objective and independent expert evaluation of the current risk program,
including a written report containing specific findings and recommendations
·
Identify and
assess your current and potential risk of loss
·
Develop alternate
(non-insurance) methods of risk financing
·
Assist in
strategic planning to achieve long range risk management objectives
·
Develop risk
management education coursework for specific needs
·
Provide guidance
during merger, acquisition and divestiture activities
·
Provide expert
witness and litigation support
Metropolitan Engineering, Consulting & Forensics
(MECF)
Providing
Competent, Expert and Objective Investigative Engineering and Consulting
Services
P.O.
Box 520
Tenafly,
NJ 07670-0520
Tel.:
(973) 897-8162
Fax:
(973) 810-0440
E-mail:
metroforensics@gmail.com
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