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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