A loss exposure is a possibility of loss, it is more specifically, the possibility of financial loss that a particular entity or organization faces as a result of a particular peril striking a particular thing that you have assigned value to. Probably the most important step in the risk management process is the identification or finding of risks that need to be treated. If you are not aware of the existence of a risk, you certainly cannot make plans for handling it or mitigating its potential loss.
In order to even consider the identification of your risks, it is necessary for you to classify them in some sort of orderly manner. Various methods for classifying risk can be devised, it is common to classify risks in a manner similar to that used by the insurance industry (contact your Risk Management professional for assistance). The advantage to this system of classification is that it makes it easier to relate your risks to your insurance coverages.
Property risks of several types are created by the possibility of property being damaged or destroyed. Your first task involves identifying that property and then determining what perils might damage it. First party losses can be divided into three categories.
- A direct loss is incurred by the owner of property or the party responsible for property when it is damaged by a peril. The property may be real property or personal property. A loss is sustained if an expenditure must be made to repair or replace the damaged or destroyed property.
- Damage to real or personal property may cause indirect or consequential losses. These are losses which occur when, as a result of damage to real or personal property, income is reduced or additional expenses are incurred other than for the repair or replacement of damaged property.
- A contingent loss may be suffered by a party who is dependent upon the activities of another party owning or operating the property that is damaged. For example, if a major supplier’s facility is damaged, or access to your facilities is not possible because of a storm or other catastrophe, you may lose income, or incur additional expenses as a result of a storm.
Crime losses fall into a number of categories.
- They can result from employee dishonesty (infidelity) or
- Losses such as burglary, robbery, or forgery by outsiders.
- Crime losses may involve money, securities or similar types of property or merchandise.
- They may involve violence or the threat of violence, or they may take place unnoticed until it is discovered sometime after its having occurred.
- Often, the most serious losses occur when there is collusion between an employee and an outsider.
Casualty losses are of many types. The term “casualty” originally was referred to as or defined or implied a sudden and accidental occurrence involving loss of life or at least serious injury. However, the term is used rather freely today to indicate losses caused by injuries to persons or liability for injuries to persons or damage to property of others. Workers Compensation, General Liability, Auto, Aircraft, Watercraft and similar losses are considered casualty losses.
This Risk Management series continues with the Evaluation of Risks in my next entry.
