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Identifying risk. Some loss is inevitable, and there is a cost to risk even if a loss does not occur. (Photo: Shutterstock)

Last month we discussed the principles of risk management and why it is important for adjusters and adjusting firms or departments to establish systems of risk control and financing. Some loss is inevitable; risk has cost even when no actual loss occurs. We spend money on various ways to prevent or pay for loss, and despite that expenditure, no loss may occur. However, unanticipated loss could far exceed what we might have anticipated.

For example, a warehouse full of stock is exposed to various kinds of loss: fire, flood, theft, worker injuries, almost anything one could imagine. The owner decides to install a fire protection system that sounds an alarm and has sprinklers if there is a fire. Such systems are expensive. If there never is a fire, was the investment in the system wasted money? What if the sprinkler system leaks and damages stock? What if the alarm malfunctions and employees leave the building, losing an hour’s worth of work while the fire department checks? What if the fire department fines the company $1000 for a false report?

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