Every business needs to employ risk mitigation strategies to protect assets and increase the company’s bottom line. The purpose of risk mitigation is to identify, assess, and prioritize risks that can affect business operations in order to reduce the adverse effects the risk can have on a business and its practices. The legal professionals at the Stroud Fenner Law Firm will help you review your business practices and determine the best risk avoidance plan for your business.
A Risk Avoidance strategy is the process of identifying risks and employing practices in your business to avoid the risk entirely, usually by refusing to take part in activities or practices that have been identified as risky. This strategy can be costly because of the lost revenue opportunity or the high cost to implement the process to avoid the risk. A construction company’s decision to shut down due to inclement weather to avoid the risk of a worker injury is an example of a risk avoidance strategy when the risk of an injured worker is too costly compared to a lost day’s work. A company may choose not to expand to a new area in order to avoid the cost of failure.
Essentially, risk avoidance involves the decision to refrain from taking a course of action to avoid exposure to the risk.
Risk acceptance is the opposite of risk avoidance. When a company employs a risk acceptance strategy, it is making a conscious decision to take no action in order to limit or avoid a risk. This strategy is typically used when the risk is one that has a low probability of occurring.
Risk Limitation is the most common strategy used by businesses. This strategy seeks to strike a balance between risk acceptance and risk avoidance. A company employing a risk limitation strategy acknowledges that a risk exists, but takes some affirmative action to prevent it from happening or reduce the adverse consequences of the risk should it occur.
The Risk Limitation strategy is often used to address known risks or specific risks, but is most commonly used to mitigate unavoidable risks. For example, a commercial retailer can limit its exposure to the unavoidable risk of its customers being the victim of crime while on business premises by employing security personnel to patrol the parking lot of its establishment.
Most businesses utilize risk transference strategies when the risk involved is not the core service of the business. Risk Transference allows a company to transfer a practice to a third party who is willing to accept the risks associated with the business practice. Areas of business practices that may be transferred are:
● Customer service
● Food Services
● Technical support
● Network and data security monitoring
● Data storage
In the typical risk transference scenario, the party who assumes the transferred risk is also responsible for any legal liability that arises out of the services provided. The acceptance or limitation of liability for the transferred risk is addressed in the written contract between the parties.
The most common type of business Risk Transference is the purchase of insurance whereby an insurance company accepts premium payments in exchange for coverage against risks should they occur.