Potential Legal Claims and Risk Management

Effective Risk Management

The first step of effective risk management is to accept that risks do exist and then to identify the specific risks facing your business. These may include:

  • physical risks (e.g. property damage, bodily injury, etc.)
  • financial risks (as described above)
  • credit risk
  • reputational risk (e.g. damage to brand)
  • or any other type of risk that may affect the operation of the business. 

The next step is to quantify the potential impact to the business – the likelihood of it happening and the potential outcomes if things do go wrong. Tangible risks with a material chance of occurrence, such as default by your creditors, can be minimised with simple processes such as tightening up payment terms or increasing the frequency of payment chasing.

Most risks can be reduced or managed but very few can be removed altogether. At this point you need to consider “risk transfer”, where the potential impact is transferred from your balance sheet onto someone else’s.  This can be done in several ways:

Legal Contract

As mentioned above, it is important to have a contract in place between yourself and your client. This contract should be the very first line of defence where you can “lay off” some of the risks you potentially face.


Captive insurance starts to become relevant if your business’s insurance spend is well into six figures. For it to be worthwhile, the owner’s loss record should out-perform the market average. Captives encourage good risk management and are often used by sophisticated businesses with a very clear understanding of the nature of the risks they face.


An insurance mutual is a commercial organisation owned by its members (as opposed to shareholders).  Being part of a mutual does not lead to the complete transfer of financial risk, as members remain responsible for the claims arising from all of the membership within a given time period. A downside to mutual membership is that you can be held responsible for claims incurred by other members, over which you have no control.

Insurance policy

An insurance policy is the most common form of risk transfer used by companies of all sizes and is ideally suited to small to medium-sized organisations. Risks are shared by many policyholders, making the cost to you proportionate to the size of your business. It is, however, important to buy the right product for your needs. This begins with finding the right broker, whose job it is to offer independent advice and to source the most appropriate insurance product for your business. 

When buying insurance, you should focus on the insurance companies who deal with your specific sector. Specialist insurance is designed to protect the unique relationship you have with your client and offers specific covers that you would not get from a standard policy.

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