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Contracts as a Risk Management Tool
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Risk management process

The risk management process largely involves identification of potential loss exposures and analysis-in the form of assessment and measurement-of potential harm from exposures.

Once the situation and risk have been identified and analyzed, a loss control technique is selected. Loss control techniques, or risk treatment devices, include the following:
  • Avoidance
  • Prevention
  • Reduction
  • Segregation (separation and/or duplication)
  • Contractual transfer
  • Combination

    Let's take a look at a few of these techniques.

    Avoidance is a technique used when a project is not yet started, when property is not yet purchased, etc. It could also mean abandoning a project that has already begun.

    Prevention deals with frequency of loss. Using loss control and safety programs will be of assistance when applying this technique.

    Reduction deals predominately with severity of loss and is a factor in controlling frequent loss. Reduction can be an extremely important function.

    Risk transfer shifts business risk to other finance mechanisms. Risk transfer typically takes place in a business contract.

    Risk finance


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    Not only are policy forms, clauses, rules and court decisions constantly changing, but forms vary from company to company and state to state. This material is intended as a general guideline and might not apply to a specific situation.
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