Indirect Loss Costs Are Big Cost Drivers

The best way to reduce your loss costs is to prevent losses. But no matter how carefully your employees drive, how closely you monitor equipment maintenance, or how frequently you fine tune quality in your products, accidents occur.

If you have a solid business insurance plan, your insurance carrier pays the damages or you have self funded the loss. However, there are other costs to your organization you must consider when accidents occur. Damages paid by your insurance carrier or that you self fund are called direct loss costs. However, after quantifying the costs of insurance and direct loss costs to your organization, including deductibles or retentions, when you evaluate the cost of accidents to your company, should also consider indirect loss costs. Only when you quantify the true cost of losses can you begin to understand how important it is to reduce losses.

Direct loss costs are easy to quantify: insurance premiums; the amount paid to repair damaged equipment or medical costs to heal the injuries; costs to defend the claim; lost wages; fines imposed by regulators; deductible costs; and amounts spent to pay claims.

If you think of a claim or injury as an iceberg, you will find that majority of the incident costs lie below the surface. These indirect costs are much more difficult to quantify and therefore may go unnoticed by your organization. Here are a few indirect loss cost examples.

• Administrative costs to administer the claim and the resultant damages
• Lost productivity due to staff loss or retraining needs
• The cost to hire temporary workers to meet production goals
• Potential failure to meet pre-injury production benchmarks
• Replacement or downtime of damaged equipment or tools
• Time lost by other employees impacted by the incident
• Impaired morale that inevitably occurs post injury, especially when injured employees do not return to work immediately
• Time spent investigating the claim and possibly defending it in depositions, mediations or trial
• Damage to your company’s reputation after adverse events that morph into public relations nightmares
• Business costs to relocate when business interruption coverage is not purchased

   
Indirect loss costs of both accidents and injuries can exceed the direct loss costs by as much as seven times. For a claim where $10,000 is paid, it may cost your organization $70,000. When you quantify those costs and your managers understand that all losses involve indirect loss costs, they may take more risk ownership.

A business may take years to recover from a loss, and some organizations never recover. It pays to quantify losses so that your management team understands the total cost of losses. When reviewing loss costs, measure the indirect loss costs to your organization, as well as the direct costs, to make sure you are capturing and educating employees of the total impact of losses to your company.