At its core, risk management is the systematic approach to identifying, assessing, mitigating, and financing risks that could negatively impact your business. Risk management should be proactive, not reactive, with policies and strategies ironed out long before a loss occurs. Importantly, it should be understood as a continuous process that evolves alongside your business.

Five Practical Steps To Approaching Risk Management

Risk management often gets reduced to the simple task of buying insurance. But as Lee Burke, President of Burke, Bogart & Brownell, emphasizes, true risk management is a much more comprehensive, overarching process. While textbooks describe risk management through abstract models, Burke prefers a more intuitive, hands-on framework distilled into five strategies every business owner can understand.

1. Avoid Risk

The most effective way to manage risk is not to take it on. In legal terms, this falls under the doctrine of ‘assumption of risk’ — you avoid the liability by avoiding the activity altogether. What this means for your business will ultimately depend on its industry and function. Therefore, you will want to spend considerable time identifying and analyzing common areas of risk specific to your business so you can decide what is worth the exposure and what makes more sense to avoid altogether.

2. Mitigate Risk

Of course, risk is an inherent part of business, and some risk will be unavoidable. In these cases, you will want to take reasonable steps to reduce the likelihood or severity of a potential loss. To mitigate risk, you must have a solid understanding of your business’s ‘loss exposures.’

Understanding Exposure

John Gotschall of Coaching Financial Concepts breaks down loss exposure into three types:

• First-party losses: Direct harm to your business, such as property damage.
• Third-party losses: Harm your business causes to others, often involving lawsuits or liability claims.
• Contingent losses: Losses that depend on an external event, like a vendor failing to deliver a critical input.

These distinctions are important for your understanding of risk exposure and will inform the mitigation you undertake. They are also important because insurance policies often cover one type of loss but exclude others. For example, most property insurance policies cover first-party losses, but do not automatically include business income losses, which fall into the contingent category.

Measuring Exposure

Business owners often think only in terms of physical assets, i.e., buildings, inventory, and equipment. But Gotschall urges a broader view: “Employee benefits liabilities, reputational harm, cyber breaches — these aren’t tangible, but they’re very real exposures.”

Burke recommends using physical inspections, financial statements, and industry data to measure risk. This aligns with standard actuarial methods, which look at:

• Frequency: how often a loss is likely to occur
• Severity: how big the loss might be

Burke highlights that mitigation should also include contingencies for post-loss responses as well, such as having a disaster recovery plan. These efforts will help minimize disruption to your business. As an added bonus, businesses that implement a robust mitigation strategy will often qualify for better insurance policy terms and lower premiums.

3. Segregate Risk

Risk segregation is all about containment. If you’re shipping high-value inventory, don’t place all of it on one truck or vessel. Distribute it across multiple shipments to limit your total exposure. This is a fundamental concept in supply chain risk management. In finance, it’s akin to asset diversification — ‘don’t put all your eggs in one basket.’

4. Transfer Risk

The strategy of transferring risk generally involves insurance policies and legal tools incorporated into agreements with business partners and vendors like indemnity clauses and hold-harmless agreements. When using legal tools to transfer risk, it is critical to ensure the language is carefully drafted for maximum enforceability. A poorly worded clause may be voided by courts, especially in high-risk industries like construction or healthcare.

5. Retain Risk

Retention involves accepting and budgeting for unavoidable risks that are an inherent part of doing business. As Burke puts it, “There are certain risks in life that we just have to deal with. Plan for them.”

A Few Words on Insurance

Many business owners think choosing an insurance broker is a matter of picking the one who can give the cheapest quote. Retail brokers deal directly with businesses, while wholesale brokers provide access to specialized markets like high-risk industries or unique assets. For complex or nonstandard risks, wholesalers can open doors to coverage otherwise unavailable through retail-only brokers.

“There’s a big difference between a salesperson and a risk advisor,” Gary Kirshenbaum of the Alera Group notes. “Your broker should ask deep operational questions that seek to understand how your business operates in all aspects, from employees vs. independent contractors to how you manage data and cyber security as well as the details of contracts the business signs with suppliers and customers to who your clients are, what keeps you up at night, and what your future plans are? Should we consider some risk planning? It should be an all-encompassing conversation.”

When researching potential brokers, look for credentials like CPCU (Chartered Property Casualty Underwriter), CRM (Certified Risk Manager), and CIC (Certified Insurance Counselor), all of which indicate training not just in sales but in insurance law, financial planning, and risk mitigation strategy.

The Fine Print

At a fundamental level, your insurance policy will include the following sections:

1. Declarations – Who and what is covered.
2. Insuring Agreement – The insurer’s basic promise to pay under certain conditions.
3. Conditions – What you must do to remain eligible for coverage.
4. Exclusions – What is explicitly not covered. For example, many general liability policies now exclude cyber-related incidents, requiring separate policies altogether. This exclusionary trend means businesses must evaluate cyber risk independently and seek tailored policies.

An insurance policy is a contract and as such, it is incredibly important to get a thorough legal review of your policy or policies, especially if your livelihood could depend on them. Standard policy forms may contain ambiguities that favor the insurer unless proactively negotiated. Christopher Cahill, senior counsel at Dykema, encourages potential policyholders not to be persuaded by apparently powerful language in a policy.

Risk Management as Business Discipline

As your business evolves, so must its risk strategy. Gotschall notes that adding employees, outsourcing production, or taking on investors all create new liabilities that must be incorporated into a risk management strategy.

Cahill adds that succession and internal governance planning become crucial as businesses scale. “If one partner dies and their spouse inherits their shares, are they capable of running the business?” he asks. Buy-sell agreements, key person insurance, and continuity plans are all tools for mitigating governance risk.

As your business grows, so do your exposures — and so does your responsibility to manage them wisely.

To learn more about this topic, view Insurance For The Business Owner – 101 / Understanding Risk Management Basics for Business Owners. The quoted remarks referenced in this article were made either during this webinar or shortly thereafter during post-webinar interviews with the panelists. Readers may also be interested to read other articles about risk management. 

This article was originally published on here.

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