Direct and indirect costs of an accident


Capitol Update, Dec. 21, 2015

What does an accident really cost? To answer that question you need to understand that accidents of any kind have both direct and indirect costs. Direct costs are usually the cost of insurance increases that you might experience as a result of that accident such as a rate increase due to increased accident frequency or severity and any out-of-pocket costs you have associated with damages, such as a direct payment to a third party or your deductible. Indirect costs are those costs that are not direct damage expenses, pre-funded loss allocations or losses covered by insurance.

Before we examine the direct and indirect costs, let's make sure we understand what an accident is and what the truth is about the "hidden" costs of an accident.

What is an accident?

An accident is an unplanned event definite to time and place that results in injury or damage to a person or property. An accident's impact can be measured monetarily.

The direct costs are outlined above, the indirect costs or hidden costs might include:

¨ Lost productivity due to the absence of an injured worker or workers.

¨ Lost productivity of employees who assist in the rescue, cleanup, and repairs caused by an accident.

¨ The cost to repair or replace damaged property, equipment or vehicles.

¨ Rental costs while equipment or vehicles are repaired.

¨ The loss of a revenue stream or contract.

¨ Damage to an organization's public image.

¨ Overtime expenses incurred by additional staff needed to make up for the lost worker or workers.

¨ Lost time of supervisors and management who must respond to the accident (assisting injured workers, conducting accident investigations, or dealing with regulatory agencies).

¨ Fines paid to regulatory agencies.

¨ Cost of first aid supplies used to treat the injured.

¨ Costs of hiring and training new employees to fill in for the injured.

¨ Your involvement in any lawsuit.

¨ Negative impact on customer relations due to reduced quality or service.

¨ Loss of customer loyalty due to negative publicity.

The indirect costs of accidents can be even greater than the direct costs. As a conservative estimate, on average for every $1 in direct loss costs per accident there are $3 of indirect costs. In fact, some studies indicate the indirect costs can be 4 to 10 times the direct costs.

To begin identifying the direct and indirect loss costs for an accident, ask this question........

"What happened inside our organization because of this loss?”

The answer to that question will be the starting point for categorizing the direct and indirect cost factors of the accident. Consider the following when answering the question:

1.    Don’t underestimate the accident's impact to your “Brand”.  In the event that a loss disrupts your business in some way, some of your customers are also affected (deliveries not made, contracts unfulfilled, bad press, etc.).  The damage to your brand or the organization's reputation can be the most expensive part of the indirect loss costs.

2. Always focus on "Business Impact".  Consider how this accident will have an impact on your organization's financial statement.  You must understand how it translates to productivity, profitability, competitiveness and human factors expense.

Just as there are many indirect costs associated with accidents, there are indirect savings associated with accident prevention. For this reason, the phrase “loss prevention” is often used to describe those practices that are implemented to reduce the frequency and severity of accidents. Every accident you prevent saves direct and indirect accident costs to your organization, both of which affect your bottom line. Other benefits of accident prevention efforts include:

¨ Safe/uninjured employees.

¨ Property and materials will not be damaged.

¨ No disruption to production, supervisors/managers can focus efforts on other priorities.

¨ Increased employee security at work.

Lost prevention requires an investment of time, capital and management support. But, when you evaluate or forecast the direct and indirect costs associated with any type of accident you realize it’s an investment worth making.




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