The Hidden Costs of Claims: Big Bites from Your Bottom Line

Tuesday, September 16, 2014

Invisible demons can eat the bottom line right out of your business, and you probably haven’t even thought about figuring these costs into the benefits of having a good safety program.

These are the hidden costs of accidents and claims, which can run as much as 70 percent of total costs. Behind every accident lurks numerous hidden costs which can be very expensive to a business. LWCC covers claims for medical and indemnity (compensation) insurance, which are direct costs.

However, the hidden demons are less predictable and more difficult to control. These spin-off accident costs are usually absorbed by the business. Many business managers would say this is overhead or the “cost of doing business.” But the smart manager should emphatically say, “Not!” Hidden costs are usually about seven times greater than direct costs, but are not taken into account because they are not easily identified. These include:

  • worker downtime
  • co-worker downtime
  • co-worker assistance
  • additional training
  • equipment downtime
  • damaged products and materials
  • lost orders and sales
  • employee turnover

Worker and Co-worker Downtime

After an accident, not only have you lost the productivity of the injured employee, you may lose productivity of other employees as well. Co-workers may be curious and worried. As a consequence, they may spend work time discussing what happened and what will be done about it. Serious accidents could affect productivity for some time. Employees begin questioning their safety because they think it can also happen to them. They also may take more time than normal to do tasks because they are worried about getting hurt.

Also, a supervisor or other manager may have to investigate reasons for the accident and complete accident reports - taking that person away from other responsibilities.

Co-worker Assistance

Usually a co-worker takes the injured employee to get medical attention, with the business temporarily losing that person’s services as well. This may include the initial hospital or doctor’s visit as well as follow-up appointments. The workflow may become even more disrupted from having two employees out instead of only one.

Training Replacement Workers

If the injured employee will be out for an extended period of time, a business usually will have to train an existing employee or bring in a temporary employee who also requires training time. In either case, the replacement worker will probably not be as productive and is more likely to make mistakes, thus increasing the likelihood of further workplace accidents.

Therefore, management could decrease business costs by deciding if it is most cost-effective to bring in temporary employees, retrain existing employees or job out the services of the missing employee to another company or competitor.

Companies will have to pay the cost of replacing and training employees—or decrease productivity by having one less employee. Effective loss prevention management plans might include preparations for backup, cross-training or job outsourcing for every employee’s job before the accident happens.

Damaged Equipment

Human factors are not the only hidden costs. Accidents can result in damage to equipment that may end up costing the employer additional profits spent in repairs, downtime and decreased production output. “Every second that equipment is not producing, the employer is losing money.”

Equipment sometimes cannot be repaired, causing the business to take on thousands of dollars of debt to acquire replacement machinery. The business now has both a new expense and new debt.

Damaged Products and Materials

Not only may equipment be damaged or destroyed in an accident, but products and materials may also need to be replaced or repaired as well. This could cause major problems if the materials are expensive or not easily available.

Materials sometimes need to be shipped in and that takes time. If there are long delays, customers often become irate because goods are not delivered on time. This is a perfect example of an accident’s ripple effects which create far-reaching consequences. Of course, the worst-case scenario is a company losing customers and market share because it failed to deliver as promised. The consequences could be disastrous in a company with limited market share and dependence on one or two key accounts. How much is customer goodwill worth? Deciding what customer goodwill, market share and key accounts are worth will probably raise a company’s perceived value of an effective loss prevention program.

Prevention Is the Best Policy

The best way to avoid such hidden costs is implementing effective safety and loss prevention programs. Don’t let accidents destroy your business. Many employers are hesitant to implement a safety program because they think it will be expensive. However, if they take these hidden costs into account and consider how much accidents could really affect their business, they would see the savings are well worth the time and effort.

Originally Published: December 1, 2001