Question

1. Explain why most firms would be more concerned about liability risk than property risk.

Answer 1

Before answering the question we should know what is actually liability risk and property risk.

Property Risk: Property Risk is the risk which arises on happening of events like theft, fire, spoilage or any natural disaster etc. which may specifically affect the facilities or the infrastructure of the organization.

Liability Risk : Liability Risk is the risk which arises when the concerned party may default on any payment or have to bear the aftereffects on the breach on any contract.

Now since we have known the difference between the two types of risk, we can extend our discussion to why firm is more concerned about the liability risk over property risk. The reason for the same is very obvious and general that property risk is a one time risk, meaning it occurs and leave a one time effect and doesn't have any long term effect. The only exception will be when the amount of property risk or property damage is large and which may effect the normal working of the organization. Also property risk can have insurance, that means that the firm can insure it's products or building or any property which it feels to. The benefit of this move will be that the firm can get the insurance claim against the damages to the property.

But the same may not be true in case of Liability risk. The problem is liability risk is more than property risk because if the firm makes any default on it's liability this would directly impact the goodwill of the firm. Any negative impact on the goodwill of the firm will also have a negative impact on the credit worthiness directly. If we think from the viewpoint of an investor then no investor would like to invest his money in such a firm who defaults on it's liability payments because ultimately the investor would be getting dividend and the payment of dividend is also a liability of the firm. Also if the credit worthiness of the firm get's affected negatively then the firm has difficulty in raising money from the credit market due to negative credit worthiness and the converse will be true when it will have a positive credit worthiness.

Hence firms are more concerned about liability risk than property risk.