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Definition of Liability Risk

Liability risk is the risk assessed from the purchase, use of goods or ownership by a company. It also can be the threat to the company if there is a breach of standards due to operations or a neglect action. Companies attempt to limit their liability risk but assume that some risk is inherent with the production of some products such as pharmaceuticals and automobiles.

There are three basic types of liability risks: product liability, general liability and contractual liability. General liability refers to the "company's operations causing damage to the company's employees, contractual parties or third parties." Product liability is the risk the company has when they produce a product that the product will injure a person or damage property. Contract liability refers to the risk contracts will not be completed properly or within the set timeframe, causing loss or claims of breach of contract.

Companies create risk management groups to study an organization's potential liabilities and prioritize them. With this risk management process the company can decide which risks are more likely to occur and which could potentially result in the greatest loss. Companies can then allocate their resources to the areas of greatest concern and those which could cost the most money or have the greatest negative impact.

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