Risk Management and Insurance

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Trieschmann, Hoyt & Sommer

Property and Liabilities Loss Exposures

Unit - 3

Source Material

• Trieschmann J., Sommer, D. & Hoyt, R. E.

(2004). Risk Management and Insurance

12th Edition. KY: South-Western College

Property Loss Exposures

• Property Risks - risk that property (including non- buildings like vehicles and equipment) may be damaged, destroyed or stolen.

• For example, lightning, tornadoes, hurricanes, explosions, riots, collisions, falling objects, floods, earthquakes, freezing, theft, etc.

• If property damage is extensive, a business may be forced to:

• shut down temporarily, thereby incurring a loss of income in addition to the expense of replacing the damaged property.

• Incur extra expenses necessary to continue operations from a different location while repairs are being made.

Property Loss Exposures

• Real Property

– Land, all structures permanently attached to

the land, and whatever is growing on the land

– Examples include the physical land, buildings,

attachments to buildings, crops

• Personal Property

– All property other than real property

• Examples include cars, money, clothes, furniture,

textbooks, airplanes, animals

Property Loss Exposures

When property is damaged there can be:

• Direct loss – Occurs when there is damage to property e.g. fire

damages a home

• Indirect loss – Occurs when a direct loss causes expenses to

increase or revenues to decline e.g. renting a motel while repairs are being done or loss of rental income

• Because of this dual nature of property losses, many insurance contracts insure both direct and indirect losses in the same contract.

Property Loss Exposures

• W hen dealing with property insurance, there are usually only two parties to the contract – The insured and the insurer

– Property insurance pays the policyholder without regard to fault

• Not all types of property are insurable – Generally, insurance contracts only cover loss to

tangible property.

– Coverage cannot be purchased for loss of goodwill or loss of a copyright

– Raw land is difficult to insure and are usually excluded

from most flood and earthquake insurance contracts

Property Loss Exposures

• Sex and property loss exposures

– Not all property losses occur to objects.

– For insurance purposes, animals are considered property

– Firms must be able to manage loss to or from the animals and learn to manage the animals during the mating season

Liability Exposures

• One of the most serious financial risks that risk

managers must deal with is loss through legal liability for

harm caused to others

• Liability Risks - risk to a company arising from the

possibility of liability for damages resulting from the

purchase, ownership, or use of a good or service offered

by that company.

• Insurance for liability (legal liability) losses is more

complex than property insurance

– Because people other than the insured and the

insurer are involved

• Liability is usually determined by proving negligence

Liability Exposures

• Negligence is the failure to exercise the degree

of care required of a reasonably prudent

individual in a given set of circumstances.

– Negligence that is the proximate cause of injury to the

property of another may, in the absence of effective

defenses, give rise to substantial court judgements

against the responsible party.

– The basis for determining liability for industrial

accidents and illnesses has been supplanted by

worker’s compensation laws in most cases

Liability Exposures

Medical Malpractice

• Medical malpractice occurs when a

hospital, doctor or other healthcare professional,

through a negligent act or omission, causes an

injury to a patient.

– The negligence might be the result of errors in

diagnosis, treatment, aftercare or health

management.

• Medical malpractice and legislative solutions for

handling this risk have been proposed.

Types of Liability Damages

• Insurance contracts are designed to pay

only for certain types of liability losses

– It is usually restricted to pay for:

• Bodily injury

• Property damage

• Personal Injury

• Legal expenses

Types of Liability Damages

• Bodily Injury – Includes liability for losses a person may incur

because his or her body or mind has been harmed • Includes payments for medical bills, loss of income,

rehabilitation costs, loss of services (household as well as marital), pain and suffering damages, punitive damages

– Pain and Suffering • Designed to compensate the injured for pain endured due to

negligent behavior of the defendant (non economic damages)

– Punitive damages • are assessed when it is deemed that the defendant acted in

a grossly negligent manner and deserve to have an example made of his or her behavior so as to discourage others from acting that way. These are usually imposed in addition to other damages and can be for very large amounts.

Types of Liability Damages

• Property Damage – Loss may be due to a loss from actual damage to the

property, as well as loss of use of the property

– The loss of use exposure may include both loss of income, because the property cannot be used, and payments for extra expenses because property must be rented to replace the damaged property.

• Personal Injury – Result from libel, slander, invasion of privacy, false

arrest, etc.

– Typically, libel involves written, printed, or pictorial material that damages a person’s reputation by defaming or ridiculing the person.

– Slander involves spoken words that are defamatory and/or injurious to a persons reputation.

Types of Liability Damages

• Legal Expenses – Individuals or organizations being sued must be

prepared to retain a lawyer for their defense, as the defense process can be very costly

– In some types of loss exposure, such as product liability, the cost of defense may be as great as or greater than the damage awarded.

Criminal and Civil Law

• Criminal Law – Directed toward wrongs against society

• Examples include murder, robbery, rape, assault with a

deadly weapon

– Charges under criminal law are made by a government body or

agent (prosecutor) and the guilty party is subject to fine and/or

imprisonment.

• Civil Law – Directed toward wrongs against individuals and organizations

• Examples include breach of contract and negligent acts

• In a civil action, the guilty party is only required to pay a fine

and/or damages, to perform a certain action, or to refrain

from performing an action

Torts

• A tort is a legal injury or wrong to another that arises out of actions other than breach of contract – These may include, libel, slander, assault and

negligence.

– The courts will provide a remedy by allowing recovery in an action for damages

• Legal injury

– Results when a person’s rights are wrongfully invaded

• Right of personal privacy, right to enjoy one’s property and right to be free from personal injury

Basic Law of Negligence

• The Negligent Act – Negligence is the failure to exercise the degree of care

required by law • That is, conduct that a reasonably prudent individual would

exercise to prevent harm

• The failure to act when there is a duty to act

• A Negative Act – A negligent act can be the failure to do something

(negative act) • Negligence maybe the failure to act when there is a duty to act

e.g. the negative act of failing to signal a turn

• A Positive Act – A negligent act can be the doing of something (positive act) .

E.g. Driving your vehicle into the rear of another vehicle.

Basic Law of Negligence

• A voluntary Act – A negligent act is one that is done voluntarily

• An involuntary act is excusable

– A negligent act is not excused because there was no intention to harm - (“I didn’t mean to”)

– Unintentional injury may give rise to both criminal and civil action

• An Imputed Act – One is liable not only for one’s own actions but also for the

negligent acts of service or agents acting in the course of their employment or agency

• Employers may be sued because of negligence acts of their employees

• Vicarious liability – liability for the negligence of another can rest on a contract to assume that liability e.g. assuming liability under a lease

Proximate Cause of the Loss

• Proximate Cause of the Loss – To give rise to actions for damages, a negligent

act must be the proximate cause of the loss.

– There must be an unbroken chain of events leading from the negligent act to the damage sustained.

Defenses Against Negligence

Claims • Contributory Negligence

– If both parties are to blame in a given accident, each is guilty of contributory negligence

– May not collect against the other, even if the defendant was 90 percent to blame and the plaintive only 10 percent to blame.

• One must come into court with “clean hands”

• Assumed Risk

– Defendant may raise the defense that the plaintiff has no cause for action because the plaintiff assumed the risk of harm from:

• The conduct of the defendant

• The condition of the premises

• The defendant’s product

• Guest-Host Statutes

– Relates to the standard of care by an automobile driver to a passenger

– The effect of the law is to reduce the standard of care owed to the guest in a car

• So, the guest must prove that the driver was guilty of gross negligence or willful injury e.g. driver being intoxicated

Factors Leading to Higher

Standards of Care

• Expanding Application of Liability – Courts tend increasingly to impose liability in new factual settings.

E.g. Manufacturer being held for faulty product.

• Weakening of defenses against a liability – Most states have enacted a statute that replaces the defense of

contributory negligence with comparative negligence

• The liability of the defendant is reduced by the extent to which the plaintiff was contributively negligent

– If the plaintiff was 20% negligent then the defendant is only liable for 80% of the plaintiff’s damages.

– Last Clear Chance Rule • A plaintive who was contributively negligent may still have a

cause of action against the defendant

– If it can be shown that the defendant had a last clear chance before the accident to avoid injuring the plaintiff but failed to do so

Factors Leading to Higher

Standards of Care

• Res Ipsa Loquitur – “The thing speaks for itself”

– Plaintiff may sometimes collect without actually proving negligence on the part of the defendant

– This may be used to establish case against the defendant when

• (1) The defendant is in a position to know the cause of the accident and the plaintiff is not,

• (2) the defendant had exclusive control over the instrumentality that caused the accident and

• (3) the use of the instrumentality would not normally cause injuries without the existence of negligence in its operation.

Factors Leading to Higher

Standards of Care • Expansion of Imputed Liability

– Joint and Several Liability

• When an accident occurs and several different parties are negligent

– The plaintiff may sue and collect from one or more of the negligent parties. E.g. most of the judgment from those having a smaller percentage of negligence

– Often the major tort feasor (person or organization) in such cases have little or no insurance.

– Superfund Legislation (comprehensive environmental response compensation and liability)

• Under this law, persons or firms have joint and several liability

• Created by the Federal government to help fund the cleanup cost of major pollution sites

– Estimated that more than 80 percent of the funds spent on the Superfund enforcement is for overhead (legal fees, etc.) and less than 20 percent for cleaning up the environment.

– E.g. new owners of land can be sued and they in turn collect from previous owner.

Factors Leading to Higher

Standards of Care

• Changing Concepts of Damage

– There is a more liberal interpretation of what types of damages may be allowed in negligence actions

• Damages have been awarded for such things as mental anguish under the theory that pain and suffering need not be physical to establish damage

– Every state allows punitive damages except Massachusetts, Nebraska and W ashington

• Awards used to punish defendants because their actions constituted gross negligence or willful and wanton misconduct

Factors Leading to Higher

Standards of Care • Increased Damage Awards

– The effect of inflation in reducing the purchasing power of the dollar has undoubtedly contributed to the increased amounts of damage awards

– Perhaps the existence of liability insurance has caused juries to be more generous

– The insurance industry is supporting various types of tort reform, including:

• Imposing restrictions on the right to sue

• Abolishing punitive damages in civil suits

• Reducing the standard of care to the standard existing at the time the product was made instead of at the time the loss occurred

• Placing a ceiling on non-economic damages

• Repealing the collateral source rule, under which courts could ignore other sources from which a plaintiff might receive indemnity for loss. Repealing this rule would reduce the amounts awarded to liable insured parties.

Table 3-1: Liability Claims

Types of Liability Exposures

• Contractual Liability – One’s liability maybe imputed to another by contract

• For example, a city may require that its street paving contractor hold the city harmless for all negligence arising out of the operations of the contractor

– Suits that may be otherwise directed against the city will be directed against the contractor

• Employer-Employee Liability – Employers are still subject to the law of negligence with respect

to employment not covered by workers’ compensation laws

• Duties owed to employees

– Must provide a safe place to work

– Must employ individuals reasonably competent to carry out their tasks

– Must warn of danger

– Must furnish appropriate and safe tools

– Must setup and enforce proper rules of conduct of employees as they relate to safe working procedures

Types of Liability Exposures

– An employee who disregards danger signals or fails to use the tools provided and is injured as a result is guilty of at least contributory negligence and under common law, cannot recover.

• This would not affect the worker’s right to workers’ compensation.

• Property Owner–Tenant Liability – The tenant or owner owes a certain degree of care to those who

enter the premises • Invitees - Individuals who are invited on the premises for their own benefit

as well as for that of the landlord or tenant e.g. customers, guests, etc. its not sufficient to just warn invitees of danger; positive steps must be taken to protect an invitee from a known danger and to discover unknown dangers.

• Licensees - Those who are on the premises for legitimate purpose with the permission of the occupier. E.g. include meter readers, milk delivery drivers, police officers. The landlord has the duty to warn the licensee of danger and to refrain from causing deliberate harm, but no other duty.

• Trespassers - All those other than invitees and licensees who enter on the premises. No care is owed to a trespasser but an owner cannot set a trap for or deliberately injure a trespasser

• Current trend is to abolish the classifications and to hold the occupier of the land liable under most circumstances for failure to exercise due care

Types of Liability Exposures

• Assumption of Liability by Tenant – W hen an individual leases a building, the question arises as to

what extent the landlord is responsible for injuries to tenants

• Generally, the tenant takes on whatever duty the landlord owes to

members of the public

• Landlord may still be liable to a third person because the landlord

retained possession of the area where the third party was injured.

E.g. in the hallways of an apartment.

• Attractive Nuisance Doctrine – Liability of the occupier of land may be changed so that a

trespassing child is considered, in many jurisdictions, to be an

invitee

– Because of contractual liability a Risk Managers need to be aware

of an organization’s contracts and contracts negotiation.

Consumption or Use of Products

• A manufacturer, wholesaler, or retailer is

required to exercise reasonable care and

to maintain certain standards in the

handling and selection of the goods in

which it deals

– If injury to person or property results from the

use of a faulty product there may be grounds

for legal action

• Such actions are usually based on grounds of

breach or warranty, strict tort, or negligence

Consumption or Use of Products

• Breach of Warranty – A warranty maybe expressed or implied – Breach of written contract may give rise to a court action

– Under the Uniform Commercial Code the seller is held to have made certain unwritten or implied warranties

• Seller warrants that the goods are reasonably fit for their intended purpose

• Seller warrants that when the goods are bought by description instead of by actual inspection the goods are salable in the hands of the buyer

• Strict Tort – The manufacturer or distributor of a defective product is liable to a

person who is injured by the product • Regardless of whether the person injured is a purchaser, a

consumer, or a third person such as a bystander

• It must be showed that there was a defect in the product and the defect caused the harm.

– The manufacturer cannot pass on any blame of component part to another manufacturer.

Consumption or Use of Products

• Negligence

– If the defendant was negligent in the preparation or

manufacture of the product

– Or failed to provide adequate instructions or warning

• A person injured may be entitled to sue for damages

– In early cases, an injured person could only bring action

against a retailer with whom there was a contractual

relationship and not against the manufacturer

• Lack of Privity between the injured and the manufacturer in

later cases brought about a relaxation of this defense.

– During the past several years the product liability area has

been very explosive

• Courts have continued to expand manufacturers’ liability

Completed Operations of a

Contractor

• The damage must occur after the contractor has

completed the work

• The work has been accepted by the owner or

abandoned by the contractor

– For example, faulty installation that results in

damage to property or person

• If the conduct of a contractor causes injury while

the contractor is still in control of the operation

the liability is similar to that of an owner-tenant of

real property.

Professional Acts

• Professional Liability – The seller of services is required to use reasonable care not to injure

others in the performance of those services • Examples include physicians , accountants, architects, insurance agents, lawyers,

pharmacists, beauticians

• The standard of care required of professional people is broadly interpreted – These individuals must possess the skill, judgment, and

knowledge appropriate to their calling

– Must conduct themselves according to recognized professional standards

• Standards vary from profession to profession and are constantly changing as each particular field develops

• Use of res ipsa loquitur in medical malpractice cases appears to have had the effect of turning doctors into insurers – May result in doctors being unwilling to try new procedures and

treatments for fear of financial bankruptcy if the treatments should fail

Principled-Agent Liability

• Under the doctrine of Respondeat Superior – A master is liable for the acts of servants if the service or agents

are acting within the scope of their employment

• An employee imposes liability on the employer for negligent harm to a third party

– Even if the employee is acting contrary to instructions as long as he or she is doing the job

• A distinction is made between acting as an agent or a servant and acting as an independent contractor – The employer is not held liable for the carelessness of an

independent contractor to as great a degree as for the carelessness of an agent or a servant

• However, exceptions to this exist

Ownership and Operation of

Automobiles

• Under common law, an automobile owner or operator is required to exercise reasonable care in the handling of automobiles

• Important distinctions of negligence – Liability of the operator

– Liability of the owner for the negligence of others operating the car - (Liability of the owner-non- operator)

– Liability of employers for the negligence of their servants or agents using automobiles in their employer’s business

• Even when the employer is not the owner

Ownership and Operation of

Automobiles • Liability of the operator

– Typical damage suit in the field of automobile liability charges the operator for injury or property damage to a third party

– Impossible to lay down a comprehensive statement of what constitutes negligence in the operation of an automobile

• Liability of the owner-non-operator – The courts have generally agreed that the automobile is not a

dangerous instrumentality in itself • One is justified in assuming that the borrower of an automobile is competent

to handle it unless there is obvious evidence of incapacity or known recklessness

– However, in many states, vicarious liability laws have the effect of making the parent of a minor child liable for damage done by negligent operation of the car by a minor

– Family-purpose doctrine • An automobile is looked upon as an instrument to carry out the common

purposes of a family – The owner ought to be responsible for its use when any family member uses it

because this member is the agent of the family head and is carrying out a family function

Ownership and Operation of

Automobiles

• Liability of employers

– Even those who do not own automobiles may

be liable for damages through their negligent

operation

• If by some legal construction the non-owner can be

shown to be responsible

– The legal construction normally employed is respondeat

superior where the employer is responsible for the

negligent actions of employees whether their acts are in

or out of an automobile.

– The ownership of automobile is considered immaterial in

such cases.