Risk Management

Legal Liability

"Man-Made" - amount of damages determined by court - judge/jury

Government Liability

"Sovereign Immunity" - The king cannot be sued Government entities can be sued of a proprietary function/ activity is involved i.e. some activity that is not unique to the government. With respect to government functions, injured party is limited to conditions (if, when and where one can bring a claim/ lawsuit) and amount of damages - specified by Statutory Law (not Common Law)

Res Ipsa Loquitur

"The Act Speak for Itself" Classic example - glass in a soft drink bottle 1. Event must be one that would not have occurred but for the carelessness negligence of another party. 2. The other party has superior knowledge or control over the cause of the harm. 3. Cause (instrumentality) of the harm must be in exclusive control of the other party. 4. Injured party has not contributed to harm/ injury/ damage in a meaningful way.

Chance of Loss Distinguished from Risk

- although chance of loss may be the same for two groups, the relative variation of Actual Loss from Expected Loss may be quite different. - difference is the Risk Premium

What is the meaning of Risk Management ?

- process that identifies loss exposures face by an organization and elects the appropriate technique to handle them. - Insurance management is simply a sub-set of risk management

Methods of Handling Risk

1. Avoidance 2. Retention

Defence against Negligence

1. Contributory Negligence - one has some responsibility to avoid harm so one's fault is considered and can bar recovery from other party regardless of the level of that other person's fault. 2. Comparative Negligence - look at both parties - 3 basic types: - PURE - recovery limited to other party's fault, i.e. one does not recover for the percentage of damage due to its own fault. - 50% - recover as long as one's fault does not exceed the fault of other party - 49% - no recovery unless one is less liable than the other party 3. Last Clear Chance Doctrine - if one has the last opportunity to avoid the harm/ loss and such ability is "clear", then one must avoid the harm and can not then recover from the other party. 4. Assumption of Risk - one is aware of the risk of harm and proceeds anyway - bars recovery from the other party.

How many elements of negligence exist? Can be very tough fact intensive issue - What would be considered reasonable? What about foreseeability? At what point does the chain stop?

1. Exercise of Legal Duty to Exercise "Due Care". - remember if no duty of care is owed, then no negligence - example0 no duty to act as Good Samaritan. 2. Failure to Perform that Duty of Care p can be action or inaction. 3. Damages of injury to the Other Party - 3 types - Special damages - actual damage - medical bills, re-construction costs. -General damages - subjective damages such as mental anguish, pain and suffering. -Punitive Damages - punishment / Example - greyhound case. 4. Proximate Casual Relationship between Negligent Act and Damages

Employer and Employees Relationships Respondent Superior - Let the Master Answer

1. Must be an actual employee - does not extend to independent contractor (party that has control over how a task is to be performed). 2. Must be acting in the "course and scope of employment" - very litigated term.

Burden of Risk on Society

1. Need for a Larger Emergency Fund - individuals simply cannot handle large losses - Law of Large Numbers effect lessons that risk - frees up capital 2. Loss of Goods and Services - certain products - think of medicines are no longer available - maybe a good thing? 3. Fear and Worry - affects individual's productivity

Commercial Risks

1. Property risks 2. Liability Risks 3. Loss of Business Income 4. OtherRisks

Basic Categories of Risk - Four (4)

1. Pure and Speculative Risk 2. Diversifiable and Non-Diversifiable Risk 3. Static and Dynamic Risk 4. Enterprise Risk

2. Retention

Active (desirable) is the deliberate choice to assume part or all of a loss exposure. Example - deductible, policy limit Passive (dangerous) often results from ignorance or inertia

Why the distinction is important?

Although both types of risk involve uncertainty, as a society we are primarily concerned with uncertainty as a loss. Society assumes party responsible for its own speculative risk as there is a chance of profit Law of Large Numbers applies best to Pure Risk Typically 3rd parties such as insurance companies prefer to handle Pure as opposed to Speculative Risk

Basic Premise

Any party can sue another party for any reason at any time (San Antonio Spurs - Miami Heat game, Subway "foot-long" sandwiches) of course, the lawsuit may have no merit and be dismissed but there is still a cost associated with defense, legal fees, time of executives or employees

Objective Probability

Apriori-bylogicaldeductionsuchasingamesofchance Empirically-byinduction,through analysis of data

Personal Risks

Basic personal risks are premature death, old age, poor health, and unemployment. Types of losses include loss of earned income, extra expenses, and depletion of financial assets.

Statutory Law

Body of Law created Federal, State and County legislative bodies.

Common Law

Body of law based on coustom and court descisions. Sate Decisis - principle that once a court has rendered a decision on a given set of facts, courts asher to the reasoning and apply it in future cases.

1. Pure and Speculative Risk

Both types of risk can be transferred but in this class we deal principally with Pure Risk. Pure risk - a situation where there are only the possibilities of loss or no loss Speculative risk - a situation where either profit or loss is possible

Parents and Children

Common Law - parents are not responsible for the torts of their children. However parent can be liable for other acts/ inactions such as a failure to supervise a child. Today - parental reponsibility is defined by state law - parents liable for providing alcohol to child.

4. OtherRisks

Crime/HumanResources/ForeignLossExposures /Intangible Property Exposures/Government Exposures

Objective Risk

Defined as the relative variation of Actual Loss from Expected Loss Objective Risk declines as the number of exposure units increases as essentially the potential randomness disappears. Objective Risk Is measurable by using the standard deviation or coefficient of variation (will discuss - Law of Large Numbers Example later in semester)

Subjective Risk

Defined as uncertainty based on one's mental condition or state of mind Difficult to measure since two individuals / parties may react differently to identical set of circumstances - thus each party's Expected Loss could be very different. But with a large number of exposures the subjective component dissipates.

2. Diversifiable and Non-Diversifiable Risk

Diversifiable Risk - affects the individual or one party follows notion that society expects individuals to be responsible for their / its own risk Examples - reputational risk, brand risk, product liability risk, legal liability risk, innovation risk Non-Diversifiable Risk - affects "wide swaths" of public Examples - market risk, political risk, inflation and recession risk

1. Avoidance

Example - move business if in high crime area

3. Transfers (non-insurance) to 3rd Parties

Examples - Contracts Hedging Incorporation

Charitable Institutions

Historically - immune due to desire to promote charitable activites. Due to abuse by some parties, most of those immunites have been eroded/ terminated. One area where benefits still exist - federal tax laws.

Chance of Loss

How do we measure chance?

What is Risk?

How many type of risks exists? 1. Uncertainty Concept 2. Objective Risk 3. Subjective

What kind of Torts exist?

Intentional - Obviously intent is the key. Examples for businesses include libel/ slander/ False Arrest/ Patent Infringement Absolute (Strict) Liability - Responsibility is imposed regardless of fault. Examples for businesses include hazardous activities - blasting/ handling toxic chemicals.

Definition of Negligence

Is the failure to exercise the standard of care required by law to protect others harm.

How many Types of Legal Wrongs exist?

Legal wrong - Is defined as the failure to perform a legal duty owed to another party or entity (business) Include crimes, breaches of contracts, torts, etc. Tort - A legal for which the law allows a remedy in the form on monetary damages

Liability Risks

Loss resulting from legal liability for damages arising out of bodily injury or property damage to another party.

Imputed Negligence

Negligence of one party is imputed (transferred) to another party. 1. Employer/Employee Relationship - discussed below. 2. Vicarious Liability 3. joint Venture - think of contractual arrangements - Example - BP / Transocean off shore rigs 4. Dram Shop - involves alcohol/ drugs - typically associated with bars and restaurants serving alcohol to intoxication individuals

What are specific applications of the Law of Negligence

Ownership of Property - degree of care required for: Trespasser - no duty owed to trespasser but cannot set up traps (spring guns) Licensee - must warn of problems but no duty to repair or inspect. Invitee - must warn and repair barricade hazard

Hazard

Peril and Hazard | defined as a condition that may create or increase the chance of loss arising from a given peril (may or may not be outside of party's control) Examples - icy street, poorly designed intersections, dimly lighted stairway, badly designed road guard rail Perils include negligence, breach of warranty, and absolute liability (can be crucial - product liability)

Peril

Peril and Hazard | defined as the cause of loss (outside of party's control, e.g. tornado, hurricane or earthquake) Examples - fire, theft, windstorm, legal liability Perils include negligence, breach of warranty, and absolute liability (can be crucial - product liability)

Types of Pure Risks

Personal Risks

4. Loss Control

Reduces loss frequency and loss severity Loss Prevention Loss Reduction | Pre-Loss | Post-Loss (mitigate damages)

Negligence

Refers to an individual's or entity's conduct or behavior. Imposes a subjective element - need to evaluate situation and access duties of the parties.

3. Static and Dynamic Risk

Static Risk - Dynamic Risk risk that would occur if no change in the economy - fire, earthquake, etc. risks resulting from changes in the economy - inflation

Ownership and Operation of Automobiles, Trucks, Commercial Liveries, etc.

The negligent owner and operator of the vehicle can be liable of injury ad damage (property) caused to another party. Where the owner is not the operator - exceptions include the family purpose doctrine or an agency relationship exists.

Basis of Legal Liability

To properly appreciate risk associated with legal liability one must understand the legal system. [Basis of Liability Risk Chart] The Law; Statutory:Criminal / Common Law:Civil

Property Risks

Types of losses include direct physical damage losses, theft losses, indirect or consequential losses (loss of use of property), and extra expenses (rent for temporary facilities). Perils include natural disasters, dishonesty, and the failure of others.

Animals

Wild Animal - absolute liability - no consideration of whether or not the animal is considered domesticated or not. Domestic pets - varies by jurisdiction. Previously there was "One Bite Rule" - largely eliminated.

Subjective Probability

a personal estimate of the chance of loss. It need not coincide with objective probability and is influenced by a variety of factors including age, sex, intelligence, education, and personality and locality.

Uncertainty Concept

a. Majority of insurance authors define risk as uncertainty b. Risk and probability - if the probability of an event is occurring either zero or one, there is no risk since there is no uncertainty.

1. Property risks

buildings, equipment, intellectual property

5. Insurance

by far they most prevalent method of handling risk

Moral hazard

dishonesty or characteristics of an individual that increase the chance of loss carelessness or indifference to a loss because of the existence of insurance

Law of Large Numbers

implies that the greater numer of risk events (exposure) when combined result in the Actual Losses being more close to the Expected Loss e.g. the predictions from Texas DPS for deaths on roads over a given weekend (e.g. Labor Day weekend) as opposed to the National Weather Service predictions of hurricanes. Both predictions are based on years of actual occurrences.

3. Loss of Business Income

often overlooked in small businesses but can have devastating impact

2. Liability Risks

operations - production, transportation, retail

Physical hazard

physical condition that increases the chance of loss. Examples are icy streets, poor designed intersections, and dimly lit stairways.

4. Enterprise Risk

risk encompassing all aspects of the business enterprise - can (and should include) consideration of Pure, Speculative, Strategic, operational and whatever other type of action or inaction that could result in a loss to the enterprise.

Attractive Nuisance Doctrine

typically associated with children and hazard that they might not truly appreciate - back yard swimming pools/ trampoline.