Trieschmann, Hoyt & Sommer

Property and Liabilities Loss Exposures

Chapter 3

©2005, Thomson/South-Western

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Chapter Objectives

• Identify the kinds of property subject to loss and the types of losses that may occur

• Define the basic payments made under liability insurance contracts

• Distinguish between criminal law and civil law• Understand what a tort is• Describe negligence and the characteristics of a

negligent act• Explain some of the defenses against a claim of

negligence• Discuss factors that are causing individuals and

businesses to maintain higher standards of care• Identify the basic types of liability exposure and give an

explanation of each

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Property Loss Exposures

• Real property – Land, all structures permanently attached to

the land, and whatever is growing on the land – Examples include buildings, attachments to

buildings, crops

• Personal property – All property other than real property

• Examples include cars, money, clothes, furniture, textbooks, airplanes, animals

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Property Loss Exposures

• Direct loss – Occurs when there is damage to property

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

increase or revenues to decline

• Many insurance contracts insure both direct and indirect losses in the same contract

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

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Property Loss Exposures

• Not all types of property are insurable – Coverage cannot be purchased for loss of

goodwill or loss of a copyright – Raw land is difficult to insure

• Sex and property loss exposures – 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

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Liability Exposures

• One of the most serious financial risks that risk managers must deal with – Loss through legal liability for harm caused to others

• Insurance for 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

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Types of Liability Damages

• Insurance contracts are designed to pay only for certain types of losses – Usually restricted to pay for

• Bodily injury • Property damage• Personal Injury• Legal expenses

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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, pain and suffering damages, punitive 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 • Personal injury

– Result from libel, slander, invasion of privacy, false arrest, etc.

• Legal expenses

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Criminal and Civil Law

• Criminal law – Directed toward wrongs against society

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

• Civil law – Directed toward wrongs against individuals

and organizations • Examples include breach of contract and negligent

acts

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Torts

• Legal injury or wrong to another that arises that of actions other than breach of contract – 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

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Basic Law of Negligence

• The negligent act – Negligence is the failure to exercise the degree of

care required by law • Conduct that a reasonably prudent individual would exercise

to prevent harm

• A negative act – Failure to do something

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

• A positive act – The doing of something

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Basic Law of Negligence

• A voluntary act – One that is done voluntarily

• An involuntary act is excusable– A negligent act is not excused because there is no intention to

harm • 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

• Proximate cause of the loss– There must be an unbroken chain of events leading from the

negligent act to the damage sustained

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Defenses Against Negligence Claims • Contributory negligence

– If both parties are to blame in a given accident – May not collect against the other, even if the defendant was 90

percent to blame and the plaintive only 10 percent to blame

• 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 – Relate to the standard of care by an automobile driver to a

passenger

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Factors Leading to Higher Standards of Care • Expanding application of liability

– Courts tend increasingly to impose liability in new factual settings

• 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

– 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

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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

• 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

– Superfund legislation • 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

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Factors Leading to Higher Standards of Care• Changing concepts of damage

– More liberal interpretation of what types of damages may be allowed in negligence actions

• Damages have been awarded for such things as mental anguish

– Every state allows punitive damages except Massachusetts, Nebraska and Washington

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

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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

• Than they would be if they knew the plaintiff would pay the damages personally

– 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

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Table 3-1: Liability Claims

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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

• 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

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Types of Liability Exposures

• 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

• Licensees – Those who are on the premises for legitimate purpose with the

permission of the occupier» Include meter readers, milk delivery drivers, police officers

• Trespassers – All those other then 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

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Types of Liability Exposures

• Assumption of liability by attendant – When 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

• 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

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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

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Consumption or Use of Products

• Breach of warranty – A warranty maybe expressed or implied – Breach of this 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 that when the goods are bought by description

instead of by actual inspection the goods are saleable 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

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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

– During the past several years the product liability area has been very explosive

• Courts have continued to expand manufacturers’ liability

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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

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Professional Acts • 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

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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

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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 areas of negligence – Liability of the operator – Liability of the owner for the negligence of others

operating the car – 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

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Ownership and Operation of Automobiles• Liability of the operator

– Typical damage suit in the field of automobile liability – Impossible to lay down a comprehensive statement of what constitutes

negligence in the operation of an automobile • Liability of the owner-nonoperator

– 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 the 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

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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 nonowner can be shown to be responsible

– The legal construction normally employed is respondeat superior