1. BUS 200 Introduction to Risk Management and Insurance Jin Park
Topic 3. Loss Exposures
BUS 200
Introduction to Risk Management and Insurance
Jin Park

2. Overview Loss Exposure Human Resources Loss Exposures
Property Loss Exposures
Net Income (Business Income) Loss Exposures
Liability Loss Exposures

3. Loss Exposures A possible event that could result in a financial loss
An item subject to loss
A cause of loss
Financial consequences of loss

4. Human Resources Loss Exposures
Premature death
Sickness
Disability
Unemployment
Outliving retirement resources

5. Human Resources Loss Exposures
In a firm
A loss of a key employee may result in
Decrease in revenue and increase in expenses
Lower sales
Loss of customer relation (or major clients)
Overall loss of productivity
Disruption of management
Additional cost to find and train a replacement
Reestablishment of customer relation

6. Property Loss Exposures
Types of Property
Real and personal property
Owned and non-owned property
Intangible property
Intellectual property
Accounts receivable
Leasehold interest (or a legal right to use)

7. Property Loss Exposures
Why are we exposed to property losses?
1. Ownership
Most common type of interest
Present ownership
Future ownership interest
Secured creditors – banks
Lessor or landlord

8. Property Loss Exposures
2. Tenant interest
Right to use the property (or use interest)
May also have a leasehold interest
Leasehold interest - an exclusive right to occupy (use) real property of the owner for a specified time
cf. Life estate
Leasehold Interest Example
Assume that you lease a unit in a shopping mall, which burns down and you have to relocate your business. If your old rent is $1,000/mo and new rent with similar condition requires $1,500/mo at fair market value (FMV), then your leasehold interest is 1,500 – 1,000 = 500/mo.
If FMV < Old rent, then the owner has a leasehold interest
If FMV = Old rent, then there is no leasehold interest

9. Property Loss Exposures
3. Transactions
Who suffers losses to goods in transit between buyers and sellers?
FOB point
FOB Origin versus FOB Destination
It indicates the point where financial responsibility shifts from seller to buyer.

10. Property Loss Exposures
4. Bailee interest
A bailee is an entity who is entrusted personal property of others under a contract of bailment.
Example: dry-cleaning, car repair or other repair stores (jewelry, watch, etc), valet parking…
What happens if the property in question is lost or damaged? Who’s suffering the losses?

11. Business Income Loss Exposures
Only one item is subject to loss
Net income – simply revenues minus expenses
Indirect losses
Business interruption
Result from direct damage to owned property
Result from little or no direct damage to owned property
A small fire at Phillips Semiconductors in NM and Erickson in Sweden
System failure at a corporation

12. Liability Loss Exposures
Basis of Liability
Statutory law
Common law
Stare decisis
Criminal and Civil law
Contractual liability

13. Liability Loss Exposures
Legal Liability
the responsibility, based in law, to remedy some (legal) wrong done to another person or organization.
Legal wrong
Crime
Breach of contract
Tort
Remedies for damages and injuries
Special or economic damages
General or non-economic damages
Punitive damages

14. Liability Loss Exposures
Tort
1. Willful tort, an intentional wrong
assault, battery, trespass, illegally invading a person's privacy (e.g. false imprisonment) or intentionally inflicting emotional distress on another person (e.g., libel, slander)

15. Liability Loss Exposures
2. Strict (absolute) Tort
Persons may be liable for damages even though negligence cannot be proven.
The potential harm to an individual or society is so great (ultra-dangerous)
Employer’s liability
Product liability
Owning wild or dangerous animals

16. Liability Loss Exposures
3. Unintentional tort - Negligence
a failure to exercise the standard of care required by law to protect others from harm
Elements of negligence
Existence of legal duty
Failure (breach) to perform that duty
Damages or injury to the claimant
Breach of duty was proximate cause of injury

17. Liability Loss Exposures
Defense against negligence
Assumption of risk
Contributory negligence
Comparative negligence
Partial comparative negligence
Complete comparative negligence
Last clear chance
Sovereign, familial, and charitable immunity

18. Liability Loss Exposures
Imputed negligence (or Vicarious liability)
Employee-employer
Business partnership
Dramshop law (liquor liability)
Parent-children
Res Ipsa Loquitur
The thing speaks for itself
The wrongdoer must prove his/her innocence, or he/she is liable

19. Liability Loss Exposures
Sources of liability
Ownership of property
Use of property
Ownership of pets
Hazardous waste
Activities and Conducts
Automobile liability
Professional liability (licensed professionals)
Product liability (manufacturers)
Completed operations (contractors)
E-commerce liability

20. The Cost of Worms & Viruses
Source: USA TODAY, September 3, 2003

21. Cyber-Risk Gaps in Insurance Coverage
Source: Ernst & Young 2003 Global Information Security Survey
of 1,400 organizations from 66 countries