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

Overview Values exposed to loss –Property –Business Income (net income) –Key Personnel –Liability

Risk Property Real property Personal property Intellectual property Liability ContractTort Products Services Ownership (Use) of Property Automobile Premises

Property Loss Exposures Financial stake or interest in the property has to be present. That is, if there is a loss to the property you suffer a financial loss. –Owned and non-owned property –Real and personal property –Intangible property Intellectual property Accounts receivable Leasehold interest (or a legal right to use)

Property Loss Exposures Jewelry, firearms, water craft, trailers, property off-premises Accounts, bills, currency, deeds, lottery tickets for sales Pets Debris removal Pollutant clean up and removal Preservation of property

Property Loss Exposures Ownership –Most common type of interest Present ownership interest Future ownership interest – in case where a property may be inherited to a heir, then the heir has a future ownership on the property and the heir is exposed to a property loss. Secured creditors – banks Lessor or landlord

Property Loss Exposures Tenant interest (Use interest) –May be responsible for returning the property without damage to the rented property. –May also have a leasehold interest Leasehold interest - an exclusive right to occupy (use) cf. Life estate

Property Loss Exposures Leasehold Interest Example –Assume that you leased a unit in a shopping mall, which burns down and you have to relocate your business. If your old rent was $1,000/mo and new rent is $1,500/mo at fair market value (FMV), then your leasehold interest is 1,500 – 1,000 = 500/mo. If FMV > Rent, then the tenant has a leasehold interest If FMV = Rent, then there is no leasehold interest

Property Loss Exposures Transactions –Who suffers losses to goods in transit between buyers and sellers? –FOB point: Freight on Board or Free on Board It indicates the point where financial responsibility shifts from seller to buyer. If goods are sold by a seller at Chicago to a buyer at Normal at FOB Chicago, then the losses to goods in transit is responsible to buyers. On the other hand, FOB Normal indicates that the losses to goods in transit is responsible to sellers.

Property Loss Exposures Bailee interest –A bailee is an entity who receives property from another under a contract of bailment. –Bailment involves delivery of property to a bailee, with the property being left in trust for a specific purpose and then returned to the bailor. –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? –Interest of the bailee is usually limited to the cost of replacing the property at question.

Net Income Loss Exposures Net income – simply revenues minus expenses A firm suffers a loss. As a result of the loss, the firm experiences a decrease in revenue, an increase in expenses, or combination of both, which will eventually cause a decrease in net income. Net income losses always occur as the result of another loss occurring first, like a chain reaction. However, the loss may not necessarily be direct loss to the firm. –Fire at Phillips Semiconductors and Erickson

Personnel Loss Exposures Who is a key employee. –Key decision maker –Possesses specialized skill and/or knowledge –Who can’t be easily replaceable If the key employee suffers a personal loss such as death, disability, or illness then –family may suffer loss of income medical expenses

Personnel Loss Exposures a firm may suffer –Decrease in revenue Sales are down Decisions are not made Loss of customer relation Overall loss of productivity –Increase in expenses Cost of replacing the key employee Additional cost of training Reestablishment of customer relation

Personnel Loss Exposures Personnel loss exposures are a special case of net income loss exposures. Business Implications of Personnel loss –Work related injuries workers compensation – statutory legal liability, that is an employer is liable for injuries occurring on work place and it is the law. –Grief and counseling for employees –Employee benefits Help employees/families deal with personal losses –Training implications –Alter decision making structure –“key-man” insurance – life insurance insured by a firm on a key employee’s life. –Kidnap and ransom insurance

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Liability Loss Exposures Legal liability is the responsibility, based in law, to remedy some (legal) wrong done to another person or organization. Legal wrong –a violation of a person’s legal rights –a failure to perform a legal duty owed to a certain person or to society as a whole

Liability Loss Exposures Legal wrongs –Crime –Breach of contract –Tort A legal (civil) wrong for which the law allows a remedy in the form of money damages. –Willful (intentional) tort –Strict (absolute) tort –Negligence A crime is a wrong against the public at large. A tort is a wrong against an individual.

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)

Liability Loss Exposures Tort 2. Strict (absolute) liability Persons are 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

Liability Loss Exposures Tort 3. 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 –Ex. Non-stop at a red light Hitchhiker at winter night

Liability Loss Exposures Remedies for damages and injuries –Special or economic damages For financial losses Medical expenses, lose of wages, repair costs of damaged property –General or non-economic damages For pain & suffering, mental anguish, etc –Punitive damages To punish wrongdoers

Liability Loss Exposures Defense against negligence –Assumption of risk A person who understands and recognizes the danger inherent in a particular activity cannot recover damages in the event of injury –Contributory negligence Whether you contribute in any way to your own injury No compensation –Comparative negligence Partial comparative negligence Complete comparative negligence –Last clear chance An injured endangered by his or her own negligence can still recover damages from the wrongdoer if the wrongdoer has a last clear chance to avoid the accident but fails to do so. Ex. Jaywalker –Sovereign, familial, and charitable immunity

Liability Loss Exposures Imputed negligence –Under the certain conditions, the negligence of one person can be imputed to another. Employee-employer Vicarious liability 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

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

CYBER RISK

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

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