RMI 3011 Unit 1 Study Guide: Chapters 1, 2, 3, 6, and 15
RMI 3011 Unit 1 Study Guide: Chapters 1, 2, 3, 6, and 15 RMI 3011
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This 20 page Study Guide was uploaded by Ruby Oates on Monday February 8, 2016. The Study Guide belongs to RMI 3011 at Florida State University taught by Lynn McChristian in Spring 2016. Since its upload, it has received 150 views. For similar materials see Risk Management and Insurance in Risk Management And Insurance at Florida State University.
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Chapter 1: Risk and Its Treatment o Risk defined o A situation involving exposure to danger o Uncertainty concerning the occurrence of a loss o Possibility of loss on the person or entity that is insured o Probability or threat of damage, injury, liability, loss, or other negative occurrence that is caused by external or internal vulnerabilities, and that may be avoided through preemptive action o loss exposure: any situation or circumstance in which a loss is possible, regardless of whether or not a loss occurs o Peril and Hazard o A peril is defined as the cause of the loss In an auto accident, the collision is the peril o A hazard is a condition that increases the chance of loss A physical hazard is a physical condition that increases the frequency or severity of loss icy roads, defective wiring, etc. Moral hazard is dishonesty or character defects in an individual that increase the frequency or severity of loss faking an accident, fraud claims, intentionally burning goods controlled with careful underwriting and various policy provisions (deductibles, waiting periods, exclusions, etc.) Attitudinal hazard: carelessness or indifference to a loss, which increases the frequency or severity of a loss "Who cares?" Legal hazard: characteristics of the legal system or regulatory environment that increase the frequency or severity of losses "The jury is out." Insurance regulations o Risk: Uncertainty over the occurrence of a loss o Classifications: Objective Risk vs. Subjective Risk Pure Risk vs. Speculative Risk Static Risk vs. Dynamic Risk Fundamental Risk vs. Particular Risk o Risk vs. Probability: What's the difference? o Classification of Risk o Objective vs. Subjective Risk Objective risk: the relative variation of actual loss from expected loss. varies inversely with the square root of the number of cases under observation can be statistically calculated by some measure of dispersion, lie standard deviation or coefficient of variation law of large numbers: as the number of exposure units increases, the more closely the actual loss experience will approach the expected loss experience Subjective risk: uncertainty based on a person's mental condition or state of mind ex. a drunk person trying to decide whether or not to drive home based on if he thinks he will get pulled over varies based in the individual o Pure and Speculative Risk A pure risk is a situation in which there are only the possibilities of loss or no loss (earthquake) Law of large numbers can be applied more easily to pure risk A speculative risk is a situation in which either profit or loss is possible (gambling) o Diversifiable Risk and Nondiversifiable Risk A diversifiable risk affects only individuals or small groups (car theft). It is also called nonsystematic or particular risk. A nondiversifiable risk affects the entire economy or large numbers of persons or groups within the economy (hurricane, flood). It is called systematic risk or fundamental risk. Government assistance may be necessary to insure nondiversifiable risks, i.e., the National Flood Insurance Program o Enterprise Risk Management combines into a single unified treatment program all major risks faced by the firm: Pure risk Speculative risk Strategic risk Operational risk Financial risk Uncertainty of loss because of adverse changes in commodity prices, interest rates, foreign exchange rates, and value of money o Chance of Loss vs. Objective Risk o Chance of loss is the probability that an event that causes a loss will occur o Objective risk is the relative variation of actual loss from expected loss o Ex: City # homes Avg. # fires Range Fire Chance Obj. Risk Philly 10,000 100 75125 1% 25% LA 10,000 100 90110 1% 10% o Sources of Pure Risk o Personal Affects individual or family o Property Destruction or theft of property Direct loss is physical damage, as the damage a fire causes to a home Indirect loss is financial loss outside of physical damage, such as losses that come when a family has to live elsewhere if a fire destroys a home o Liability "It's all your fault!" o Types of Personal Risks o Premature death: the death of a family head with unfulfilled financial obligations Dependents, mortgage, family education, credit card loans, lost income Human life value: the present value of the family's share of the deceased breadwinner's future earnings Expenses: funeral, medical bills, estate settlement and taxes Insufficient income Noneconomic costs: emotional grief, loss of role model, counseling for children o Insufficient retirement income Many retired people live in poverty Do not have enough saved for a comfortable retirement o Poor health Uninsured Loss of earned income Savings depleted Sometimes confined to home o Unemployment Lose income and health insurance Cut to part time and be insufficient Savings may be exhausted o Property risks Direct loss: losing house in fire Indirect or consequential loss: having to live in a hotel after losing house in fire o Types of Liability Risks o Premises hazards o Product liability o Professional liability o Contractual liability o Environmental impairment liability o Employmentrelated practices liability o Liability Risk o Liability risks involve the possibility of being held legally liable for bodily injury or property damage to someone else There is no maximum upper limit with respect to the amount of the loss A lien can be placed on your income and financial assets Legal defense costs can be enormous o Major Commercial Risks o Firms face a variety of pure risks that can have serious financial consequences if a loss occurs: Property risks, such as damage to buildings, furniture, and office equipment Liability risks, such as suits for defective products, pollution, and sexual harassment Loss of business income, when the firm must shut down for some time after a physical damage loss Other risks: Crime exposures Human resource exposures (theft, cyber) Foreign loss exposures Intangible property exposures Government exposures, regulation o Burden of Risk on Society o Large amounts of personal emergency funds would be needed to repair damages, without proper insurance o People may lose access to goods or services, such as a company fearing a lawsuit that would stop producing an important product o Fear and worry every time you leave the house! o Techniques for Managing Risk o For most people, insurance is the most practical method for handling major risks o Risk Control Avoidance Loss prevention Loss reduction o Risk Financing Retention Active: consciously aware of risk; saving Passive: unknowingly retained because of ignorance, indifference, laziness, or failing to identify SelfInsurance Transferring Holdharmless clause: scaffold manufacturer is held harmless by retailer if scaffold collapses and someone is injured Hedging: purchase and sell futures contracts to transfer risk Incorporation: personal assets are not attached by creditors as form of payment of debts o Insights on the public's view of risk o Natural disasters classified as lowprobability highconsequence events are increasing in likelihood and severity o Most people do not purchase insurance until AFTER suffering a severe loss from a disaster and then they often cancel it after several years. For example, flood insurance o Individuals are not very good at assessing risk o Publicprivate partnerships can reduce the costs of future disasters, i.e., building stronger homes o People expect government to help if they have severe damage. But government money is typically a loan, not a handout o Hurricanes get the headlines but other big risks are overlooked (tornadoes). Chapter 2: Insurance and Risk o Definition of Insurance o Insurance is the pooling of fortuitous losses by transfer of such risks to insurers, who agree to indemnify insureds for such losses, to provide other pecuniary benefits on their occurrence, or to render services connected with the risk o Characteristics: Pooling of losses Payment of fortuitous claims Risk transfer Indemnification o Pooling of Large Losses o Pooling spreads losses over the entire group o Risk reduction is based on the Law of Large Numbers The greater the number of exposures, the more closely the actual results will approach the probable results that are expected from an infinite number of exposures o Standard Deviation o As more people are added to the risk pool, the standard deviation decline while the expected value of the loss is unchanged o Basic Characteristics of Insurance o Payment of fortuitous losses Unforeseen, unexpected, and occurs as a result of chance o Risk transfer Pure risk transferred from insured to insurer o Indemnification Insured is restored to the financial position prior to the loss o Characteristics of an Ideally Insurable Risk o Large number of exposure units To predict average loss based on the law of large numbers o Accidental and unintentional loss To assure random occurrence of events o Determinable and measurable loss To determine how much should be paid o No catastrophic loss To allow the pooling technique to work Exposures to catastrophic loss can be managed by using reinsurance, dispersing coverage over a large geographic area, or using financial instruments, such as catastrophe bonds o Calculable chance of loss To establish a premium that is sufficient to pay all claims and expenses and yields a profit during the policy period o Economically feasible premium So people can afford to purchase the policy For insurance to be an attractive purchase, premiums paid must be substantially less than the face value, or amount, of the policy o Based on these requirements: Most personal, property, and liability risks can be insured Market risks, financial risks, production risks, and political risks are difficult to insure o Risk of Unemployment and Fire Examples o Fire meets all six requirements o Unemployment doesn't necessarily meet any of them o Adverse Selection and Insurance o Adverse selection is the tendency of persons with a higherthanaverage chance of loss to seek insurance at standard rates o If not controlled by underwriting, adverse selection results in higherthanexpected loss levels o Adverse selection can be controlled by: Careful underwriting (selection and classification of applicants for insurance) Policy provisions (e.g., suicide clause in life insurance) o Insurance vs. Gambling o Insurance: Is a technique for handling an already existing pure risk Always socially productive Both parties have a common interest in the prevention of a loss o Gambling: Creates a new speculative risk Not socially productive Winner's gain comes at the expense of the loser o Insurance vs. Hedging o Insurance: Risk is transferred by a contract Insurance involves the transfer of pure (insurable) risks Insurance can reduce the objective risk of an insurer Through the Law of Large Numbers o Hedging: Risk is transferred by a contract Hedging involves risks that are typically uninsurable Hedging does not result in reduced risk o Types of Private Insurance o Life and Health Includes individual and group health plans, disability income plans, longterm care plans o Property and Liability Property: indemnifies property owners against loss or damage of real or personal property Liability: covers insured's legal liability arising out of property or bodily damage to others; also pays legal defense costs Casualty insurance: broad field of insurance that covers whatever is not covered by fire, marine, and life insurance; include auto, liability, burglary and theft, workers compensation, and health insurance Personal Lines: for individuals and families Private passenger auto insurance Homeowners insurance Personal umbrella liability insurance Earthquake insurance Flood insurance Commercial Lines: for businesses, nonprofit organizations, government agencies Fire and allied lines insurance Commercial multipleperil insurance General liability insurance Products liability insurance Workers compensation insurance Commercial auto insurance Accident and health insurance Inland marine and ocean marine insurance Professional liability insurance Directors and officers liability insurance Boiler and machinery insurance Fidelity bonds and surety bonds Crime insurance o Types of Government Insurance o Social Insurance Programs Financed entirely or in large part by contributions from employers and/or employees Benefits are heavily weighted in favor of lowincome groups Eligibility and benefits are prescribed by statute Ex: Social Security, Unemployment, Workers Comp o Other Government Insurance Programs Found at both the federal and state level Ex: Federal flood insurance, state health insurance pools o Social Benefits of Insurance o Indemnification for Loss o Reduction of Worry and Fear o Source of Investment Funds o Loss Prevention o Enhancement of Credit o Social Costs of Insurance o Cost of Doing Business An expense loading is the amount needed to pay all expenses, including commissions, general administrative expenses, state premium taxes, acquisition expenses, and an allowance for contingencies and profit o Fraudulent Claims o Inflated Claims o Higher premiums to cover additional losses reduce disposable income and consumption of other goods and services Chapter 3: Introduction to Risk Management Process o What is Risk Management? o Risk Management is a process that identifies loss exposures faced by an organization and selects the most appropriate techniques for treating such exposures o A loss exposure is any situation or circumstance in which a loss is possible, regardless of whether a loss occurs E.g., a plant that may be damaged by an earthquake, or an automobile that may be damaged in a collision o Risk Management Objectives: o Preloss Objectives: Prepare for potential losses in the most economical way Reduce anxiety Meet legal obligations o Postloss Objectives: Business survival Continue operations Continue growing the business Minimize the effects of a loss on others and society o Operational risks o Loss of earnings o Assets damaged, destroyed, or stolen o Assets become obsolete o Employeerelated risks o Legal liability o Political risks o Financial risks o Input price risk o Output price risk o Interest rate risk o Credit (counterparty) risk o Currency or foreign exchange rate risk o Strategic risks o Macroeconomic and other primarily external influences and trends o Loss of Market Share/Competition o Decisions Regarding Products Products don't meet sales productions Technology issues... Products become obsolete Economic risks that impact sales and/or costs o Merger/Acquisition Doesn't Pay Off o Steps in the Risk Management Process o Identify loss exposures o Measure and analyze the loss exposures o Select the appropriate combination of techniques for treating the loss exposures: 1. Risk control Avoidance Loss prevention Loss reduction 2. Risk financing Retention Noninsurance transfers Insurance o Implement and monitor the risk management program o Identify Loss Exposures o Property loss exposures Building, contents, inventory, valuable papers o Liability loss exposures Pollution, defective products, discrimination o Business income loss exposures Loss of income, extra expenses o Human resources loss exposures Death, disability, retirement of key employees o Crime loss exposures Robbery, fraud, employee theft o Employee benefit loss exposures Failure to pay promised benefits o Foreign loss exposures Kidnapping, international locations, repatriation o Intangible property loss exposures Damage to public image, damage to brand o Failure to comply with government rules and regulations This one can cause a loss and land you in jail.... o Risk Managers have several sources of information to identify loss exposures: Risk analysis questionnaires and checklists Physical inspection Flowcharts Financial statements Historical loss data o Industry trends and market changes can create new loss exposures E.g., exposure to acts of terrorism o Measure and Analyze Loss Exposures o Estimate for each type of loss exposure: Loss frequency refers to the probable number of losses that may occur during some time period Loss severity refers to the probable size of the losses that may occur o Rank exposures by importance o Loss severity is more important than loss frequency The maximum possible loss is the worst loss that could happen to the firm during its lifetime The probable maximum loss is the worst loss that is likely to happen o Select Techniques for Treating the Loss Exposures o Methods of Risk Control: Avoidance, Loss Control, Loss Reduction o Loss prevention refers to measures that reduce the frequency of a particular loss E.g., installing safety features on hazardous products o Loss reduction refers to measures that reduce the severity of a loss after it occurs E.g., installing an automatic sprinkler system o Risk Financing Methods: o Retention A risk manager has several methods for paying retained losses: Current net income: losses are treated as current expenses Unfunded reserve: losses are deducted from a bookkeeping account Funded reserve: losses are deducted from a liquid fund Credit line: funds are borrowed to pay losses as they occur Why Retain Losses? No other treatment method available The worst possible loss is not serious Losses are highly predictable A captive insurer is an insurer owned by a parent firm for the purpose of insuring the parent firm's loss exposures A singleparent captive is owned by only one parent An association or group captive is an insurer owned by several parents Reasons for forming a captive include: The parent firm may have difficulty obtaining insurance To take advantage of a favorable regulatory environment Costs may be lower than purchasing commercial insurance A captive insurer has easier access to a reinsurer A captive insurer can become a source of profit Advantages: Save on loss costs Save on expenses Encourage loss prevention Increase cash flow Disadvantages: Possible higher losses Possible higher expenses Possible higher taxes o NonInsurance Transfers Advantages: Can transfer some losses that are not insurable Less expensive Can transfer loss to someone who is in a better position to control losses Disadvantages: Contract language may be ambiguous, so transfer may fail If the other party fails to pay, the firm is still responsible for the loss Insurers may not give credit for transfers o Insurance The risk manager negotiates the terms of the insurance contract A manuscript policy is a policy specially tailored for the firm The parties must agree on the contract provisions, endorsements, forms, and premiums Information concerning insurance coverage's must be disseminated to others in the firm The risk manager must periodically review the insurance program Deductible: a provision by which a specified amount is subtracted from the loss payment otherwise payable to the insured Excess insurance: a plan in which the insurer does not participate in the loss until the actual loss exceeds the amount a firm has decided to retain Disadvantages: Premiums may be costly Negotiation of contracts takes time and effort The risk manager may become lax in exercising loss control Advantages: Firm is indemnified for losses Uncertainty is reduced Insurers can provide valuable risk management services Premiums are incometax deductible o Risk Management Matrix: Exhibit 3.2 Type of Loss Loss Frequency Loss Severity Appropriate RM Technique 1. Low Low Retention 2. High Low Loss prevention and retention 3. Low High Transfer 4. High High Avoidance o Market Conditions and the Selection of Risk Management Techniques o Risk managers may have to modify their choice of techniques depending on market conditions in the insurance markets o The insurance market experiences an underwriting cycle In a "hard" market, profitability is declining, underwriting standards are tightened, premiums increase, and insurance is hard to obtain In a "soft" market, profitability is improving, standards are loosened, premiums decline, and insurance becomes easier to obtain o Benefits of Risk Management o Enables firm to attain its preloss and postloss objectives more easily o A risk management program can reduce a firm's cost of risk o Reduction in pure loss exposures allows a firm to enact an enterprise risk management program to treat both pure and speculative loss exposures o Society benefits because both direct and indirect losses are reduced o Personal Risk Management o Personal risk management refers to the identification of pure risks faced by an individual or family, and to the selection of the most appropriate technique for treating such risks o The same principles applied to corporate risk management apply to personal risk management Chapter 9: Fundamental Legal Principles o Principle of Indemnity o The insurer agrees to pay no more than the actual amount of the loss o Purpose: Prevents the insured from profiting from a loss Reduce moral hazard (fraud) o In property insurance, indemnification is based on the Actual Cash Value (ACV) of the property at the time of loss Three main methods to determine actual cash value: ACTUAL CASH VALUE = Replacement cost Depreciation Fair market value (what would a willing buyer pay?) Broad eviden rule (includes all relevant factors an expert would use to determine the value) o Replacement Cost Coverage (RCC) Restores damages property with new stuff of similar kind and quality Replacement cost coverage for a home and for personal property are two different policy endorsements o Exceptions to the Principle of Indemnity o Valued Policy Pays the face amount of insurance if a total loss occurs o Valued Policy Law Some states require certain policies to pay the face amount of insurance if a total loss to property occurs from a peril specified in the law o Replacement cost insurance o No deduction for depreciation A life insurance contract is a valued policy that pays a stated sum to the beneficiary upon the insured's death o Principle of Insurable Interest o The insured must be in a position to lose financially if a covered loss occurs o Purposes: Prevents gambling Reduces moral hazard Measure the amount of the insured's loss o An insurable interest can e supported by: Ownership of property Potential legal liability Serving as a secured creditor Contractual rights o When must insurable interest exist? Property insurance: at the time of the loss Life insurance: only at inception of the policy o The question of insurable interest does not arise when you purchase life insurance on your own life o Insurable interest in another person's life can be shown by close family ties, marriage, or a pecuniary (financial/business) interest o Principle of Subrogation o Substitution of the insurer in place of the insured for the purpose of claiming indemnity from a third party for a loss covered by insurance o Purposes: Prevents the insured from collecting twice for the same loss Holds the negligent person responsible for the loss Controls insurance rates Insurer can collect its losses Excess amount goes to the insured Sometimes, less than 100% of the amount is collected. If that happens, insured gets the same percentage of the deductible back The insurer is entitled only to the amount it has paid under the policy The insurer cannot subrogate against its own insureds Subrogation does not apply to life insurance o Principle of Utmost Good Faith o A higher degree of honesty is imposed on both parties to an insurance contract than is imposed on parties to other contracts o Supported by three legal doctrines: Representations Concealment Warranty o Representations are statements made by the applicant for insurance A contract is voidable if the representation is material, false, and relied on by the insurer Material means that if the insurer knew the true facts, the policy would not have been issued, or would have been issued on different terms An innocent misrepresentation of a material fact, if relied on by the insurer, makes the contract voidable o A concealment is intentional failure of the applicant for insurance to reveal a material fact to the insurer Insurer must prove the concealed fact was known to be material and that the insured intended to defraud o A warranty is a statement that becomes part of the insurance contract and is guaranteed by the maker to be true in all respects Statements made by applicants are considered representations, not warranties A breach of warranty may allow insurer to deny all or part of a claim o Requirements of an Insurance Contract o To be legally enforceable, an insurance contract must meet four requirements: Offer and acceptance of the terms of the contract Consideration the value that each party gives to the other Competent parties, with legal capacity to enter into a binding contract The contract must exist for a legal purpose o Distinct Legal Characteristics of Insurance Contracts o An insurance contracts is: Aleatory: values exchanged are not equal Unilateral: only the insurer makes a legally enforceable promise Conditional: policy owner must comply with all policy provisions to collect for a covered loss Personal: property insurance policy cannot be validly assigned to another party without the insurer's consent A contract of adhesion: the insured must accept the entire contract with all of its terms and conditions o Courts have ruled that any ambiguities or uncertainties in the contract are construed against the insurer o The principle of reasonable expectations states than an insured is entitled to coverage under a policy that he or she reasonably expects it to provide, and that to be effective, exclusions or qualifications must be conspicuous, plain, and clear o Law and the Insurance Agent o An agent is someone who has the authority to act on behalf of a principal (the insurer) o Several laws govern the actions of agents and their relationship to insureds There is no presumption of an agency relationship An agent must be authorized to represent the insurer A principal is responsible for the acts of agents acting within the scope of their authority Limitations can be placed on the powers of agents o Insurance Sales o Producer Someone who sells insurance o Agent Represents the insurer Independent agents are selfemployed, represent several companies and are paid on commission Exclusive or captive agents represent only one insurance company and are either salaried or work on commission o Broker Represents the insured Are an intermediary between customer and insurer. Usually they sell commercial coverage. o Law and the Insurance Agent o An agent's authority comes from three sources Express authority Implied authority Apparent authority o Knowledge of the agent is presumed to be knowledge of the principal with respect to matters within the scope of the agency relationship o Insurers can place limitations on the power of agents by adding a nonwaiver clause to the application or policy o Waiver is defined as the voluntary relinquishment of a known legal right o Estoppel occurs when a representation of face made by one person to another person is reasonably relied on by that person to such an extent that it would be inequitable to allow the first person to deny the truth of the representation Translation: You can't go back on your word. Chapter 19: The Liability Risk o Basics of Legal Liability o A legal wrong is a violation of a person's legal rights, or a failure to perform a legal duty owed to a certain person or to society as a whole o Legal wrongs include: Crime: wrong against society; punishable by fines, imprisonment, or death Breach of contract Torts: a legal wrong for which the law allows a remedy in the form of money damages o 3 Classifications of Torts o Intentional: Causes harm or injury to another or damages property. Fraud, assault, slander, copyright infringement o Strict (absolute) liability Liability is imposed regardless of negligence Manufacturing explosives, owning dangerous animals, crop spraying from airplanes, occupational injury and disease under worker's comp o Negligence Running a red light o Law of Negligence o Negligence is the failure to exercise the standard of care required by law to protect others from an unreasonable risk of harm The standard of care is not the same for each wrongful act. It is based on the care required by a reasonably prudent person. A 5 year old pulls a chair out under the teacher and she's hurt v. A 25 year old o Elements of Negligence Existence of a legal duty to use reasonable care Stop on red, ask about allergies before prescribing drugs, etc. Failure to perform that duty Positive: does something they shouldn't (speed) Negative: doesn't do something they should (don't repair brakes) Damage or injury to the claimant A proximate cause relationship between the negligent act and the infliction of damages, which requires an unbroken chain of events. In other words, a direct cause. o 1992: 79 year old woman went to McDonald's for coffee. She burned herself on it and sued McDonald's. This sounds like a frivolous lawsuit; that's what sticks. The stories said that she was driving the car and dropped it on her lap, but she was a passenger, and the coffee was so hot (3040 degrees hotter than coffee they sell inside). 700 other people had reported burns from this coffee before her. She was in the hospital for 8 days, and it took her 2 years to recover. She wanted to settle so they would cover her medical bills ($20,000), but they refused to go over $800 (not nearly enough for her medical bills) so she sued to right a wrong. She was awarded $200,000 for pain and suffering and $2.7 million dollars for punitive damages (reduced after that to $480,000). We don't hear that it was reduced. o Big tobacco case(s) o Negligent Torts: Duty o Can you think of examples of due care (duty) that each of the following people must exercise? A lifeguard at a municipal pool: Do not read or take a nap; blow the whistle, look after everybody A lumberjack felling a tree: YELL TIMBER :D An owner of an aggressive dog: Beware of dog sign A high school football coach: limit time working out in the heat outside o Negligent Torts: Causation o Causation in fact, also known as "butfor" causation, is pretty simple. o The question is, but for the defendant's actions would the injury have occurred? o Example: A hits in the shin with a golf club. B's shin would not have been injured if A had not hit him in the shin with a golf club. o Res Ipsa Loquitur o "The thing speaks for itself" The very fact that an injury or damage occurs establishes a presumption of negligence Dentist extracts wrong tooth Operation is performed on wrong patient or limb o Requirements The event is one that normally does not occur in the absence of negligence The defendant has exclusive control over the instrumentality causing the accident The injured party has not contributed to the accident o Example: Scissors left in a patient during an operation. The thing speaks for itself; the patient did not do that o Law of Negligence o Compensatory damages compensate the victim for losses actually incurred Special damages provide compensation for medical expenses Can be determined/measured General damages provide compensation for pain and suffering Cannot be determined/measured o Punitive damages are designed to punish people and organizations so that others are deterred from committing the same wrongful act Often very large; several times the compensatory damages o When you have pain and suffering, losses can't be itemized. Losses that can't be itemized are general damages o Know Types of Damages Slide o Defenses Against Negligence o Ability to collect depends on state law: Under a contributory negligence law, the injured person cannot collect damages if his or her care falls below the standard of care required for his or her protection Under strict application of common law, the injured cannot collect damages if his or her conduct contributed in any way to the injury Under a comparative negligence law (FLORIDA) the financial burden of the injury is shared by both parties according to their respective degrees of fault. Under the pure rule, you can collect damages even if you are negligent, but your reward is reduced in proportion to your fault Under the 50% rule, you cannot recover if you are 50% or more at fault Under the 51% rule, you cannot recover if you are 51% or more at fault o Some legal defenses can defeat a claim for damages: The last clear chance rule states that a plaintiff who is endangered by his or her own negligence can still recover damages from the defendant if the defendant has a last clear chance to avoid the accident but fails to do so Jaywalker is breaking the law, but if the motorist has the chance to stop and doesn't, the jaywalker can recover damages Under the assumption of risk doctrine, a person who understands and recognizes the danger inherent in a particular activity cannot recover damages in the event of an injury. o Imputed Negligence o Imputed Negligence: under certain conditions, the negligence of one person can be attributed to another Driving a car on behalf of company and crash: employer can be held liable o Under vicarious liability law, a motorist's negligence is imputed to the vehicle's owner Jeff drives Lisa's car to pick up her dry cleaning and crashes; Lisa could be held liable o Under the family purpose doctrine, the owner of an auto can be held liable for negligent acts committed by family members Daughter crashes dad's car; dad can be held liable Joint business venture: two brothers are partners in business; one brother crashes company car; both could be held liable o Under a dram shop law, a business that sells liquor can be held liable for damages that may result from the sale of liquor Sells liquor to drunk person, and that person crashes and hurts people on way home; owner could be held liable o Specific Applications of the Law of Negligence o The standard of care owed to others depends upon the situation o A trespasser is a person who enters or remains on the owner's property without the owner's consent Do not have to keep property safe for trespassers, but don't actively injure them or set a trap The duty to refrain from injuring a trespasser is sometimes referred to as the duty of slight care. Ex. Having a bear trap set to catch trespassers violates the duty of slight care because it is an active attempt to harm trespassers o A licensee is a person who enters the premises with the occupant's expressed or implied permission. The property owner must warn the licensee of unsafe conditions which are apparent o An invitee is a person who is invited onto the premises for the benefit of the occupant. The occupant has an obligation to inspect the premises and eliminate any dangerous conditions o An attractive nuisance is a hazardous condition that can attract and injure children The occupants of land are liable for the injuries of children who may be attracted by some dangerous condition, feature, or article Ex: swimming pool, diving board, slides, trampolines, leaving keys in a car o Owners and operators of automobiles who drive in a careless manner can be held liable for property damage or bodily injury sustained by another person An owner who is not the operator can be held liable for the acts of operators if an agency relationship exists o Charitable institutions are no longer immune from lawsuits, especially with respect to commercial activities o Governmental entities can be sued in almost every aspect of governmental activity The doctrine of sovereign immunity has been modified over time Used to exist cause the king and queen can do no wrong A governmental unit can be held liable if it is negligent in the performance of a proprietary function, e.g., the operation of water plants, building of municipal auditoriums, telephone systems, transportation, etc. Immunity from lawsuits for governmental functions, such as the planning of a sewer system, has eroded over time. o Under the doctrine of respondeat superior, an employer can be held liable for the negligent acts of employees while they are acting on the employer's behalf. "Let the master answer." The worker must be an employee The employee must be acting within the scope of employment when the negligent act occurred. Parents can be held liable for the actions of a child if: The child uses a dangerous weapon to injure someone o Child shoots someone with gun with permission to use it The child is acting as an agent for the parents o Hurts someone working at parents' business A minor child is operating a family car o Under family purpose doctrine from before Owners of wild animals are held strictly liable for injuries of others, even if the animals are domesticated Ex: tigers Sometimes dogs; depending on state; in 1/3 of states, you only have to show that the dog caused the injury for the owner to be strictly liable o Current Tort Liability Problems o Recently, risk managers, business firms, physicians and liability insurers have been troubled by: A defective tort liability system Medical malpractice Corporate governance and the financial sector o Defects in the present tort liability system include: Rising tort liability costs Inefficiency in compensating injured victims Uncertainty of legal outcomes Higher jury awards Long delays in the settling lawsuits o Rising Tort Liability Costs o Why the increases in tort costs? Juries and judges desensitized to the value of the dollar when damages are awarded Aggressive and creative litigation strategies Rising medical costs Abuses in class action lawsuits States in striking down portions of tort reform An increase in lawsuits against company officials Deep pocket syndrome Exploitation of highverdict cases by the media o Litigation may increase because: The credit crunch following the collapse of the mortgage and housing markets Employment practices litigation alleging gender discrimination in pay, promotion, and work assignments Environmental claims, including alleged water contamination caused by the new natural gas drilling method "fracking" Claims from samesex couples alleging discrimination Investment schemes Etc, etc, etc... o Current Tort Liability Problems o Critics argue that the present system is inefficient because injured victims receive less than half of each tort dollar paid o There is considerable uncertainty in predicting legal outcomes o Jury awards for certain types of lawsuits continue to increase o There are long delays in settling lawsuits o Tort Reform in the States o State tort reforms include: Capping noneconomic damages, such as pain and suffering Reinstating the stateoftheart defense for product liability cases Restricting punitive damages awards Modifying the collateral source rule Modifying the joint and several liability rule Alternative dispute resolution (ADR), a technique for resolving a legal dispute using arbitration or mediation o Florida ranked #4 in the 20142015 report by the American Tort Reform Association o Components for the ranking: Aggressive personal injury bar Allied medical clinics Expansive tort liability Plaintifffriendly judges o Problems in Liability Decisions: A sampling... o "Blindfolded" Juries o Slipandfall Cases o Smoking Lawsuits o "Expert" Testimony o Medical Malpractice: o Medical malpractice occurs when a negligent act or omission by a physician or other health care professional results in injury or harm to the patient The injured patient must show that the doctor deviated from the generally accepted standards of practice in this particular case o Many malpractice suits are due to medical errors by health care providers, especially errors in hospitals that result in the death of patients o Other reasons patients sue physicians include: The intimate relationship between patients and physicians that existed in the past has been lost People are more litigious than in the past Physicians and other medical experts will now testify against physicians in malpractice cases The media has made more people aware of the vulnerability of physicians to malpractice suits Physicians accuse attorneys of filing malpractice suits because of the high fees that attorneys may collect if they win There is a growing resentment against large forprofit health care firms and managed care plans o Reducing Medical Malpractice Costs o Methods to reduce medical malpractice costs include: Not charging for "never events" Surgery on wrong person; objects left in patient; mismatched blood transfusions; ulcers from hospital; preventable postop deaths Laws allowing physicians to apologize without allowing the admission to be used against them Can relieve patient's anger and have a quick settlement rather than long litigation Prompt disclosure of medical errors Honesty with patients; leads to fewer lawsuits, quicker settlements, and lower litigation costs Legally required in many states Remedial action against problem physicians Require training programs to keep license for problem physicians Emphasis on risk management principles Study claimcausing actions to avoid them Make study of medical malpractice prevention part of licensing requirement Use technology to reduce medical errors o Corporate Fraud and Lax Corporate Governance o The SarbanesOxley Act (2002) is designed to expose and punish acts of corruption The company's CEO and CFO must swear to the accuracy of the financial reports, among other things o The DoddFrank Wall Street Reform and Consumer Protection Act (2010) includes provisions that address financial disclosure, liquidation of financial institutions, regulation of credit ratings agencies, and predatory lending practices
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