Property Risk, Liability Risk,
Tort System, and Workers’
Compensation
Vickie Bajtelsmit, J.D., Ph.D.
Colorado State University

Outline
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Property Risk
Liability Risk
The Tort System
Workers’ Compensation

Property risk
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Definition: The risk of theft, loss, or damage to your real or personal property.
Direct versus indirect losses
Examples:
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Home burns down
Automobile is damaged is accident
Personal property is stolen from your home

Major Property Insurance
Policies
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Homeowners’
Auto Comprehensive
Building and personal property
Business income
Boiler and machinery
Inland marine
Ocean marine
Crime (Employee dishonesty)
Difference in conditions

Homeowners’ Insurance
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Standardized and simplified policies
Risk classification and underwriting based on
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Location
Construction
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Fire protection
Building code adequacy and enforcement
Age
Credit score

Homeowner’s Coverages
Form Type Coverage Under Each Policy
All Policies
HO-3 All-Risk Form
--Personal liability, medical payments for guests, additional living expenses during repair
--Losses due to: fire, lightning, windstorm, hail, explosion, riots, damage from aircraft or vehicles, smoke, vandalism, theft, glass breakage, volcanic eruption,
All perils, including those listed above, except flood, earthquake, war, nuclear accident
HO-4 Renter's Contents
HO-5 Comprehensive Form
HO-6 Condominium
HO-7 Country Home Form
Loss to personal belongings caused by perils listed above.
Similar as HO-3 but includes endorsements for replacement cost coverage on contents and buildings.
Similar to HO-4; covers personal belongings and additions to the living unit.
Covers agricultural buildings and equipment for non-farm businesses

Valuation of recoverable loss
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Actual cash value versus replacement cost
Coinsurance clause
Deductibles
Limits and exclusions
Subrogation

Current Issues in Property Insurance:
Catastrophes!
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Earthquake, hurricane, flood, wildfire
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Do these risks fit the requirements for insurable risks?
Government insurance available (e.g.
National Flood Insurance Program) but many do not buy.
Losses have increased over time due to concentration of population in high risk areas.

Liability Risk
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Definition: Risk that you will be responsible for an injury to another person or their property.
Legal Basis (1) The Law of Negligence
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Breach of duty to another
Causation of Loss
Legal Basis (2) Strict Liability
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Causation of Loss

Types of Liability Exposures
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Professional liability
Contractors liability
Employer liability
Product liability
Principal-agent liability
Auto liability
Landlord-tenant liability
Contractual liability

Liability Insurance Policies
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Homeowners’
Personal Auto
Commercial Auto
Commercial General Liability (CGL)
Umbrella Liability (business or personal)
Directors and Officers (D&O)
Environmental Impairment Liability (EIL)
Employment Practices Liability
Professional Liability (malpractice)
Errors and omissions (E&O)

Important Concepts in Liability
Insurance
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Policy Trigger
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Accident
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Occurrence vs. Claims Made
Policy Limits
Defense Costs
Underwriting Factors
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Moral Hazard
Adverse Selection

Types of Damages
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Compensatory Damages
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Medical costs
Lost wages
Pain and suffering
Punitive Damages

Auto Insurance Coverages
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Liability
Medical payments
Uninsured/underinsured motorist
Personal injury protection (PIP)
Physical damage coverage

Minimum Auto Liability Coverage
Differs by State: Low Relative to
Potential Losses

Auto Insurance Rating
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Factors in claim costs by jurisdiction
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Accident rate, Small cars, Urbanization,
Medical costs, Auto repair costs, Fraud,
Litigiousness
By person
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Driving record, Age, Miles driven, Credit score, Type of vehicle, Marital status,
Gender, Territory

Auto No Fault Laws
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Pure versus modified
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Verbal thresholds
Dollar thresholds
Add-on laws
Choice systems
Evidence on cost savings
Number of No Fault States Declining

Issues related to the Legal
System
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Increased Litigation
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Class Actions
Insurer bad faith claims
“New risks”
Escalating jury awards
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Non-economic and punitive damages
Insurance fraud

Evaluating the Legal System
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Objectives
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Compensation of victims
Improved safety
Deterrence
Are these accomplished?
At what cost?
Are the outcomes equitable?

Cost of the U.S. Tort System

Inefficiency of the System: Less than Half the Tort Dollar Goes to Claimants
Administrative
Costs of Settling
Claims 21%
Actual Economic
Losses 22%
Defense Costs
14%
Attorneys Fees
19%
Pain and Suffering
(Non-Economic)
Losses
24%
Source: Tillinghast-Towers Perrin

Factors Driving Tort Costs
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Innovative Plaintiff’s Attorneys
Generous Juries and Punitive Damages
More Class Action Law Suits (Product
Liability, Discrimination, Shareholder)
Medical Cost Inflation
Media Coverage
Weak Economy
First Party Bad Faith Claims

Tort Reform Developments
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Medical Malpractice Caps on Noneconomic
Damages
Caps on Punitive Damages—What’s Reasonable?
Class Action Reform
Arbitration

Tort Reform Proposals
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Caps on punitive damages
Caps on pain and suffering damages
Attorney fee limits
Arbitration
Limits on class actions
Modifications to Collateral Source Rule
Modifications to Joint & Several Liability

Workers’ Compensation

Workers Compensation
Background
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Historically, injured workers had to rely on the law of negligence
Employers were rarely held responsible
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Proof of negligence difficult
Defenses available
Currently: No fault (strict liability) system
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Wage replacement
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Medical benefits
Employer strictly liable for injuries arising out of and in the course of employment
Workers give up the right to bring suit

Problems in Workers Comp
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Variation across states
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Benefits and utilization
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Financing of the system
Litigation (above threshold)
Fraud (by workers,employers,doctors, lawyers, insurers)
Medical Cost Inflation
Cost of dispute resolution

Other Current Issues
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Increasing occurrence modern risks such as repetitive motion, mental stress, obesity
Reintegration of veterans
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ADA (Americans with Disabilities Act): Must accommodate employees with disabilities
Managed Care
24 hour coverage

Workers’ Comp Summary
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Workers’ compensation programs provide a valuable type of insurance for injured workers.
The original trade-off of employer strict liability in return for employees giving up the right to sue is often eroded.
Costs are rising but are a decreasing % of total employee compensation.
Smaller firms feel the cost the most.