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
Liability
Contract
Ownership (Use)
of Property
Tort
Personal property
Products
Automobile
Intellectual property
Services
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
Internship opportunity
• Country Insurance & Financial Services
• Internship positions in the Underwriting
Dept.
• Bloomington-Normal
• Begins September 30
• 25+ hours during school year
• Full-time during summer 2004
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
Love Bug virus
(2000)
$10bn
$9bn
Klez worm (2002)
Code Red I and II
worms (2001)
$2.6bn
Nimda virus
(2001)
$590m to $2bn
Slammer worm
(2003)
$1bn
Melissa virus
(1999)
$80m
Source: USA TODAY, September 3, 2003
Cyber-Risk Gaps in Insurance
Coverage
Insured by a
specific policy
7%
Do not know the
answer
22%
Do not have
insurance
34%
Risks covered by
general policies
33%
0
5
10
15
20
Source: Ernst & Young 2003 Global Information Security Survey
of 1,400 organizations from 66 countries
25
30
35
40