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

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

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

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

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

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)

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

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

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.

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?

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

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

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

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 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

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

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

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

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

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