The Liability Exposure

• The importance of the liability exposure rests

on the possible severity of loss.

• The gigantic losses that are periodically

reported in the newspapers are stark
reminders of the catastrophic proportions
that losses from the liability exposure can
assume.

23-1
 Magnitude of the Exposure

• Catastrophic liability losses can afflict

organizations of all types and sizes. Simply
by being in business, an organization is
exposed to the threat of legal liability.
• It is an exposure that cannot be avoided and
for which loss prevention is an inadequate
response.

23-2
 Criminal and Tortious Behavior

1. Two classes of wrong: public and private

(crimes and torts).
2. Crimes are subject to criminal law and are
punishable by fine, imprisonment, or
execution.
3. Torts are an infringement of the rights of
another and are the subject of civil law.
4. Torts may be intentional or unintentional.

23-3
 Unintentional Torts

• Unintentional torts are those that result from

negligence or carelessness.

• While many of the doctrines relating to the

law of negligence are found in statutes, its
primary development has been through
common law.

23-4
 Establishing Legal Liability

Legal liability is imposed by the courts when it

has been established that all the following
occurred:
1. There was negligence.
2. The negligence was cause of the damage.
3. There was actual damage or loss.
4. The person injured was free from fault.

23-5
 There Must be Negligence

1. Basic concept of law holds that unless a

person is at fault, he or she is not liable.
2. Negligence is the failure of a person to
exercise the proper degree of care required
by the circumstances.
3. Normally, the burden of proof of negligence
is on the injured party, but this burden is
sometimes shifted.

23-6
 Doctrines That Modify Burden of Proof

Negligence Per Se

Absolute Liability

Res Ipsa Loquitur

23-7
 Actual Damage or Loss

• A tort may result in several types of injuries

to another.
• The most common types of injuries are
bodily injury and property damage.
• In addition to these, the courts recognize
other types of injuries, usually referred to a
personal injury.

23-8
 Personal Injury Torts

• Some personal injuries result from

intentional torts, such as libel, slander,
defamation, or invasion of privacy.
• Newer types of injuries that have been
recognized by the courts include intangible
losses, such as those that might result from
discrimination in employment, sexual
harassment, or the loss that results from the
failure of a fiduciary to meet an obligation.

23-9
 Classes of Damages

1. Special damages: out of pocket and

measurable loss.
2. General damages: intangible; pain and
suffering, and so on.
3. Punitive damages: intended to punish
tortfeasor.

23-10
 Collateral Source Rule

1. Holds that the negligent party should not

benefit from the existence of other sources
of recovery available to the party who was
injured.
2. Damages payable by a tortfeasor are not
reduced by payments made to the injured
party under life or health insurance
contracts.

23-11
Negligence Must Be the Proximate Cause

• The negligence must have been the

proximate cause of the damage if the injured
party is to collect for the damage.
• There must have been an unbroken chain of
events beginning with the negligence and
leading to the injury or damage.
• The negligence must have been the cause
without which the accident would not have
happened.

23-12
 Vicarious Liability

• There are circumstances in which one person

may become legally liable for the negligent
behavior of another person.
• This type of liability is known as “imputed” or
vicarious liability and is based on the
common law principle of respondeat
superior, “let the master answer.”
• Employers are liable for the negligence of
their employees when they are acting within
their capacity as employees.

23-13
 Joint and Several Liability

• A liability is said to be joint and several when

the plaintiff obtains a judgment that may be
enforced against multiple tortfeasors
collectively or individually.

• In effect, this doctrine permits an injured

party to recover the entire amount of
compensation due for injuries from any
tortfeasor who is able to pay, regardless of
the degree of that party’s negligence.

23-14
 Liability Exposures Classified

Broadly speaking, liability exposures may be

divided into three categories, corresponding to
the types of insurance that have evolved to
insure them.
1. Liability to employees
2. Liability arising out of automobiles
3. General liability

23-15
 General Liability Exposures of
Businesses and Organizations

• Because business firms vary greatly in their

activities, their liability exposures also vary.
• The same is true with respect to not-for-profit
organizations and governmental units.
• Every organization, however, is subject to
one or more of the following liability
exposures.

23-16
Ownership and Maintenance of Premises

• Ownership or responsibility to maintain

property that others may enter creates a
liability exposure for the business firm.
• The owner or tenant of a building may be
held liable for damages if a member of the
public is injured, or if property of others is
damaged as a result of a condition in or
arising out of the premises.

23-17
Obligations of Property Owners to Others

1. Trespasser avoid intentional injury

2. Licensee warn of any dangers

3. Invitees make the premises safe

4. Children attractive nuisance doctrine

23-18
 Conduct of Business Operations

• In addition to the liability exposure from

premises occupied, the firm may be liable if a
member of the public or property of others is
injured on or away from the premises by an
activity of the owner or an employee.
• For example, employees of a contractor may
injure someone at some place other than the
firm's premises.

23-19
 Products

• The legal liability exposure of a manufacturer

or seller does not end when the product is
sold and delivered to the customer.
• The manufacturer or distributor of a faulty
product that injures someone or damages
property may be held legally liable, and such
liability may be established on one of three
bases: negligence, breach of warranty, and
strict liability.

23-20
 Product Liability Bases

Liability for bodily injury or property damage

arising out of products may be imposed on one
of three bases:
1. Negligence
2. Breach of Warranty
3. Strict Liability

23-21
 Product Liability Crisis

• Product liability losses mushroomed during

the 1970s, as both the number of losses and
the size of the awards mounted.
• In many cases, manufacturers were held
liable for injuries caused by machines
manufactured 10, 20, or 30 years prior to the
time of the injury.

23-22
 Product Liability Crisis

• Faced with an increasing number of losses

and escalating judgments, insurers reacted
by increasing their premiums.
• For most buyers, the cost of product liability
insurance skyrocketed, and in some
instances the protection was difficult or
impossible to obtain.

23-23
 Product Liability Reform Proposals

• In the wake of this product liability crisis,

many proposals were made to reform the tort
system as it relates to product liability.
• These proposals suggested modification of
statues of limitations, adoption of the rule
that manufacturers be held responsible only
to the extent of the "state of the art" at the
time the product was originally produced and
even a no-fault approach to products liability.

23-24
 Period of Repose Doctrine

• Most proposals for product liability reform

include a "period of repose" doctrine.
• The period of repose doctrine requires that
the suit must be brought within a certain time
from the manufacture or sale of the product,
a statute of limitations, ranging from 2 years
to 11 years, and consideration of the state of
art when the product was manufactured.

23-25
 Completed Operations

• The completed operations exposure is

similar to the products exposure, and
consists in the possibility of liability arising
out of work that has been performed.
• Such work is, in a sense, the product of the
firm, and any damage arising out of it may
result in liability if it is defective.

23-26
 Contingent Liability

• It is possible for an individual or a business

to be held liable because of work performed
by independent contractors.
• Despite the general rule that a principal is
generally not liable for the negligence of an
independent contractor, there are important
exceptions.
• Where the work being performed is unlawful
in itself, or is inherently dangerous, or where
the principal exercises any supervision, the
principal may be held liable.

23-27
 Errors and Omissions Liability

• The term errors and omissions encompasses

a wide range of wrongful acts that can
occasion loss or damage.
• Errors and omissions may include breaches
in the organization’s responsibility to its
employees (called employment-practices
liability) or
• breaches in the responsibility of officers and
directors to stockholders or to the public
generally (called directors and officers or
D&O liability).

23-28
 Environmental Impairment Liability

• More than a half-dozen federal statutes

establish regulations relating to the
environment and pollution, and many states
have added their own laws in this area.
• The major federal law is Comprehensive
Environmental Response, Compensation,
and Liability Act (CERCLA, also known as
Superfund), which was passed in 1980 and
renewed in 1986 and 1991.

23-29
 Superfund

• Superfund authorizes the EPA to identify

parties responsible for polluted sites and
order them to cleanup these sites.
• Where responsible parties (an owner and
operator, the transporter who selected the
site, or the generator of the waste) can be
identified, such party is responsible for the
cleanup cost.

23-30
 Superfund

• If the parties responsible for a particular site

fail to respond, the government can fund the
cleanup and then sue for reimbursement plus
punitive damages equal to three times the
cleanup costs.
• Although Congress did not extend Superfund
before it adjourned in 1995, Congress was
considering renewal in mid-1996 and there
seemed little question that pollution liability
would remain an important hazards for
business and industry.
23-31
 Employment Related Practices Liability

• Suits alleging discrimination in the

workplace, wrongful termination, and sexual
harassment have grown at an exponential
rate for a variety of reasons.
• One reason has been the growth in federal
legislation that specifically outlaws various
types of discrimination in the workplace.
• Another reason is a heightened sensitivity on
the part of those who are wrongly treated in
connection with employment.

23-32
 The Corporate Form of Ownership

• One of the frequently cited distinctions

between corporations, proprietorships and
partnerships is the limited liability associated
with the corporate form.
• While there is some limitation in liability
associated with the corporate form of
ownership, this limitation is frequently
misunderstood and has received far more
attention than it deserves.

23-33
 The Corporate Form of Ownership

• While it is true that one of the features of the

corporate form of ownership is the limited
liability of stockholders, this limitation on
liability applies to stockholder only in their
role as stockholders.
• Individuals employed by the corporation--
including its stockholders--are personally
liable for their own torts, the same as any
other individual.

23-34
 Defenses to Negligence

• An individual’s negligent behavior does not

necessarily mean that a person has a legal
liability.

• For many torts predicated on negligence

alone, the presumed negligent parties may
have certain defenses that could free them
from legal liability in spite of the negligent
behavior.

23-35
 Assumption of Risk

• An excellent defense to tort actions is that of

assumption of risk by the injured party.

• If one recognizes and understands the

danger involved in an activity and voluntarily
chooses to encounter it, this assumption of
the risk will bar any recovery for injury
caused by negligence.

23-36
 Negligence by the Injured Party

• Negligence on the part of the injured party

may also serve as a bar to recovery or, in
some jurisdictions, reduce the amount to
which the injured party is entitled as
damages.

• Two doctrines have developed: contributory

negligence and comparative negligence.

23-37
 Contributory Negligence

• Under the doctrine of contributory

negligence, any negligence on the part of the
injured party, even though slight, will
normally defeat the claim.
• Note that the degree of contributory
negligence is of no consequence. Its
existence on the part of the injured party,
even though slight, will defeat the claim.

23-38
 Comparative Negligence

• Because of the harshness of the contributory

negligence doctrine, a majority of states have
adopted a somewhat more lenient doctrine,
that of comparative negligence.
• Here contributory negligence on the part of
the injured party will not defeat the claim, but
will be used in some manner to mitigate the
damages payable by the other party.

23-39
 Comparative Negligence

• Comparative negligence rules divide into two

broad types.
• One is the so-called “pure” rule, sometimes
called the “Mississippi” rule under which any
defendant who is only partly at fault must still
pay in proportion to his or her blame.
• Most other states follow the Wisconsin rule,
under which the defendant who was least at
fault is not required to pay at all.

23-40
 Comparative Negligence Illustrated

Common
Percent Law Wisc. Miss.
PartyAt Fault LossRecovery Rule Rule

Brown 40% $10,000 0 $6,000 $6,000

White 60% $10,000 0 0 $4,000

23-41
 Last Clear Chance

• The doctrine of last clear chance is an

additional modification of the doctrine of
contributory negligence.
• If one can avoid an accident and does
nothing to prevent its occurrence, one
should be legally liable for damages,
regardless of the contributory negligence of
the injured party.

23-42
 Immunity - Government Bodies

• At common law, sovereign powers can be

sued only with their permission, a concept
known as sovereignty is immunity.
• The doctrine has been modified significantly
—both by statute and by court decision and
in a growing number of instances, the courts
have attempted to find exceptions to the
doctrine of government immunity, and some
have rejected it entirely.

23-43
 Charitable Institutions

• Formerly there was a distinct difference

between the liability exposure of a charitable
institution and that of a profit-making one,
but this distinction has gradually
disappeared.
• At one time, the courts were reluctant (and
some still are) to hold charitable institutions
liable, but the recent trend has been to treat
them in the same manner as profit-making
institutions.

23-44
 Survival of Tort Actions

• Under common law, tort actions do not

survive the death of the person committing
the injury or the person injured.
• In almost every jurisdiction, this rule has
been changed to some extent.
• Some statutes provide that cause of action
for damage to property survives the death of
a deceased but most allow actions for
personal injuries as well.

23-45
 Legal Liability and Bankruptcy

• The question naturally arises whether

bankruptcy is an approach that will address
obligations arising out of tort liability.
• Several major corporations have sought
protection under the bankruptcy laws.
• Countless smaller firms have also been
bankrupted by tort liability judgments.

23-46
 Possible Changes in the Tort System

1. Alternative dispute resolution

mechanisms (binding arbitration for
small claims).
2. Elimination of joint-and-several
liability.
3. A sliding fee schedule for plaintiff’s
attorneys in place of contingency
system.
4. “Caps” on noneconomic damages.
5. Elimination of collateral source rule.
6. Periodic payment of awards
(structured settlements) in place of
lump sum payments. 23-47
 Liability Arising Out of Contract

• In addition to liability arising out of torts, an

organization may incur liability by contractual
assumption, where liability is transferred from
one party to another by contract.
• Such transfers occur in hold-harmless
agreements, exculpatory agreements, and
indemnity agreements in construction
contracts, leases and other business-related
contracts.

23-48
 Effect of Contractual Transfers

• The contractual transfer does not affect the

indemnitee’s obligation to an injured third
party.
• If Smith is injured as a result of negligence
by Jones, and Johnson has agreed to hold
Jones harmless, nothing prevents Smith
from suing Jones.
• If Jones is held liable, Johnson must pay the
judgment. If Johnson cannot pay the
judgment, Jones remains liable for Smith.

23-49
 Liability Loss Prevention and Control

Given the peril that gives rise to legal liability—

negligent acts—the simplistic response to the
question of how to reduce the frequency of
liability losses is to reduce the number of
negligent acts.
Although this response seems simplistic, it is
only through the reduction in negligent acts
that liability claims are reduced.

23-50
 Premises Hazards Loss Control

There are several areas that may be addressed.

• Removal of hazards on the premises that
could injure those who enter. This requires
inspections and conscientious housekeeping
and employee training.
• Because the responsibility differs with the
status of the person who enters the
premises, measures aimed at drawing a clear
distinction between trespassers and invitees
are beneficial by using Not Open to Public or
Employees Only signs.

23-51
 Product Liability Loss Control

• Product liability loss control begins with

product design. The design should be
judged against the standards of the
Consumer Product Safety Commission.
• High standards of qualify control in the
production process are needed to guarantee
that finished products meet specifications.
• The design and production quality control
measures should be documented, for use as
evidence in the event of a claim.

23-52
 Product Liability Loss Control

• Packaging and labeling should be reviewed

by the firm’s legal counsel.
• Instructions for use of the product and
warnings about hazards or side effects are
attempts by a manufacturer to meet the
prudent man rule.
• Contracts with suppliers should be reviewed
and revised when necessary to make certain
that suppliers of components for the firm’s
product assume liability for failure of their
component-product.

23-53
 Product Liability Loss Control

• The final element in a product liability loss

control program is a contingency plan to be
activated in the event of a product crisis.
• The purpose of the contingency plan is to
allow the company to recall defective
products or locate consumers and repair
faults in the field.

23-54
 Contractual Liability

• The obvious control measure is to have all

contracts the firm enters into reviewed by
legal counsel.
• The bargaining power of the parties in the
contract may be such that the firm must
accept the contractual assumptions of
liability, but a review of contract terms will
allow an informed decision to be made.

23-55
 Environmental Liability

• For environmental claims arising out of the

discharge or release of pollutants at some
time in the distant past, the only risk control
measure is an effective defense.
• The prospects for success in controlling
future pollution-related losses, on the other
hand, is good for the organization that is
willing to address the hazard.

23-56
 Employment Related Practices

• Preventing employment-practice losses

requires a commitment from management in
the form of policies that address sexual
harassment, discrimination, and similar torts
and aggressive enforcement of the policy.
• This is an area in which professional legal
help is a requisite.
• Corporate policies should be reviewed by
attorneys who are knowledgeable in the area
of employment law.

23-57
 Post-Event Loss Control

In the post-loss phase of liability loss control,

the organization can attempt to reduce the
amount of loss in two ways.
• The first is to attempt to negotiate a
settlement with the claimant or the
claimant’s attorneys that is less than the
amount of the judgment that is likely to be
rendered.
• The second is an aggressive defense that
attempts to defeat the claim.

23-58
 Negotiation and Settlement

• In a negotiated settlement, the defendant

saves defense and other costs that would be
incurred in addition to the judgment.
• Even if a settlement is not reached,
negotiation may produce a limit on the
amount of loss.
Alternative dispute resolution
High/Low Agreements
Structured settlements

23-59
 Aggressive Defense

• The second post-loss control measure is to

resist the claims and attempt to build a
strong defense that may defeat the claim or
minimize the damages that are awarded.
• Some organizations believe that settling
claims leads to more claims and that an
aggressive defense will deter nuisance
claims.

23-60