Chapter 19 The Liability Risk Agenda • • • • • Basis of Legal Liability Law of Negligence Imputed Negligence Res Ipsa Loquitur Specific Applications of the Law of Negligence Current Tort Liability Problems Copyright â2014 Pearson Education, Inc All rights reserved 19-2 Basis of Legal Liability • 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 • Legal wrongs include: – Crime – Breach of contract – Tort Copyright ©2014 Pearson Education, Inc All rights reserved 19-3 Basis of Legal Liability • A tort is a legal wrong for which the court allows a remedy in the form of money damages • The person who is injured (plaintif) by the action of another (tortfeasor) can sue for damages • Torts fall into three categories: – Intentional, e.g., fraud, assault – Strict liability means that liability is imposed regardless of negligence or fault – Negligence Copyright ©2014 Pearson Education, Inc All rights reserved 19-4 Law of Negligence • 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 of a reasonably prudent person Copyright ©2014 Pearson Education, Inc All rights reserved 19-5 Law of Negligence • Elements Negligence – Existence of a legal duty to use reasonable care – Failure to perform that duty – 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 Copyright ©2014 Pearson Education, Inc All rights reserved 19-6 Law of Negligence • Compensatory damages compensate the victim for losses actually incurred – Special damages provide compensation for medical expenses – General damages provide compensation for pain and sufering • Punitive damages are designed to punish people and organizations so that others are deterred from committing the same wrongful act Copyright ©2014 Pearson Education, Inc All rights reserved 19-7 Exhibit 19.1 Types of Damages Copyright ©2014 Pearson Education, Inc All rights reserved 19-8 Law of Negligence • The ability to collect damages for negligence 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 Copyright ©2014 Pearson Education, Inc All rights reserved 19-9 Law of Negligence • Under a comparative negligence law, 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 percent rule, you cannot recover if you are 50 percent or more at fault – Under the 51 percent rule, you cannot recover if you are 51 percent or more at fault Copyright ©2014 Pearson Education, Inc All rights reserved 19-10 Specific Applications of the Law of Negligence • Most states have laws that hold parents liable for willful and malicious acts of children that result in property damage to others • Owners of wild animals are held strictly liable for injuries to others • Strict liability may also be imposed on the owners of ordinary pets, such as dogs Copyright ©2014 Pearson Education, Inc All rights reserved 19-20 Current Tort Liability Problems • 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 Copyright ©2014 Pearson Education, Inc All rights reserved 19-21 Current Tort Liability Problems • 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 settling lawsuits Copyright ©2014 Pearson Education, Inc All rights reserved 19-22 Rising Tort Liability Costs • Several factors help explain the substantial increase in tort costs over time, including: – 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 high-verdict cases by the media Copyright ©2014 Pearson Education, Inc All rights reserved 19-23 Rising Tort Liability Costs • Experts believe litigation will increase because of the following: – 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 same-sex couples alleging discrimination Copyright ©2014 Pearson Education, Inc All rights reserved 19-24 Rising Tort Liability Costs – High unemployment that occurred during and after the financial crisis – Investment schemes that defrauded investors of billions of dollars – Claims arising from toxic side-efects of nanotechnology – Unprecedented intervention by the federal government into the economy Copyright ©2014 Pearson Education, Inc All rights reserved 19-25 Exhibit 19.2 Tort Costs Relative to GDP ($billions) Copyright ©2014 Pearson Education, Inc All rights reserved 19-26 Exhibit 19.3 Median1 and Average Personal Injury Jury Awards, 2000 and 2009 Copyright ©2014 Pearson Education, Inc All rights reserved 19-27 Current Tort Liability Problems • Critics argue that the present system is inefficient because injured victims receive less than half of each tort dollar paid • There is considerable uncertainty in predicting legal outcomes • Jury awards for certain types of lawsuits continue to increase • There are long delays in settling lawsuits Copyright ©2014 Pearson Education, Inc All rights reserved 19-28 Tort Reform in the States • State tort reforms include: – Capping noneconomic damages, such as pain and sufering – Reinstating the state-of-the-art 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 Copyright ©2014 Pearson Education, Inc All rights reserved 19-29 Medical Malpractice • 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 • Many malpractice suits are due to medical errors by health care providers, especially errors in hospitals that result in the death of patients Copyright ©2014 Pearson Education, Inc All rights reserved 19-30 Medical Malpractice • 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 Copyright ©2014 Pearson Education, Inc All rights reserved 19-31 Reducing Medical Malpractice Costs • Methods to reduce medical malpractice costs include: – Not charging for “never events” – Laws allowing physicians to apologize without allowing the admission to be used against them – Prompt disclosure of medical errors – Remedial action against problem physicians – Emphasis on risk management principles Copyright ©2014 Pearson Education, Inc All rights reserved 19-32 Corporate Fraud and Lax Corporate Governance • In the 1990s, many large corporations used dishonest or aggressive accounting practices to inflate stated earnings and profits, or to conceal or misstate certain transactions • The Securities and Exchange Commission has indicted numerous company officials for securities fraud, illegal accounting practices, destruction of company records, and obstruction of justice • During the economic downturn between 2008 and 2011, many large corporations lost billions of dollars because of improper financial risk management Copyright ©2014 Pearson Education, Inc All rights reserved 19-33 Corporate Fraud and Lax Corporate Governance • The Sarbanes-Oxley 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 • The Dodd-Frank 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 Copyright ©2014 Pearson Education, Inc All rights reserved 19-34 ... regardless of negligence or fault – Negligence Copyright ©2014 Pearson Education, Inc All rights reserved 19- 4 Law of Negligence • Negligence is the failure to exercise the standard of care required by. .. rights reserved 19- 15 Specific Applications of the Law of Negligence • An attractive nuisance is a hazardous condition that can attract and injure children – The occupants of land are liable for... reserved 19- 16 Specific Applications of the Law of Negligence • Owners and operators of automobiles who drive in a careless manner can be held liable for property damage or bodily injury sustained by