In this chapter, the learning objectives are: Meaning of risk management, objectives of risk management, steps in the risk management process, benefits of risk management, personal risk management.
Lecture No Introduction to Risk Management Copyright © 2011 Copyright Pearson © 2011Prentice Pearson Prentice Hall AllHall rights All rights reserved reserved 31 Objectives • • • • • Meaning of Risk Management Objectives of Risk Management Steps in the Risk Management Process Benefits of Risk Management Personal Risk Management Copyright © 2011 Pearson Prentice Hall All rights reserved 32 Personal Risk Management • • Personal risk management refers to the identification of pure risks faced by an individual or family, and to the selection of the most appropriate technique for treating such risks The same principles applied to corporate risk management apply to personal risk management Copyright © 2011 Pearson Prentice Hall All rights reserved 33 Property Loss Exposures • Real property – – • Land, all structures permanently attached to the land, and whatever is growing on the land Examplesincludebuildings,attachmentstobuildings, crops Personalproperty Allpropertyotherthanrealproperty ã Examplesincludecars,money,clothes,furniture,textbooks, airplanes,animals Copyright â 2011 Pearson Prentice Hall All rights reserved 34 Property Loss Exposures • Direct loss – • Indirect loss – • • Occurs when there is damage to property Occurs when a direct loss causes expenses to increase or revenues to decline Many insurance contracts insure both direct and indirect losses in the same contract When dealing with property insurance, there are usually only two parties to the contract – The insured and the insurer Copyright © 2011 Pearson Prentice Hall All rights reserved 35 Property Loss Exposures • Not all types of property are insurable – – • Coverage cannot be purchased for loss of goodwill or loss of a copyright Raw land is difficult to insure Sex and property loss exposures – – For insurance purposes, animals are considered property Firms must be able to manage loss to or from the animals and learn to manage the animals during the mating season Copyright © 2011 Pearson Prentice Hall All rights reserved 36 Liability Exposures • One of the most serious financial risks that risk managers must deal with – • Insurance for liability losses is more complex than property insurance – • Loss through legal liability for harm caused to others Because people other than the insured and the insurer are involved Liability is usually determined by proving negligence Copyright © 2011 Pearson Prentice Hall All rights reserved 37 Types of Liability Damages • Insurance contracts are designed to pay only for certain types of losses – Usually restricted to pay for • • • • Bodily injury Property damage Personal Injury Legal expenses Copyright © 2011 Pearson Prentice Hall All rights reserved 38 Types of Liability Damages • Bodily injury – Includes liability for losses a person may incur because his or her body or mind has been harmed • • Property damage – • Loss may be due to a loss from actual damage to the property, as well as loss of use of the property Personal injury – • Includes payments for medical bills, loss of income, rehabilitation costs, loss of services, pain and suffering damages, punitive damages Result from libel, slander, invasion of privacy, false arrest, etc. Legal expenses Copyright © 2011 Pearson Prentice Hall All rights reserved 39 Criminal and Civil Law • Criminal law – Directed toward wrongs against society • • Examples include murder, robbery, rape, assault with a deadly weapon Civil law Directedtowardwrongsagainstindividualsand organizations ã Examplesincludebreachofcontractandnegligentacts Copyright â 2011 Pearson Prentice Hall All rights reserved 310 10 Factors Leading to Higher Standards of Care • Increased damage awards – – The effect of inflation in reducing the purchasing power of the dollar has undoubtedly contributed to the increased amounts of damage awards Perhaps the existence of liability insurance has caused juries to be more generous • – Than they would be if they knew the plaintiff would pay the damages personally The insurance industry is supporting various types of tort reform, including • • • • • Imposing restrictions on the right to sue Abolishing punitive damages in civil suits Reducing the standard of care to the standard existing at the time the product was made instead of at the time the loss occurred Placing a ceiling on noneconomic damages Repealing the collateral source rule Copyright © 2011 Pearson Prentice Hall All rights reserved 318 18 Table 31: Liability Claims Copyright © 2011 Pearson Prentice Hall All rights reserved 319 19 Types of Liability Exposures • Contractual liability – One’s liability maybe imputed to another by contract • • For example, a city may require that its street paving contractor hold the city harmless for all negligence arising out of the operations of the contractor Employeremployee liability – Employers are still subject to the law of negligence with respect to employment not covered by workers’ compensation laws • Duties owed to employees – – – – – Must provide a safe place to work Must employ individuals reasonably competent to carry out their tasks Must warn of danger Must furnish appropriate and safe tools Must setup and enforce proper rules of conduct of employees as they relate to safe working procedures Copyright © 2011 Pearson Prentice Hall All rights reserved 320 20 Types of Liability Exposures • Property owner–tenant liability – The tenant or owner owes a certain degree of care to those who enter the premises • Invitees – • Licensees – • Those who are on the premises for legitimate purpose with the permission of the occupier » Include meter readers, milk delivery drivers, police officers Trespassers – • Individuals who are invited on the premises for their own benefit as well as for that of the landlord or tenant All those other then invitees and licensees who enter on the premises » No care is owed to a trespasser but an owner cannot set a trap for or deliberately injure a trespasser Current trend is to abolish the classifications and to hold the occupier of the land liable under most circumstances for failure to exercise due care Copyright © 2011 Pearson Prentice Hall All rights reserved 321 21 Types of Liability Exposures • Assumption of liability by attendant – When an individual leases a building, the question arises as to what extent the landlord is responsible for injuries to tenants • • Generally, the tenant takes on whatever duty the landlord owes to members of the public Attractive nuisance doctrine – Liability of the occupier of land may be changed so that a trespassing child is considered, in many jurisdictions, to be an invitee Copyright © 2011 Pearson Prentice Hall All rights reserved 322 22 Consumption or Use of Products • A manufacturer, wholesaler, or retailer is required to exercise reasonable care and to maintain certain standards in the handling and selection of the goods in which it deals – If injury to person or property results from the use of a faulty product there may be grounds for legal action Copyright © 2011 Pearson Prentice Hall All rights reserved 323 23 Consumption or Use of Products • Breach of warranty – – – A warranty maybe expressed or implied Breach of this written contract may give rise to a court action Under the Uniform Commercial Code the seller is held to have made certain unwritten or implied warranties • • • Seller warrants that the goods are reasonably fit for their intended purpose Seller warrants that that when the goods are bought by description instead of by actual inspection the goods are saleable in the hands of the buyer Stricttort Themanufacturerordistributorofadefectiveproductisliableto apersonwhoisinjuredbytheproduct ã Regardlessofwhetherthepersoninjuredisapurchaser,a consumer,orathirdpersonsuchasabystander Copyright â 2011 Pearson Prentice Hall All rights reserved 324 24 Consumption or Use of Products • Negligence – – If the defendant was negligent in the preparation or manufacture of the product Or failed to provide adequate instructions or warning • – A person injured may be entitled to sue for damages During the past several years the product liability area hasbeenveryexplosive ã Courtshavecontinuedtoexpandmanufacturersliability Copyright â 2011 Pearson Prentice Hall All rights reserved 325 25 Completed Operations of a Contractor • • The damage must occur after the contractor has completed the work The work has been accepted by the owner or abandoned by the contractor Copyright © 2011 Pearson Prentice Hall All rights reserved 326 26 Professional Acts • The seller of services is required to use reasonable care not to injure others in the performance of those services – • Examples include physicians , accountants, architects, insurance agents, lawyers, pharmacists, beauticians The standard of care required of professional people is broadly interpreted – – These individuals must possess the skill, judgment, and knowledge appropriate to their calling Must conduct themselves according to recognized professional standards • • Standards vary from profession to profession and are constantly changing as each particular field develops Use of res ipsa loquitur in medical malpractice cases appears to have had the effect of turning doctors into insurers – May result in doctors being unwilling to try new procedures and treatments for fear of financial bankruptcy if the treatments should fail Copyright © 2011 Pearson Prentice Hall All rights reserved 327 27 PrincipledAgent Liability • Under the doctrine of respondeat superior – A master is liable for the acts of servants if the service or agents are acting within the scope of their employment • An employee imposes liability on the employer for negligent harm to a third party – • Even if the employee is acting contrary to instructions as long as he or she is doing the job A distinction is made between acting as an agent or a servant and acting as an independent contractor – The employer is not held liable for the carelessness of an independent contractor to as great a degree as for the carelessness of an agent or a servant • However, exceptions to this exist Copyright © 2011 Pearson Prentice Hall All rights reserved 328 28 Ownership and Operation of Automobiles • • Under common law, an automobile owner or operator is required to exercise reasonable care in the handling of automobiles Important areas of negligence – – – Liability of the operator Liability of the owner for the negligence of others operating the car Liability of employers for the negligence of their servants or agents using automobiles in their employer’s business • Even when the employer is not the owner Copyright © 2011 Pearson Prentice Hall All rights reserved 329 29 Ownership and Operation of Automobiles • Liability of the operator – – • Typical damage suit in the field of automobile liability Impossible to lay down a comprehensive statement of what constitutes negligence in the operation of an automobile Liability of the ownernonoperator – The courts have generally agreed that the automobile is not a dangerous instrumentality in itself • – – One is justified in assuming that the borrower of an automobile is competent to handle it unless there is obvious evidence of incapacity or known recklessness However, in many states, vicarious liability laws have the effect of making the parent of a minor child liable for damage done by negligent operation of the car by a minor Familypurpose doctrine • An automobile is looked upon as an instrument to carry out the common purposes of the family – The owner ought to be responsible for its use when any family member uses it because this member is the agent of the family head and is carrying out a family function Copyright © 2011 Pearson Prentice Hall All rights reserved 330 30 Ownership and Operation of Automobiles • Liability of employers – Even those who do not own automobiles may be liable for damages through their negligent operation • If by some legal construction the nonowner can be shown to be responsible – The legal construction normally employed is respondeat superior Copyright © 2011 Pearson Prentice Hall All rights reserved 331 31 End of Lecture No Copyright © 2011 Copyright Pearson © 2011Prentice Pearson Prentice Hall AllHall rights All rights reserved reserved 332 ...Objectives • • • • • Meaning of? ?Risk? ?Management Objectives of? ?Risk? ?Management Steps in the? ?Risk? ?Management? ?Process Benefits of? ?Risk? ?Management Personal? ?Risk? ?Management Copyright © 2011 Pearson... All rights reserved 32 Personal? ?Risk? ?Management • • Personal? ?risk? ?management? ?refers? ?to? ?the identification of pure risks faced by an individual or family,? ?and? ?to? ?the selection of the most appropriate technique for treating such risks... Relate? ?to? ?the standard of care by an automobile driver? ?to? ?a passenger Copyright © 2011 Pearson Prentice Hall All rights reserved 314 14 Factors Leading? ?to? ?Higher Standards of Care • Expanding application of liability