Topic Loss Exposures by liaoqinmei


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

                  Jin Park
• Values exposed to loss
  –   Property
  –   Business Income (net income)
  –   Key Personnel
  –   Liability

                        Property                            Liability

                                                                             Ownership (Use)
   Real property                   Contract          Tort
                                                                               of Property

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
    –   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
• 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
• 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
   – 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
               The Cost of Worms &
  Love Bug virus                                       $10bn

Klez worm (2002)                                    $9bn

Code Red I and II                       $2.6bn
 worms (2001)
      Nimda virus                   $590m to $2bn
  Slammer worm               $1bn
    Melissa virus            $80m

 Source: USA TODAY, September 3, 2003
        Cyber-Risk Gaps in Insurance
       Insured by a
      specific policy

   Do not know the

        Do not have

  Risks covered by
  general policies

                        0       5      10       15      20      25    30   35    40

Source: Ernst & Young 2003 Global Information Security Survey
of 1,400 organizations from 66 countries

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