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Chapter 19

The Liability Risk

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Agenda
• Basis of legal liability
• Law of Negligence
• Current tort liability problems

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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

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fraud. e.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 (plaintiff) by the action of another (tortfeasor) can sue for damages • Torts fall into three categories: – Intentional.. 19-4 . assault – Strict liability: liability is imposed regardless of negligence or fault – Negligence Copyright © 2008 Pearson Addison-Wesley. All rights reserved.g.

19-5 . All rights reserved. It is based on the care required of a reasonably prudent person Copyright © 2008 Pearson Addison-Wesley.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.

All rights reserved. 19-6 .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 – Proximate cause relationship between the negligent act and the infliction of damages • A proximate cause relationship requires an unbroken chain of events Copyright © 2008 Pearson Addison-Wesley.

g. e. medical expenses • General damages.g.Law of Negligence • The law allows for the following types of damages: – Compensatory damages compensate the victim for losses actually incurred. 19-7 ... e. pain and suffering – Punitive damages are designed to punish people and organizations so that others are deterred from committing the same wrongful act Copyright © 2008 Pearson Addison-Wesley. They include: • Special damages. All rights reserved.

19-8 . 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. All rights reserved.Law of Negligence • The ability to collect damages for negligence depends on state law • Under a contributory negligence law. the injured cannot collect damages if his or her conduct contributed in any way to the injury Copyright © 2008 Pearson Addison-Wesley.

but your reward is reduced in proportion to your fault – Under the 49 percent rule. the financial burden of the injury is shared by both parties according to their respective degrees of fault – Under the pure rule. All rights reserved.Law of Negligence • Under a comparative negligence law. you can recover reduced damages only if your negligence is not greater than the negligence of the other party Copyright © 2008 Pearson Addison-Wesley. 19-9 . you can collect damages even if you are negligent. you can collect damages only if your negligence is less than the negligence of the other party – Under the 50 percent rule.

19-10 . All rights reserved. a person who understands and recognizes the danger inherent in a particular activity cannot recover damages in the event of an injury Copyright © 2008 Pearson Addison-Wesley.Law of Negligence • Some legal defenses can defeat a claim for damages: – The last clear chance rule states that a plaintiff who is endangered by his or her own negligence can still recover damages from the defendant if the defendant has a last clear chance to avoid the accident but fails to do so – Under the assumption of risk doctrine.

a motorist’s negligence is imputed to the vehicle’s owner • Under the family purpose doctrine.g. the negligence of one person can be attributed to another – e.Imputed Negligence • Under certain conditions. 19-11 . All rights reserved. a business that sells liquor can be held liable for damages that may result from the sale of liquor Copyright © 2008 Pearson Addison-Wesley.. the owner of an auto can be held liable for negligent acts committed by family members • Under a dram shop law. the negligent act of an employee can be imputed to the employer • Under a vicarious liability law.

19-12 .Res Ipsa Loquitur • Under this doctrine. the very fact that the injury or damage occurs establishes a presumption of negligence on behalf of the defendant – Means.. a dentist extracts the wrong tooth • Three requirements must be met for res ipsa loquitur to apply: – The event is one that normally does not occur in the absence of negligence – The defendant has exclusive control over the instrumentality causing the accident – The injured party has not contributed to the accident in any way Copyright © 2008 Pearson Addison-Wesley. “the thing speaks for itself” – e.g. All rights reserved.

19-13 . a door-to-door salesperson • The property owner must warn the licensee of unsafe conditions or activities which are apparent – An invitee is a person who is invited onto the premises for the benefit of the occupant • The occupant has an obligation to inspect the premises and eliminate any dangerous conditions Copyright © 2008 Pearson Addison-Wesley.. All rights reserved.Applications of Negligence Law • The standard of care owed to others depends upon the situation – A trespasser is a person who enters or remains on the owner’s property without the owner’s consent • The duty to refrain from injuring a trespasser is sometimes referred to as the duty of slight care – A licensee is a person who enters the premises with the occupant’s expressed or implied permission • E.g.

.g. feature or article – e. All rights reserved. 19-14 .Applications of Negligence Law • An attractive nuisance is a hazardous condition that can attract and injure children – The occupants of land are liable for the injuries of children who may be attracted by some dangerous condition. and a child is injured while driving it Copyright © 2008 Pearson Addison-Wesley. a building contractor leaves the keys in a tractor.

e.Applications of Negligence Law • Today. has been eroded • Charitable institutions are no longer immune from lawsuits. All rights reserved. the operation of water plants – Immunity from lawsuits for governmental functions. especially with respect to commercial activities Copyright © 2008 Pearson Addison-Wesley.g. such as the planning of a sewer system. 19-15 . governmental entities can be sued in almost every aspect of governmental activity – The doctrine of sovereign immunity has been modified over time – A governmental unit can be held liable if it is negligent in the performance of a proprietary function..

All rights reserved. an employer can be held liable for the negligent acts of employees while they are acting on the employer’s behalf – The worker must be an employee – The employee must be acting within the scope of employment when the negligent act occurred • A parent can be held liable if a child uses a dangerous weapon to injure someone • 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 Copyright © 2008 Pearson Addison-Wesley.Applications of Negligence Law • Under the doctrine of respondeat superior. 19-16 .

risk managers. 19-17 . physicians and liability insurers have been troubled by: – A defective tort liability system – A medical malpractice crisis – Corporate fraud and lax corporate governance – An increase in asbestos law suits Copyright © 2008 Pearson Addison-Wesley. business firms.Current Tort Liability Problems • Recently. All rights reserved.

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 © 2008 Pearson Addison-Wesley. All rights reserved. 19-18 .

1 Tort Costs in the United States. All rights reserved.Exhibit 19. 19-19 . 1990–2004 ($ billions) Copyright © 2008 Pearson Addison-Wesley.

19-20 .Exhibit 19. GDP Since 1950 (ratio to 1950 levels) Copyright © 2008 Pearson Addison-Wesley. All rights reserved.2 Growth in Tort Costs vs.

All rights reserved. 19-21 .Exhibit 19. 2002a Copyright © 2008 Pearson Addison-Wesley.3 Where the Tort Dollar Goes.

All rights reserved. 19-22 .4 Median and Average Jury Awards. 1997 and 2003 ($000) Copyright © 2008 Pearson Addison-Wesley.Exhibit 19.

All rights reserved.S.5 U.Exhibit 19. Average Liability Limits Relative to Loss Experience. 2001–2005 Copyright © 2008 Pearson Addison-Wesley. 19-23 .

Federal Tort Reform • Reform measures that have passed or have been proposed at the federal level include: – The Class Action Fairness Act. 19-24 .a. 2005 • Moves class action suits of more than $5 million from the state to federal courts – Protection of Lawful Commerce in Arms Act • Protects gun manufacturers and sellers of guns from lawsuits based on the criminal use of their products – Personal Responsibility in Food Consumption Act (a. the cheeseburger bill) • Protects food companies and fast food restaurants from lawsuits by overweight customers – Lawsuit Abuse Reduction Act • Imposes sanctions on attorneys who file frivolous lawsuits Copyright © 2008 Pearson Addison-Wesley.k. All rights reserved.

such as pain and suffering – Reinstating the state-of-the-art defense for product liability cases – Restricting punitive damages awards – Modifying the collateral source rule • Under the collateral source rule.Tort Reform in the States • State tort reforms include: – Capping noneconomic damages. 19-25 . All rights reserved. the defendant cannot introduce any evidence that shows the injured party has received compensation from other collateral sources Copyright © 2008 Pearson Addison-Wesley.

but a defendant who is only slightly responsible may be required to pay the full amount of damages – Alternative dispute resolution (ADR).Tort Reform in the States – Modifying the joint and several liability rule • Under this rule. a technique for resolving a legal dispute without litigation • In arbitration. several people may be responsible for the injury. All rights reserved. a neutral third party tries to arrange a settlement without resorting to litigation – Restrictions on obesity lawsuits Copyright © 2008 Pearson Addison-Wesley. 19-26 . the parties to a dispute agree to be bound by the decision of an independent third party • In mediation.

19-27 .Medical Malpractice Crisis • 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 • Indicators of the crisis include: – Malpractice insurance premiums have soared – Many physicians have abandoned high-risk areas. All rights reserved. some have withdrawn from the market – Some physicians have formed physician-owned insurance companies Copyright © 2008 Pearson Addison-Wesley. such as neurosurgery – Malpractice insurers have incurred heavy underwriting losses.

All rights reserved.2 in 2004. indicating an underwriting loss – The combined ratio is the percentage of each premium dollar an insurer spends on claims and expenses – People are more litigious than in the past Copyright © 2008 Pearson Addison-Wesley. including: – Many malpractice suits are due to medical errors by health care providers. especially errors in hospitals that result in the death of patients – Insurers have experienced significant underwriting losses • The medical malpractice combined ratio was 109. 19-28 .Medical Malpractice Crisis • The crisis is due to many factors.

Medical Malpractice Crisis • Measures taken to help solve the crisis include: – Caps on noneconomic damages – Arbitration panels to resolve disputes between physicians and patients – Limitations on attorney fees – Shorter period for filing suits – More effective medical review boards – Training programs to reduce medical errors – Emphasis on risk management. 19-29 . through practice standards Copyright © 2008 Pearson Addison-Wesley.. e.g. All rights reserved.

among other things • These activities have had an impact on directors and officers liability insurance (D&O) Copyright © 2008 Pearson Addison-Wesley.Corporate Fraud and Lax Corporate Governance • Recently. destruction of company records. many large corporations have 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. and obstruction of justice • 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. illegal accounting practices. 19-30 . All rights reserved.

19-31 . All rights reserved.000 people have filed claims for asbestos-related personal injuries since 1966 – Exposure to asbestos can cause lung cancer or other respiratory diseases – Diseases have a long latency period – The insured losses are expected to reach $200 billion – Congress is considering legislation to establish a national trust fund to pay claimants over several decades. and to require evidence of an asbestos-related disease before a claim can be filed Copyright © 2008 Pearson Addison-Wesley.Increase in Asbestos Lawsuits • More than 600.