Topic 3.Topic 3.Loss ExposuresLoss Exposures

BUS 200 BUS 200 Introduction to Risk Management and Introduction to Risk Management and

InsuranceInsurance

Jin ParkJin Park

OverviewOverview• Loss Exposure• Human Resources Loss Exposures• Property Loss Exposures• Net Income (Business Income) Loss

Exposures• Liability Loss Exposures

Loss ExposuresLoss Exposures• A possible event that could result in

a financial loss– An item subject to loss– A cause of loss– Financial consequences of loss

Human Resources Human Resources Loss ExposuresLoss Exposures

• Premature death• Sickness• Disability• Unemployment• Outliving retirement resources

Human Resources Human Resources Loss ExposuresLoss Exposures

• In a firm– A loss of a key employee may result in

• Decrease in revenue and increase in expenses

– Lower sales– Loss of customer relation (or major clients)– Overall loss of productivity– Disruption of management– Additional cost to find and train a replacement– Reestablishment of customer relation

Property Loss ExposuresProperty Loss Exposures• Types of Property

– Real and personal property – Owned and non-owned property– Intangible property

• Intellectual property• Accounts receivable • Leasehold interest (or a legal right to use)

Property Loss ExposuresProperty Loss Exposures• Why are we exposed to property

losses?1. Ownership

• Most common type of interest • Present ownership • Future ownership interest• Secured creditors – banks• Lessor or landlord

Property Loss ExposuresProperty Loss Exposures2. Tenant interest

• Right to use the property (or use interest)• May also have a leasehold interest

– Leasehold interest - an exclusive right to occupy (use) real property of the owner for a specified time » cf. Life estate

– Leasehold Interest Example » Assume that you lease a unit in a shopping mall,

which burns down and you have to relocate your business. If your old rent is $1,000/mo and new rent with similar condition requires $1,500/mo at fair market value (FMV), then your leasehold interest is 1,500 – 1,000 = 500/mo.

» If FMV < Old rent, then the owner has a leasehold interest

» If FMV = Old rent, then there is no leasehold interest

Property Loss ExposuresProperty Loss Exposures3. Transactions

• Who suffers losses to goods in transit between buyers and sellers?

• FOB point– FOB Origin versus FOB Destination– It indicates the point where financial

responsibility shifts from seller to buyer.

Property Loss ExposuresProperty Loss Exposures4. Bailee interest

• A bailee is an entity who is entrusted personal property of others under a contract of bailment. – 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?

Business Income Business Income Loss ExposuresLoss Exposures

• Only one item is subject to loss– Net income – simply revenues minus expenses

• Indirect losses– Business interruption– Result from direct damage to owned property– Result from little or no direct damage to owned

property• A small fire at Phillips Semiconductors in NM and

Erickson in Sweden• System failure at a corporation

Liability Loss ExposuresLiability Loss Exposures• Basis of Liability

– Statutory law– Common law– Stare decisis – Criminal and Civil law– Contractual liability

Liability Loss ExposuresLiability Loss Exposures• Legal Liability

– the responsibility, based in law, to remedy some (legal) wrong done to another person or organization.

– Legal wrong• Crime• Breach of contract• Tort

– Remedies for damages and injuries• Special or economic damages• General or non-economic damages• Punitive damages

Liability Loss ExposuresLiability 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 ExposuresLiability Loss Exposures2. Strict (absolute) Tort

• Persons may be 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 ExposuresLiability Loss Exposures3. Unintentional tort - 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

Liability Loss ExposuresLiability Loss Exposures• Defense against negligence

– Assumption of risk– Contributory negligence– Comparative negligence

• Partial comparative negligence• Complete comparative negligence

– Last clear chance– Sovereign, familial, and charitable

immunity

Liability Loss ExposuresLiability Loss Exposures• Imputed negligence (or Vicarious

liability)• Employee-employer• 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 ExposuresLiability 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 & The Cost of Worms & VirusesViruses

Source: USA TODAY, September 3, 2003

$10bn

$9bn

$80m

$1bn

$590m to $2bn

$2.6bn

Melissa virus(1999)

Slammer worm(2003)

Nimda virus(2001)

Code Red I and IIworms (2001)

Klez worm (2002)

Love Bug virus(2000)

Cyber-Risk Gaps in Insurance Cyber-Risk Gaps in Insurance CoverageCoverage

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

33%

34%

22%

7%

0 5 10 15 20 25 30 35 40

Risks covered bygeneral policies

Do not haveinsurance

Do not know theanswer

Insured by aspecific policy