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Topic 3. Loss Exposures

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Topic 3. Loss Exposures BUS 200 Introduction to Risk Management and Insurance Jin Park Overview Values exposed to loss Property Business Income (net income) Key ... – PowerPoint PPT presentation

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Title: Topic 3. Loss Exposures


1
Topic 3.Loss Exposures
  • BUS 200
  • Introduction to Risk Management and Insurance
  • Jin Park

2
Overview
  • Values exposed to loss
  • Property
  • Business Income (net income)
  • Key Personnel
  • Liability

3
(No Transcript)
4
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)

5
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

6
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

7
Property Loss Exposures
  • Tenant interest (Use interest)
  • May be responsible for returning the property
    without damage to the rented property.
  • May also have a leasehold interest
  • Leasehold interest - an exclusive right to occupy
    (use) cf. Life estate

8
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 gt Rent, then the tenant has a leasehold
    interest
  • If FMV Rent, then there is no leasehold interest

9
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.

10
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? Whos suffering the losses?
  • Interest of the bailee is usually limited to the
    cost of replacing the property at question.

11
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

12
Personnel Loss Exposures
  • Who is a key employee.
  • Key decision maker
  • Possesses specialized skill and/or knowledge
  • Who cant 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

13
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

14
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 employees life.
  • Kidnap and ransom insurance

15
Internship opportunity
  • Country Insurance Financial Services
  • Internship positions in the Underwriting Dept.
  • Bloomington-Normal
  • Begins September 30
  • 25 hours during school year
  • Full-time during summer 2004

16
Liability Loss Exposures
  • Legal liability is the responsibility, based in
    law, to remedy some (legal) wrong done to another
    person or organization.
  • Legal wrong
  • a violation of a persons legal rights
  • a failure to perform a legal duty owed to a
    certain person or to society as a whole

17
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.

18
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)

19
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)
  • Employers liability
  • Product liability
  • Owning wild or dangerous animals

20
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

21
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

22
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 injury
  • 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

23
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

24
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

25
CYBER RISK
26
The Cost of Worms Viruses
Source USA TODAY, September 3, 2003
27
Cyber-Risk Gaps in Insurance Coverage
Source Ernst Young 2003 Global Information
Security Survey of 1,400 organizations from 66
countries
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