This chapter contains some of the most important topics of the exam. Here are the topics that you must know from this chapter.
Asset at risk of loss
This is often referred to as asset exposed to loss. An asset exposed to loss is any tangible or intangible item of value owned by an individual or organization that is subject to a loss.
Cause of loss (peril)
Cause of loss is any condition or situation that poses the threat of loss to an asset. This is commonly called a hazard. A hazard is any situation that increases the frequency or severity of a loss.
Civil law is the type of law applied when the rights of a party are breached. This is the type of law used when the legal matter is not considered criminal and does not fall under the criminal law jurisdiction. This law covers liability claims. This law protects the rights of U.S. citizens; it provides a solution when a breach of these rights occurs. This allows the damaged party to sue the liable party for breach of duties, often resulting in monetary compensation.
Components of negligence
Four components of negligence must be established in this order:
- Party owes a duty of care – All parties owe a legal duty of care to others, meaning they must act with reasonable care while performing any act to avoid harming others. For example, a taxi driver has the legal duty to drive carefully and not harm others on the road.
- Party breaches their duty of care – This is the second aspect of negligence. A breach of the duty of care is a party’s failure to act with reasonable care and avoid harming others. This means the party failed to act with the care of a reasonable person.
- Party’s negligent act causes damage – This is the third aspect of negligence. Proximate cause is an event that causes an outcome. If the event had not occurred, the outcome would have been different. For example, Joe leaves his basketball on the stairs. Max, Joe’s neighbor, steps on the ball and falls down the stairs, breaking his arm. The basketball is the proximate cause because if Joe had not left the ball on the stairs, Max would not have fallen down the stairs.
- The other party suffers actual damages – The fourth and final aspect of negligence states that the actual injury and damage caused must be the direct result of the negligent act of the defendant. If the defendant’s act did not actually harm the plaintiff, then the act is not legally considered negligent.
Cost of loss
Cost of loss is the financial consequence of incurring a loss. This is the monetary loss caused by a loss exposure. The extent of a financial consequence depends on the type of loss and the cause of the loss.
Damages are the amount of money paid by the liable party to the injured party to compensate the injured party for losses. There are three common types of damages:
- General damages – General damage is the amount of money awarded by the court to compensate the injured party for non-quantifiable losses. This is a loss that cannot be easily measured, such as pain and suffering.
- Punitive damages – Punitive damage is money awarded to the plaintiff that does not directly relate to the injury. This amount of money is intended to punish the defendant for acting negligently. The purpose is to punish the defendant and discourage others from acting in a similar manner.
- Special damages – Special damage is money awarded by the court to compensate the injured party for a specific quantifiable loss, paying the plaintiff a set amount of money. This is a specific cost such as the cost to repair a damaged home or the cost to reimburse the injured party for medical bills. This is paid when the amount owed to the plaintiff is easily quantifiable and results from the plaintiff’s injury.
Elements to loss exposures
There are three elements to loss exposures:
- Asset at risk of loss
- Cause of loss (peril)
- Cost of loss
An intentional tort is a purposeful act; this is the deliberate and planned action to commit a tort. The person committing the tort should have understood that their actions would harm another person. Types of intentional torts:
- Absolute liability – this is also called strict liability, this is liability imposed by law. This law states that the party performing a dangerous activity, one that is not a normal action, is automatically held liable for any damage caused regardless of any other determinants of fault. Even when no party is technically at fault, if the activity is considered strict liability, the party performing the dangerous act is automatically held liable for the damage.
- Assault – Assault is a threat to physically harm another person. Assault is only the threat of physical harm; it does not actually physically harm anyone. To be considered assault, the other party must fear and believe that they will be physically harmed. For instance, Marry waves a knife at Shannon shouting “I’m going to cut you!” is considered assault even though no harm was done.
- Battery – Battery is a deliberate physical act that physically harms another party. The act of battery must be purposeful and malicious. Accidental harm is not battery; accidentally tripping another person is not battery. For example, Nick punches Taylor in the face. Nick is liable for battery.
- Libel – Libel is a false written statement that damages a party’s reputation. Like slander, libel must be a statement made to a third party other than the plaintiff. If a statement is made directly to the plaintiff and only the plaintiff, it cannot damage their reputation. For example, Adam writes a newspaper article claiming that the governor is stealing money from the town government, causing the governor to lose votes in the upcoming election.
- Nuisance – A nuisance is an act that causes annoyance or inconvenience, which interferes with another party’s right to enjoy property. Such as storing rotten vegetables outside, knowing the smell will bother the neighbors and attracting insects.
- Slander – Slander is a false oral statement that damages a party’s reputation. There must be substantial proof that the oral statement damaged the plaintiff’s reputation and the slanderous statement must be made to a third person other than the plaintiff to constitute slander. For example, Bill lies and tells all of the parents that the principal of the high school is an alcoholic, causing the principal to be fired.
- Trespass – Trespass occurs when a person enters onto or interferes with another party’s real property without the owner’s consent. Entering onto another’s land, even if accidental, is considered trespassing. Interfering with real property, such as trimming the bushes on another person’s property, is considered trespassing. Interfering with another party’s personal property is also considered trespassing.
A loss exposure is anything that may cause a loss. This is an asset or condition exposed to a situation or occurrence that results in a financial loss to the primary party.
A negligent tort is a tort resulting from the act of negligence. Negligence is the failure to take proper care in doing something. This failure to take reasonable care results in damage or injury to another party. For an act to be considered negligent, the court must establish that the four components of negligence exist.
Pain and suffering
Pain and suffering is money awarded for physical and mental anguish caused by the injury. For example, Jim is injured and paralyzed. He would be awarded general damages to compensate his suffering
Personal property is a type of property asset. This is any tangible or intangible property that is not considered real property, such as a sofa, computer, patents, or items in a home. There are four categories of personal property:
Real property is anything tangible and attached to land. This includes plants, buildings, and structures.
Retention is the process of saving or setting aside funds to pay for a loss. This is needed if the loss is not fully covered by insurance. A deductible is a common retention technique. This is a predetermined amount of money that must be paid by the insured before the insurance policy pays the claim. Savings is another form of retention; this is money set aside that can be used to pay for a loss. This is the risk financing technique used if a risk is not transferred. If the risk is not transferred then the party must pay for the loss out of pocket using retention.
Risk control is used to reduce the frequency and severity of losses.
There are six risk-control techniques:
- Avoidance – the act of never taking an action. With avoidance, the individual is choosing to never partake in an activity, that way a loss can never happen. For example, one may choose to never use the stove to cook in the house so that there is no risk of starting a fire from using the stove.
- Diversification – the process of dividing up loss exposure and spreading the exposure over multiple projects or regions. For example, choosing to invest in five different stocks and five different bonds in five different industries to ensure that the investor will not be financially crippled if one company or one segment performs poorly.
- Duplication – the process of creating a duplicate or backup of information and personal property. Backing up data from a computer to a cloud server to save critical data in case the physical computer breaks down is one example.
- Loss prevention – any risk-control method that reduces the frequency of loss. For example, a deadbolt lock keeps burglars out of the home, reducing the frequency of theft.
- Loss reduction – any risk-control technique that reduces the severity of a loss. For example, fireproof shingles minimize the damage caused by a fire. A burglar alarm is an example of risk control that is both loss-preventing and loss-reducing because it deters a burglary from happening (loss-preventing) and reduces the loss that does occur as police will arrive at the scene (loss reducing).
- Separation – the act of splitting up and isolating one exposure from another. This helps to minimize the effect of a single loss. Separating a collection of high-value pieces of artwork so some are stored at home and some are stored at the bank is an example of separation.
Risk financing is the technique most individuals are familiar with. This technique generates the necessary sum of money to pay for losses. There are two forms of risk financing:
The risk-management process is the activities that make up an organization’s approach to managing risk. This differs from company to company. Each company has a unique process for managing risk. Each company’s risk management framework is unique, and changes based on the organization’s unique risks. This process is used by risk-management and insurance professionals to identify loss exposures.
The risk management process is made up of a few key steps and activities. The key risk management activities that make up the risk management process include:
- Step 1: Scan the Environment for Risks (scan, review, and analyze the risk environment)
- Step 2: Identify the Risks (identify any exposures or risks)
- Step 3: Analyze the Risks (analyze exposures and risks)
- Step 4: Treat the Risks (apply risk treatment)
- Step 5: Monitor the Risks
Transfer shifts the financial burden of a loss to another party. This moves the financial responsibility of paying for a loss from one party (the transferor) to another party (the transferee).