Risk Managment Topic 2

Name the 4 TRM loss exposures

Property, Net Income, Personnel, Liability.

What is a Property Loss Exposure?

Ownership of a financial or physical asset, where theft or damage is a loss exposure.

Name the 2 types of direct losses from property.

Cost of replacing the asset; cost of repair.

What is a "legal interest" in property?

A financial interest or stake in the property, so a loss to the property is also a loss to you.

Name the 5 situations giving rise to interest in property.

Ownership interest, Secured creditors, Buyers and sellers interest, Bailee interest, Tenant interest.

What are the 2 types of Ownership interest?

Present and future.

When do you have a "future" ownership interest?

When you have a car loan or mortgage.

Who is a Secured Creditor?

The bank or lender when you take a loan for a house or car.

Why is the borrower's ownership interest "future" when a secured creditor is involved?

Because the creditor actually holds title (they own it) until the loan is paid off.

What's an example of Buyers and Sellers interest?

Shipping products.

What is a Bailee?

An entity that receives property from another for a business purpose.

What is a Bailor?

The owner of the property.

What is the Bailee's interest?

A legal liability to return, or the cost to replace, the property if something happens before returning it to the bailor.

Tenant interest ("continued use interest") applies to what 3 things?

A specified period of time, purpose, and rental rate.

What is a tenant responsible for?

Returning the property in reasonable condition.

When does a Leasehold interest exist for a tenant?

When the fair market value (FMV) of rent is greater than the rent being paid.

In the leasehold example, what was the lease term and rent?

A 10-year lease at $1,000/month.

In the leasehold example, what did the tenant lose when fire destroyed the building?

Their leasehold interest.

What is Net Income Loss Exposure also known as?

Business interruption.

What is the Net Income formula?

Revenue - Expenses

What happens after a firm suffers a primary loss?

It suffers a secondary loss, resulting in indirect expenses.

Name the 2 types of indirect losses.

Extra expenses; loss of income.

What 2 things happen when a firm's productive process is interrupted?

A decrease in revenue and an increase in expenses.

What happens when a delivery truck is stolen (example)?

Renting another truck increases expenses; unfilled orders decrease revenue.

What happens when a key supplier has a property loss (example)?

The firm can't produce goods, causing a decrease in revenue.

What else can cause a decrease in revenue?

A power or telephone outage.

What is a Personnel Loss Exposure?

Risk that the organization suffers losses due to a key employee's illness, death, disability, retirement, or resignation.

What is this same risk called for the employee themselves?

Human capital risk.

What 2 things might the firm suffer from losing a key employee?

Revenue decrease; expense increase (cost of replacing the person).

What's the key theme of Personnel Loss?

A personal issue for the employee becomes a business issue for the employer.

What are "wealth losses" from liability exposure?

Money loss from being sued, plus legal fees.

Name the 2 classifications of behavior that can lead to a lawsuit

Intentional (assault, libel, slander) and unintentional (negligence or carelessness).

When is Legal Liability (L.L.) established?

When there was negligence AND actual damage or loss.

What is negligence?

Failure of a person to exercise the proper degree of care.

Who has the burden of proof in a negligence case?

The injured party.

What is Absolute/Strict Liability?

L.L. established because accidents happen, imposed regardless of fault.

Give examples where strict liability applies.

Situations involving children; workers' compensation.

What's usually the easy part of measuring a loss?

Establishing that injury or damage occurred.

What's usually the hard part of measuring a loss?

Establishing the amount of damage.

Are Property losses (PD) easy or hard to calculate?

Relatively simple.

What are "Special damages" in a Bodily Injury claim?

Compensation for measurable losses (medical expenses, loss of income); moderately difficult to calculate.

What are "General damages"?

Compensation for intangible losses (pain and suffering, mental anguish); very difficult to estimate.

What are "Punitive damages"?

Amounts assessed as punishment, when gross negligence is involved; very difficult to estimate.

What is the Assumption of Risk defense?

The injured party recognized the danger and voluntarily chose to encounter it.

Give examples of Assumption of Risk.

Attending a hockey game; going skydiving.

What is Comparative/Contributory Negligence?

The plaintiff was partially to blame for what happened.

What does "Res Ipsa Loquitur" mean? "

"The thing speaks for itself."

What is Res Ipsa Loquitur a modification of?

The law of negligence.

What does Res Ipsa Loquitur create?

A presumption of negligence on the defendant.

Name the 3 requirements for Res Ipsa Loquitur.

The event normally wouldn't happen without negligence; the defendant exclusively controls the equipment; the injured party didn't contribute to the loss.

What's the classic example of Res Ipsa Loquitur?

A dentist removes the wrong tooth.

What is Vicarious Liability?

One person becomes legally liable for another's negligent behavior.

Give an example of Vicarious Liability.

Employers held responsible for employees' actions within their job scope.

What is Joint and Several Liability?

When negligence of 2 or more parties contributes to the injury or damage.

Under Joint and Several Liability, who can the injured party recover from?

Any negligent party able to pay, regardless of their degree of fault.

What's the nickname for Joint and Several Liability?

“Search for deep pockets."

Who can be held liable under Product Liability?

Manufacturers of a faulty product that injures someone or damages property.

Name the 2 ways negligence occurs in product liability.

The product is negligently made or improperly designed; proper warning isn't given to the consumer.

Name the 3 types of Product Liability losses.

Cost of defending and paying claims; cost of recalling defective batches; damage to your name.

What is Premises Liability?

An owner or tenant may be held liable for injuries, or damage to others' property, from a condition on the premises.

Who is a Trespasser?

Someone who comes without right or consent.

What's the owner's obligation to a Trespasser?

Only to abstain from intentional harm.

Who is a Licensee?

Someone who comes onto the property with the owner's knowledge, with no purpose or benefit to the owner.

What's the owner's obligation to a Licensee?

Must warn of hidden dangers.

Who is a Social Guest/Invitee?

Someone invited for some purpose (ex: a customer in a store).

What's the owner's obligation to a Social Guest/Invitee?

Must keep the premises safe.

What is Liquor Liability?

Liability for businesses that manufacture, sell, or serve alcohol, for injuries to patrons/guests.

What are Dram Shop Laws

Laws that can hold businesses liable if they over-serve someone who then leaves and injures another person.

How many states have Dram Shop laws?

30 states.

What do the other states have instead?

Social host liability (typically only for serving someone underage).

What kind of liability applies to exotic animals?

Strict liability. (animals)

What's the rule for dog liability in some states?

Strict Liability

What's the "one bite" nuance for dogs in some states?

If the dog never bit before, the owner could escape liability the first time.

What approach does TRM use?

A silo approach

What kind of risks does TRM mostly focus on?

Pure, insurable risks.

Under the silo approach, who manages Property/Liability pure risk (hazard risks)?

The Risk Manager.

Under the silo approach, who manages Personnel Risk?

Human Resources.

Under the silo approach, who manages Financial Risk?

The CFO.

Under the silo approach, who manages Strategic Risk?

The CEO/Board of Directors.

What's the guiding philosophy of ERM?

Manage risk and seize opportunity.

What kind of approach is ERM?

Risk-based, very strategic and scientific.

What does ERM evaluate?

Risk throughout the organization and its impact on the whole firm.

How many quadrants of risk does ERM use?

4

Name examples of Quadrant 1, Hazard Risks

Fire/floods (property), key employee issues (personnel), lawsuits (liability), net income losses.

What type of risk is Quadrant 1 typically?

Pure risk.

What framework is Quadrant 1 essentially the same as?

Traditional Risk Management.

Name examples of Quadrant 2, Financial Risks.

Inflation, foreign currency rate, stock market, interest rates, liquidity, credit, debt rating.

What type of risk is Quadrant 2 mostly?

Speculative risk (no net income losses)

Who's affected by rising mortgage interest rates, per the notes' example?

Builders, banks, credit card companies, realtors, and money managers.

What are Operational Risks (Quadrant 3)?

Risks that arise out of business operations.

What mix of risk types is Quadrant 3?

A combo of pure and speculative risks.

Name Quadrant 3 examples under "Manufacturing Products.”

Supply chain issues, service provider failures, product recalls.

What's the notes' product recall example?

The chip shortage for cars post-COVID.

What's the notes' Regulatory Issue example?

The Commerce Bank example.

Name Quadrant 3 examples under "Employment Practices."

Discrimination, workplace violence/sexual harassment.

What framework is used for Quadrant 4?

SWOT.

Name examples of Quadrant 4, Strategic/Business Risk.

Customer service issues, PR/reputation risk, competition/bad business decisions, business trends.

What "business trends" example does the notes give?

Alcohol, marijuana, and gambling.

Name other Quadrant 4 examples

Intellectual property, ethics, union issues.

What type of risk is Quadrant 4 typically?

Speculative risk.