Traditional Risk Management (TRM) & Enterprise Risk Management (ERM)

Vocabulary flashcards covering core concepts of Traditional Risk Management (TRM) and Enterprise Risk Management (ERM), including loss exposures, liability, damages, legal defenses, and risk identification methods.

Four Major Loss Exposures in TRM

Property loss exposure, net income loss exposure, personnel loss exposure, and liability loss exposure.

Property Loss Exposure

The possibility of financial loss because physical or financial assets are stolen, damaged, or destroyed.

Direct Property Losses

Financial losses directly involving property repair or replacement, such as the cost of replacing an asset and the cost of repairing an asset.

Legal Interest in Property

A financial interest or stake in property that causes an entity or individual to suffer financially if the property is damaged or destroyed.

Ownership Interest

A legal interest in property based on present or future ownership.

Secured Creditor's Interest

A financial interest that a bank or lender has in property used as security for a loan, such as a house or car.

Bailee

A person or business that temporarily receives property belonging to someone else for a business purpose.

Bailor

The owner of property that is temporarily possessed by a bailee.

Tenant Interest

A tenant's interest in continuing to use rented property for an agreed period, purpose, and rental rate.

Leasehold Interest

The financial advantage a tenant has when the rent specified in a lease is lower than the current fair-market rent.

Net Income Loss Exposure

Also called business interruption exposure, it is the possibility of losses that decrease revenue, increase expenses, or both.

Net Income Formula

$$\text{Net Income} = \text{Revenue} - \text{Expenses}$$

Personnel Loss Exposure

The possibility that an organization suffers financially because an employee experiences a loss such as illness, death, or disability.

Human Capital Risk

Risk associated with losing the value or services provided by employees.

Negligence

Failure to exercise the proper degree of care that a reasonable person should exercise.

Absolute or Strict Liability

Legal liability imposed even when the defendant did not act negligently or was not at fault.

Vicarious Liability

Liability imposed when one person or organization is legally responsible for the actions of another, such as an employer for an employee's actions within the scope of employment.

Joint and Several Liability

A liability concept where, if two or more negligent parties contributed to a loss, an injured person may recover the entire amount from one party able to pay.

Search for Deep Pockets

Seeking compensation from the liable party that has the greatest ability to pay.

Product Liability

The legal responsibility of manufacturers or sellers when a defective product injures someone or damages property.

Premises Liability

Liability of a property owner or tenant when someone is injured or property is damaged because of a dangerous condition on the premises.

Trespasser

Someone who enters property without permission or legal right.

Licensee

Someone allowed onto property with the owner's permission, often for a social or personal purpose.

Invitee

Someone invited onto property for a business purpose, such as a customer in a store.

Dram Shop Liability

Liability that may apply to businesses that sell or serve alcohol to someone who later causes injury.

Social Host Liability

Liability that may arise when a private person serves alcohol to another person, particularly emphasizing serving someone underage.

One-Bite Rule

A rule in some jurisdictions where an owner may avoid liability for a first dog bite if the owner had no reason to know the dog was dangerous.

Special Damages

Compensation in a bodily injury case for measurable losses, such as medical expenses and lost income.

General Damages

Compensation for intangible losses in a bodily injury case, such as pain and suffering and mental anguish.

Punitive Damages

Damages intended to punish particularly serious or wrongful conduct rather than simply compensate the injured person.

Assumption of Risk

A legal defense in which the injured person knew about a danger and voluntarily chose to encounter it.

Comparative or Contributory Negligence

A defense argument that the injured person was partly responsible for causing their own injury.

Res Ipsa Loquitur

A legal rule meaning 'the thing speaks for itself,' allowing negligence to be inferred from circumstances when an accident normally would not occur without negligence.

Silo Approach

The traditional risk management method where different types of risk are managed separately by individual departments.

Enterprise Risk Management (ERM)

An integrated, enterprise-wide approach to identifying and managing risks while also recognizing opportunities.

Hazard Risks

An ERM risk category that includes floods, lawsuits, key-employee losses, property losses, and net-income losses.

Financial Risks

An ERM risk category that includes inflation, foreign-currency changes, tariffs, stock-market changes, interest rates, liquidity, credit risk, and debt ratings.

Operational Risks

Risks arising from day-to-day business operations, including manufacturing, supply chain, service providers, product recalls, regulatory issues, and employment practices.

Strategic Risks

Risks related to major business decisions, competition, reputation, trends, and long-term company strategy.

Hold-Harmless Agreement

An agreement in which one party agrees to assume certain liabilities or protect another party from specified losses.

Financial Statement Approach

A method to identify loss exposures by reviewing balance sheets, income statements, and budgets to identify assets, liabilities, income sources, and potential financial losses.