Liability Risk Management Research Paper Starter

Liability Risk Management

(Research Starters)

Society must balance the interests of business and the injuries that flow from it. The law attempts to strike that balance by allowing the injured to recover and also by giving businesses an incentive to prevent injury. To minimize the risks of legal liability, a business or individual must first understand the nature and source of legal liability within their particular field of endeavor. With that knowledge, steps can be taken to eliminate known risks, reduce the affects of possible risks and prepare for the chance of unforeseeable or uncontrollable risks. This essay provides an overview of risk factors generally faced by business and methods to control them.

Keywords Commercial insurance; Contract liability; Insurance; Liability insurance; Liability Risk; Limited Liability Entity; Negligence; Tort Liability



Liability risk management is a concept with specific application to a variety of settings. For a general introduction, it is helpful to begin with clear definitions of the terms to frame the discussion. Liability is a legal obligation that is enforceable by a civil remedy or criminal punishment. A risk is the chance of injury, damage or loss (Garner, 1999). Management is the act of handling or controlling ( Generally, liability risk management is an activity that controls the chances of incurring legal obligations for injury, damage or loss. The range of risk any particular organization may face varies according to their industry and to their position within that industry. A business may incur liability to individuals within the organization. For example, Federal employment discrimination laws give employees the right to sue and recover from employers that violate those laws. Employers must also comply with certain standards that mandate safety and fairness in the workplace. Managers may attempt to minimize risk through accounting strategies and diversification to help absorb shocks caused by lawsuits (Gormley & Matsa, 2011). The most effective way to avoid such liabilities, however, is to prevent the happening of events that may cause claims or lawsuits. With positive control of their environment, businesses can eliminate or minimize their exposure to internally generated liabilities. Commanding positive control of the work environment entails training, education and other programs and systems designed to enable employees and management to act appropriately with respect to each other.

For this discussion, liability risks are unintended or unexpected legal obligations that an organization may incur to an individual or entity outside the organization that arise from conduct in which a business must engage. A business must carry on their business and those activities carry a degree of risk. Some activities may be safer than others, but the chance of injury does not disappear; things can go wrong in ways never imagined. To minimize such risks, an organization should understand how they may arise and then take active steps to eliminate the factors that may contribute to unexpected or unwanted legal obligations. Specific events that can cause liability are too numerous to list. However, as general matter, troublesome legal obligations, in the form of lawsuits, arise from the law of torts. A tort is a civil wrong for which a remedy may be obtained. Defamation and interference with business relations are examples of torts, but the centerpiece of the tort system is negligence. Negligence is cause of action whereby an injured person may recover from a responsible party if they can show that another party breached their duty of care and that the breach caused their injury. A standard of care is the minimum level of care (e.g. precaution, expertise) that a business must exercise in the course of their dealings to protect others from injury. If a business fails to meet that standard, the business is said to have breached their duty of care and the legal mechanism, or cause of action, which allows the injured person to recover, is called negligence.

Every business, and indeed every person, has a permanent responsibly to meet their duty of care at all times and every activity has a corresponding standard of care. For example, a construction company builds a bridge with grade "A" steel, which is the same steel they had always used without incident. The bridge buckles and collapses during an especially cold winter. Some people are killed and others are injured. It is later determined that grade A-1 steel would have held up. Is the construction company liable to the people for injuries? Did they fail to meet their standard of care by not using A-1 steel? Maybe and maybe not, but the company would be likely to find out because the injured will seek a remedy and the construction company would almost certainly be sued and maybe even bankrupted as a result. For another example, imagine that morning commuters are crowding into a train from the platform as the train's doors begin to close in anticipation of departure. A man who arrived a few seconds too late is determined to be on that train. He tries to squeeze between the doors with some help from the train workers and by doing so drops a package onto the tracks. The package contains fireworks that begin to go off causing a clock, hanging from a column on the other end of the platform, to shake lose. The clock falls on a woman waiting for the next train and causes her injury. Is the railroad liable to the woman for her injuries? These circumstances are based on a famous case decided by the highest court in New York State. In that case, the Railroad was not liable and the Court announced a famous and much debated rule that limited liability to foreseeable plaintiffs. The results of litigation over injuries are all around us. Have you seen a coffee cup warn that its contents are hot? (Wild west judgments, 1996)

The appropriate level of reasonable precaution required by the law varies with the circumstances and according to the parties involved. For example the standard of care is determined differently for professionals (lawyers, doctors, architects, etc.), grocery store clerks, and hotel owners. A standard can also evolve over time to adapt to society; the same conduct that may have been acceptable in the past may incur legal liability at some point in the future. Situations tend to be unique and whether any particular precaution should have been taken requires close examination of the facts in light of similar cases previously decided. A general formula, called the "Hand Formula," named after Judge Learned Hand, can help to determine which precautions should be taken under a business's duty of care. The formula is represented by B < P x L. "B" is the cost or burden on the company of taking a precaution that would avoid a foreseeable injury. "P" is the increase in the probability of loss if "B" is not done and "L" is the probable magnitude of loss. If the cost of taking a precaution, "B" is less than the benefit of the precaution to the consumer, calculated by "P x L," the company should take the precaution and if not then negligence is suggested. The "Hand Formula" is helpful as a tool to understand the obligations that a business could face. Clearly, enormously costly initiatives to eliminate a minor injury are generally not required but inexpensive actions that would prevent great injury are generally always required (Owens, 2005).

Strict products liability is of particular concern for businesses that sell or produce products (cars, drain cleaners, frozen dinners, perfumes, airplanes, etc.). Depending on the case, an injured party can recover based on negligence or strict liability. Strict liability is often preferable because an injured party does not have to prove that an offending company, usually a manufacturer or retailer, was at fault or negligent. The injured party need only prove that the product was defective. Products can have manufacturing defects, design defects or inadequate warnings. Manufacturing defects are unintended flaws in production. Design defects are unnecessarily risky designs that reasonably could have been avoided. Warning defects are those injuries that could have been avoided with reasonable access to information.

Contracts are an integral part of any business and a potential area that businesses can incur unwanted liability. Contracts are a voluntary exchange of promises by parties that are enforceable as legal obligations. Parties are free to negotiate the terms, or promises, that make up the contract. Contracts can be written, oral or implied by conduct of the parties. Oral contracts, which are enforceable in many situations, and contracts that arise by conduct often lack a clear definition of the performance required by the promises. As a result, they are subject to misunderstandings and disagreement. When the parties can't agree, some binding authority, like a court or arbitration board must decide. As a result, a party to oral or implied contract may end up with a deal they did not intend, in addition to the expense and aggravation of presenting their case to a court.

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