AINS Loss Exposures

Question 1

Assets Exposed to Property Loss: Buildings

Answer 1

considered to be part of the building includes basic portable equipment such as:
fire extinguishers
lawn mowers
wall-to-wall carpeting
built-in appliance,
boilers & machinery & Refrigerating and air conditioning system- considered to be fixtures (permanent part of the building and constitute a special class of property).

Boilers and Machinery share two characteristics: they are susceptible to explosion or breakdown that can result in serious losses to the unit and to person and property nearby, less likely to have these problems if they are inspected and maintained properly

Personal Property: furniture, such as desks or file cabinets; machinery and equipment like cash registers; stock, such as groceries in stores.

Question 2

Assets Exposed to Property Loss: Money and Securities

Answer 2

these present special problems

highly susceptible to loss by theft

cash if particularly difficult to trace because it can be readily spent

other types of property, on the other hand must be sold for cash before the thief can make a profit

lightweight, easily concealed, and easy to transport

can also be quickly destroyed in the even of a fire

Question 3

Assets Exposed to Property Loss: Vehicles and Watercraft

Answer 3

these are groups into categories which are useful in identifying property loss exposures:
autos and other highway vehicles
mobile equipment
recreational vehicles

watercraft are exposed to special perils not encountered in other means of transit. these perils include extreme weather conditions that can result in rougher seas than the craft can handle, poor navigation resulting in striking the ground or another obstacle, and depending on the shipping route - piracy

Question 4

Assets Exposed to Property Loss: Property in Transit

Answer 4

property can be moved by autos, buses, trucks, trains, watercraft, and airplanes

when property is damaged or lost in transit, it must be replaced. delays often result. the property owner may also incur expense to move damaged property.

Question 5

Causes of Property Loss- Perils versus Hazards

Answer 5

peril and hazard are often confused- a peril is a cause of loss (fire, theft, collision, flood, hair, windstorm are some examples).
hazard is anything that increases the frequency or severity of a loss (careless smoking, keeping large amounts of cash overnight at a business)

Question 6

Financial Consequence of Property Losses

Answer 6

property loss reduces its value

reduction can be measured in different ways, sometimes with differing results. if it can be repaired/restored, then the reduction in value can be measured by the cost of the repair or restoration. Property that must be replaced has no remaining worth, unless the salvageable items can be sold.

if a property is lost, stolen, or disappears, its value is reduced just as though it had been destroyed and retained no salvage value. in the case of fine art that was valuable because of its mint condition, its value would be further reduced as its repaired after damage makes it no longer in that unspoiled condition, its value will decline. the owner faces loss in the form of the cost to repair as well as a reduction in value because of the altered condition.

most common valuation measures used in insurance policies are replacement cost and actual cash value. in certain situations, however, other valuation measures are used, such as agreed value.

Question 7

Parties Affected by Property Losses: Property Owners

Answer 7

most affected when property is lost, damaged, or destroyed.

if the property has some value, the owner incurs a financial loss to repair or replace it

Question 8

Parties Affected by Property Losses: Secured Lenders

Answer 8

when property is used to secure a loan, the lender is exposed to loss.

if a financed car is destroyed in an accident, no vehicle would be available for the lender to repossess in the even that the owner defaulted on he loan. Property insurance policies generally protect the secured lender’s interest in the financed property by naming the lender on the insurance policy and given the lender certain rights under the policy.

Question 9

Parties Affected by Property Losses: Property Holders (Bailees)

Answer 9

responsible for safekeeping property they do not own

Dry cleaners, repair shops, common carriers, and many other businesses temporarily hold property belonging to others.

Question 10

Tort

Answer 10

a wrongful act or an omission, other than a crime or a breach of contract, that invades a legally protected right. crimes differ from torts because criminal law allows the state to prosecute and civil law does not.

tort law is enforced by the injured party bringing a private lawsuit against the alleged wrongdoer.

central concern is determining the responsibility for injury or damage

tort law is still based mainly on common law

under tort law, an individual or organization can face a claim for legal liability on the basis of negligence, intentional torts, or strict liability.

Question 11

Type of Tort: Negligence

Answer 11

Description: Failure to act in a prudent manner, to exercise the degree of care that a reasonable person in a similar situation would do to avoid harming others

Elements (all have to be met):
duty owed to another- the driver of a car has the duty to operate the car safely

breach of that duty- if a tank explodes due to overfilling it could indicate that the defendant failed to act reasonably and breached its duty to provide safe conditions

breach of duty is proximate cause of injury or damage- patrons of a night club were injured by other patrons’ panic when part of the stage caught on fire- the injured patrons would have to prove that the club owner’s breach of its duty to provide safe conditions was the proximate cause of their injuries

injury or damage-passengers may claim a driver negligently caused an accident, but unless they actually suffered an injury, such as medical expenses, lost wages, or pain and suffering, they will not have a valid claim

Examples: driving while intoxicated and causing an accident
allowing a pet dog to run loose and bite a child

The greatest number of liability cases arise from negligence. tort law gives the injured parties the right to seek compensation if they can demonstrate that someone else’s negligence led to their injuries.

the person/organization whose that committed a tort and their conduct is proved to be negligent is generally responsible for the consequences. This party is called the tortfeasor.

other persons or organizations may be held responsible for the tortfeasor’s action are called vicarious liability. often arrives in business situations from the relationship between employer and employee. for example, an employee drives a customer to a meeting and negligently causes an accident in which the customer is injured, both the employee and the employer could be held liable for the customer’s injuries. responsibility would not shift from employee to the employer but rather could extend to include the employer.

Question 12

Type of Tort: Intentional Tort

Answer 12

Description: Deliberate acts that cause harm, either foresees or should foresee that this will harm another person

Elements: Deliberate act (other than a breach of contract) that causes harm to another person

Examples:
Assault-threat of force against another person that creates a well-founded fear of imminent harmful or offensive contract
Battery- unlawful/unprivileged touching of another person
Defamation- false written or oral statement that harms another’s reputation (libel and slander), for defamation to occur someone other than the defamed person must read or hear the false statement and true statements are not defamatory
Libel- distributes untrue statement through any medium
Slander- spoken, untrue statement
False Arrest- poses a problem for retail stores if a store employee detains a customer for theft, and it was wrong.
Invasion of privacy- unauthorized release of confidential info, illegal use of hidden microphones or other surveillance equip, unauthorized search, or the public disclosure of private facts

Question 13

Types of Torts: Strict Liability

Answer 13

Description: Inherently dangerous activities, result from activities that are extremely dangerous, unnatural, ultrahazardous, abnormal, or inappropriate

Elements: Inherently dangerous activities or dangerously defective products that result in injury or harm

Examples: owning a wile animal
blasting operations

Question 14

Contracts

Answer 14

allows an injured party to seek recovery because another party has breached a duty voluntarily accepted in a contract

in a suit, it is the specific contract, rather than the law in general, that the court interprets

parties to a contract sometimes find it convenient for one party to assume the financial consequences of certain types of liability faced by the other. called hold-harmless agreements. common in construction and service businesses. called so because they require one party to “hold harmless and indemnify” the other party against liability specified in the contract.

the law of contracts also governs claims arising from breach of warranty, a written or oral statement in a contract that certain facts or true; promises made by the seller.

Question 15

Statutes

Answer 15

legal liability imposed by a specific statute or law

although common law may cover a particular situation, statutory law may extend, restrict, or clarify the rights of injured parties in that situation. to ensure adequate compensation for injuries without lengthy disputes over who is at fault. ex of this kind involves no-fault auto laws and workers comp laws. the specific statues (rather than the common-law principals of torts) gives one party the right of recovery from another or restricts that right of recovery.

to reduce the number of auto-accident lawsuits, some states have enacted “no-fault” laws where the victims with less serious injuries collect their out-of-pocket expenses from their own insurers without the need for expensive legal proceedings.

similar is the WC where this statute eliminates an employee’s right to sue the employer for most work-related injuries and also imposes on the employer automatic (strict) liability to pay specified benefits.

Question 16

Assets Exposed to Liability Loss

Answer 16

the asset can be of anything of value an individual or organization owns

the asset plaintiffs claim most frequently is money

assets owned such as property and investments can be sold and converted to money that can be used to make a payment to a plaintiff

a plaintiff can claim income that a defendant will receive in the future

Question 17

Causes of Liability Loss

Answer 17

autos, watercraft, and other vehicles- auto accidents produce the greatest number of liability claims; also created by owning and operating other conveyances such as watercraft, aircraft, and recreational vehicles

premises- anyone who owns or occupies real property has a premises liability loss exposure

personal activities- can become liable to others when engaged in a personal activity not business related and away from the defendant’s premises. for example, a person could hit a golf ball off a tee and strike and injure another golfer; or a dog escaping and biting a neighbor

business operations- activity the business performs has the potential to cause harm to someone else

completed operations- even after a plumber, electrician, painter completes a job and leaves the work site, a liability loss exposure remains. if something leads to an injury, the person or business that performed the work may be liable, considerable time could pass in the interim, but the person or business may still be held liable eventually cause the injury.

products- a significant exposure for manufacturers

advertising- businesses often include photographs of people using their products in their advertisements, unless a business obtains proper permission, publishing the pictures could lead to a lawsuit alleging invasion of privacy. using another company’s trademarked slogan or advertisement can also generate a liability claim.

pollution- the manufacture of some products creates contaminants that, if not disposed of property, can cause environmental impairment, or pollution.

liquor-consumption, serving, and sale of alcohol can present liability loss exposures. both the drunk person and the person who served the alcohol can be held legally liable

professional activities- negligence involves a failure to exercise the degree of care that is reasonable under given circumstances, it is reasonable to expect that professionals with special competence in a particular field or occupation will exercise a higher standard of care in performing their duties than someone without. attorneys, physicians, architects, engineers, and other professionals are considered experts in their field and are expected to perform accordingly.

Question 18

Financial Consequences of Liability Loss

Answer 18

in theory, the financial consequences of a liability loss exposure are limitless

in practice, financial consequences are limited to the total wealth of the person or organization

Damages: damages of a liability loss can be more difficult to determine than those involved with other types of losses. for ex a hotel fire resulting in injuring hundreds of guests may be hard to predict because each claim is different and may take years for all of them to reach settlement or be tried in court to a final judgment

Defense Costs: in addition to damages, may also include costs to defend the alleged wrongdoer in court, expenses can include investigation expenses, expert witness fees, premiums for necessary bonds, even if found groundless, defendants and their liability insurers will probably incur substantial defense costs

Damage to Reputation: often difficult to quantify

Question 19

Personnel Loss Exposure

Answer 19

a condition that presents the possibility of loss caused by a person’s death, disability, retirement, or resignation, that deprives an organization of the person’s special skill or knowledge that the organization cannot readily replace

Question 20

Assets Exposed to Personnel Loss

Answer 20

Key Employees are valuable employees whose loss to a firm through death or disability before retirement would have economic effects on the company

groups of employees who perform crucial functions, if they are all lost simultaneously can cause a crisis for an organization

can include several categories of key personnel:

individual- employees with unique talents, creativity, or special skills vital to the organization’s ability to meet its goals. these employees do not own, manage, or oversee but add value.

owners, officers, and managers- a sole proprietorship literally ceases to exist as a legal entity when its owner dies or retires, partnerships may legally terminate when a partner dies or retires. similarly, partnerships may legally terminate when a partner dies or retires. the same is true in close corporations, in which ownership is typically concentrated in just a few major shareholders, most of whom are also managers.

groups of employees- group departure, except through layoffs, is rare, but entire group may leave due to common dissatisfaction, may follow a manager to a new organization, or may be lost because of a catastrophic event

Question 21

Causes of Personnel Loss

Answer 21

Death- most losses from death are low frequency, and the severity of impact on the employer depends on the employee’s value to the organization.

Disability- overall, disability occurs far more frequently than death, the severity of personnel losses resulting from disability can be equal to those resulting from death if the disability is permanent and total.

Resignation, Layoffs, and Firings- resignation (voluntary), layoff or firing (involuntary). Resignation is expected part of doing business, frequency of it depends on the type of industry. Severity depends on who is leaving. Involuntary separation is generally not considered a personnel loss because the organization has determined it is better off without that employee.

Retirement- while death and voluntary resignation often occur suddenly, retirement is usually planned.

Kidnapping- some result from political unrest, most likely it’s due to a financially motivated kidnapping- for ransom. kidnapping losses are similar to death and disability losses- the severity depends on the importance of the employee and the cost of temporarily or permanently replacing him/her.

Question 22

Financial Consequences of Personnel Losses

Answer 22

similar to the effect of property and liability losses in that they reduce the value of the organization, may difference is that the personnel losses typically manifest themselves as net income losses.

• loss of the value the employee contributed to the organization
• replacement costs (recruitment, interviewing, training)
• losses to the organization’s value caused by negative publicity
• losses cause by low morale, such as reduced productivity and increased illness

Question 23

Assets Exposed to Net Income Loss

Answer 23

the asset exposed to loss in a net income loss exposure is the future stream of net income of the individual/organization. Net income includes revenues minus expenses and income taxes in a given time period. usually associated with property losses.

a fire or a tornado that damages the facilities (a property loss) would for the organization to stop operations while damage is being repaired, resulting in a loss of sales (a net income loss exposure)

net income losses are often the result of a property, liability, or personnel loss (all of which are direct losses). for many causes of net income loss, it can often be difficult to discern when the direct property loss, liability loss, personnel loss, or business risk loss ends and when the indirect net income loss begins.

direct loss: occurs immediately as the result of a particular cause of loss, such as the reduction in the value of a building that has been damaged by fire

indirect loss: results from, but not directly caused by, a particular cause of loss, such as the reduction in revenue that an organization suffers as a result of fire damage to one of its buildings. estimating indirect losses is often challenging because of the difficulty in projecting the effects that a direct loss will have on revenues and expenses.

a customer brings about a lawsuit to a restaurant for food poisoning (direct loss), however projecting effect on future restaurant sales (indirect loss) due to negative publicity would be more difficult.

Question 24

Causes of Net Income Loss: Property Loss

Answer 24

loss sustained resulting from damage to property in which that person/organization has a financial interest

can cause a reduction of property’s value, sometimes to zero.

a car is stolen and the owner suffers a total loss of that property because the owner no longer has use of it, the owner could incur a net income loss by renting a replacement vehicle.

Question 25

Causes of Net Income Loss: Liability Loss

Answer 25

caused by a claim of legal liability from someone who is usually seeking monetary damages against a person/organization.

direct cost: liability claim that includes damages and defense costs.

a liability loss can result in a net income loss. for example, if a driver of a car develops a history of poor driving, the cost of renewing the driver’s personal auto policy, if available, will be likely substantially higher. OR a doctor can incur an increase in net income losses when their professional liability insurance coverage renews at a higher rate as a consequence of successful claims of professional malpractice made against them.

Question 26

Causes of Net Income Loss: Personnel Loss

Answer 26

often cause of a key person’s death, disability, retirement, or resignation

such a loss deprives those dependent on that person of a special skill or knowledge that cannot be easily replaced

for ex. contractors recruiting employees to work in areas of the world where hostile military conflicts are ongoing. the frequent personnel losses by death or disability of the contractors’ current employees force the contractors to pay higher salaries to attract new employees and retain existing ones.

Question 27

Causes of Net Income Loss: Business Risks

Answer 27

risk that is inherent in the operation of a particular organization

loss of goodwill- this can be lost in many ways, including providing poor service, offering obsolete products, or mismanaging operations. for a not-for-profit organization, goodwill is equivalent to reputation. goodwill may have monetary value. to maintain goodwill, many organizations choose to pay for certain accidents for which they are not legally responsible. for ex, if a guest hurts them self on the organizations’ premise and they did not cause or contribute to the injury, they may still choose to pay any medical bills in order to maintain goodwill and avoid adverse publicity

failure to perform- net income loss for this one ma be the result of some type of failure to perform, including a product’s failure to perform as promised, to complete a construction project as scheduled, or debtor’s failure to make scheduled payments.

missed opportunities- for ex an organization that delays a decision to modify its product in response to market demand might lose market share and profit that it could have made on that updated product.

Question 28

Financial Consequences of Net Income Losses

Answer 28

the financial consequences of net income loss are a reduction in revenues, an increase in expenses, or a combination of the two.

once a loss occurs, the difference between the projected net income and the actual net income earned after the accident is the net income loss.

the worst-case scenario for a net income loss is a decrease in revenues to zero and a significant increase in expenses for a prolonged period.