Chapter 19 The Liability Risk Agenda Basis of Legal Liability Law - - PDF document

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Chapter 19

The Liability Risk

Agenda

• Basis of Legal Liability
• Law of Negligence
• Imputed Negligence
• Res Ipsa Loquitur
• Specific Applications of the Law of Negligence
• Current Tort Liability Problems

Basis of Legal Liability

• A legal wrong is a violation of a person’s legal rights, or a

failure to perform a legal duty owed to a certain person or to society as a whole

• Legal wrongs include:
• Crime
• Breach of contract
• Tort

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Basis of Legal Liability

• A tort is a legal wrong for which the court allows a remedy in

the form of money damages

• The person who is injured (plaintiff) by the action of another

(tortfeasor) can sue for damages

• Torts fall into three categories:
• Intentional, e.g., fraud, assault
• Strict liability means that liability is imposed regardless of

negligence or fault

• Negligence

Law of Negligence

• Negligence is the failure to exercise the standard of care

required by law to protect others from an unreasonable risk of harm

• The standard of care is not the same for each wrongful act. It is

based on the care required of a reasonably prudent person

Law of Negligence

• Elements Negligence
• Existence of a legal duty to use reasonable care
• Failure to perform that duty
• Damage or injury to the claimant
• A proximate cause relationship between the negligent act and the

infliction of damages, which requires an unbroken chain of events

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Law of Negligence

• Compensatory damages compensate the victim for losses

actually incurred.

• Special damages provide compensation for medical expenses
• General damages provide compensation for pain and suffering
• Punitive damages are designed to punish people and
• rganizations so that others are deterred from committing the

same wrongful act

Exhibit 19.1 Types of Damages

Law of Negligence

• The ability to collect damages for negligence depends on state

law

• Under a contributory negligence law, the injured person

cannot collect damages if his or her care falls below the standard of care required for his or her protection

• Under strict application of common law, the injured cannot

collect damages if his or her conduct contributed in any way to the injury

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Law of Negligence

• Under a comparative negligence law, the financial burden of

the injury is shared by both parties according to their respective degrees of fault

• Under the pure rule, you can collect damages even if you are

negligent, but your reward is reduced in proportion to your fault

• Under the 50 percent rule, you cannot recover if you are 50

percent or more at fault

• Under the 51 percent rule, you cannot recover if you are 51

percent or more at fault

Law of Negligence

• Some legal defenses can defeat a claim for damages:
• The last clear chance rule states that a plaintiff who is

endangered by his or her own negligence can still recover damages from the defendant if the defendant has a last clear chance to avoid the accident but fails to do so

• Under the assumption of risk doctrine, a person who understands

and recognizes the danger inherent in a particular activity cannot recover damages in the event of an injury

Imputed Negligence

• Under certain conditions, the negligence of one person can be

attributed to another

• Under a vicarious liability law, a motorist’s negligence is

imputed to the vehicle’s owner

• Under the family purpose doctrine, the owner of an auto can

be held liable for negligent acts committed by family members

• Under a dram shop law, a business that sells liquor can be held

liable for damages that may result from the sale of liquor

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Res Ipsa Loquitur – “the thing speaks for itself”

• Under this doctrine, the very fact that the injury or damage
• ccurs establishes a presumption of negligence
• Three requirements must be met for res ipsa loquitur to apply:
• The event is one that normally does not occur in the absence of

negligence

• The defendant has exclusive control over the instrumentality

causing the accident

• The injured party has not contributed to the accident in any way

Specific Applications of the Law of Negligence

• The standard of care owed to others depends upon the

situation

• A trespasser is a person who enters or remains on the
• wner’s property without the owner’s consent
• The duty to refrain from injuring a trespasser is sometimes

referred to as the duty of slight care

Specific Applications of the Law of Negligence

• A licensee is a person who enters the premises with the
• ccupant’s expressed or implied permission
• The property owner must warn the licensee of unsafe conditions

which are apparent

• An invitee is a person who is invited onto the premises for the

benefit of the occupant

• The occupant has an obligation to inspect the premises and

eliminate any dangerous conditions

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Specific Applications of the Law of Negligence

• An attractive nuisance is a hazardous condition that can

attract and injure children

• The occupants of land are liable for the injuries of children who

may be attracted by some dangerous condition, feature or article

• e.g., a building contractor leaves the keys in a tractor, and a child

is injured while driving it

Specific Applications of the Law of Negligence

• Owners and operators of automobiles who drive in a careless

manner can be held liable for property damage or bodily injury sustained by another person

• An owner who is not the operator can be held liable for the acts
• f operators if an agency relationship exists
• Charitable institutions are no longer immune from lawsuits,

especially with respect to commercial activities

Specific Applications of the Law of Negligence

• Governmental entities can be sued in almost every aspect of

governmental activity

• The doctrine of sovereign immunity has been modified over time
• A governmental unit can be held liable if it is negligent in the

performance of a proprietary function, e.g., the operation of water plants

• Immunity from lawsuits for governmental functions, such as the

planning of a sewer system, has eroded over time

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Specific Applications of the Law of Negligence

• Under the doctrine of respondeat superior, an employer can

be held liable for the negligent acts of employees while they are acting on the employer’s behalf

• The worker must be an employee
• The employee must be acting within the scope of employment

when the negligent act occurred

• Parents can be held liable for the actions of a child if:
• The child uses a dangerous weapon to injure someone
• The child is acting as an agent for the parents
• A minor child is operating a family car

Specific Applications of the Law of Negligence

• Most states have laws that hold parents liable for willful and

malicious acts of children that result in property damage to

• thers
• Owners of wild animals are held strictly liable for injuries to
• thers
• Strict liability may also be imposed on the owners of ordinary

pets, such as dogs

Current Tort Liability Problems

• Recently, risk managers, business firms, physicians and liability

insurers have been troubled by:

• A defective tort liability system
• Medical malpractice
• Corporate governance and the financial sector

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Current Tort Liability Problems

• Defects in the present tort liability system include:
• Rising tort liability costs
• Inefficiency in compensating injured victims
• Uncertainty of legal outcomes
• Higher jury awards
• Long delays in settling lawsuits

Rising Tort Liability Costs

• Several factors help explain the substantial increase in tort

costs over time, including:

• Juries and judges desensitized to the value of the dollar when

damages are awarded

• Aggressive and creative litigation strategies
• Rising medical costs
• Abuses in class action lawsuits
• States in striking down portions of tort reform
• An increase in lawsuits against company officials
• Deep pocket syndrome
• Exploitation of high‐verdict cases by the media

Rising Tort Liability Costs

• Experts believe litigation will increase because of the

following:

• The credit crunch following the collapse of the mortgage and

housing markets

• Employment practices litigation alleging gender discrimination in

pay, promotion and work assignments

• Environmental claims, including alleged water contamination

caused by the new natural gas drilling method “fracking”

• Claims from same‐sex couples alleging discrimination

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Rising Tort Liability Costs

• High unemployment that occurred during and after the financial

crisis

• Investment schemes that defrauded investors of billions of dollars
• Claims arising from toxic side‐effects of nanotechnology
• Unprecedented intervention by the federal government into the

economy

Exhibit 19.2 Tort Costs Relative to GDP ($billions)

Exhibit 19.3 Median1 and Average Personal Injury Jury Awards, 2000 and 2009

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Current Tort Liability Problems

• Critics argue that the present system is inefficient because

injured victims receive less than half of each tort dollar paid

• There is considerable uncertainty in predicting legal outcomes
• Jury awards for certain types of lawsuits continue to increase
• There are long delays in settling lawsuits

Tort Reform in the States

• State tort reforms include:
• Capping noneconomic damages, such as pain and suffering
• Reinstating the state‐of‐the‐art defense for product liability cases
• Restricting punitive damages awards
• Modifying the collateral source rule
• Modifying the joint and several liability rule
• Alternative dispute resolution (ADR), a technique for resolving a

legal dispute using arbitration or mediation

Medical Malpractice

• Medical malpractice occurs when a negligent act or omission

by a physician or other health care professional results in injury or harm to the patient

• The injured patient must show that the doctor deviated from the

generally accepted standards of practice in this particular case.

• Many malpractice suits are due to medical errors by health

care providers, especially errors in hospitals that result in the death of patients

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Medical Malpractice

• Other reasons patients sue physicians include:
• The intimate relationship between patients and physicians that existed

in the past has been lost

• People are more litigious than in the past
• Physicians and other medical experts will now testify against physicians

in malpractice cases

• The media has made more people aware of the vulnerability of

physicians to malpractice suits

• Physicians accuse attorneys of filing malpractice suits because of the

high fees that attorneys may collect if they win

• There is a growing resentment against large for‐profit health care firms

and managed care plans

Reducing Medical Malpractice Costs

• Methods to reduce medical malpractice costs include:
• Not charging for “never events”
• Laws allowing physicians to apologize without allowing the

admission to be used against them

• Prompt disclosure of medical errors
• Remedial action against problem physicians
• Emphasis on risk management principles

Corporate Fraud and Lax Corporate Governance

• In the 1990s, many large corporations used dishonest or

aggressive accounting practices to inflate stated earnings and profits, or to conceal or misstate certain transactions

• The Securities and Exchange Commission has indicted

numerous company officials for securities fraud, illegal accounting practices, destruction of company records, and

• bstruction of justice
• During the economic downturn between 2008 and 2011,

many large corporations lost billions of dollars because of improper financial risk management

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Corporate Fraud and Lax Corporate Governance

• The Sarbanes‐Oxley Act (2002) is designed to expose and

punish acts of corruption

• The company’s CEO and CFO must swear to the accuracy of the

financial reports, among other things

• The Dodd‐Frank Wall Street Reform and Consumer Protection

Act (2010) includes provisions that address financial disclosure, liquidation of financial institutions, regulation of credit ratings agencies, and predatory lending practices