This text was adapted by The Saylor Foundation under a Creative Commons Attribution-NonCommercial-ShareAlike 0 License without attribution as requested by the work’s original creator or licensee. Preface Introduction and Background
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- Risk Management of E-Commerce Liabilities
- The Medical Malpractice Crisis
- KEY TAKEAWAYS
- DISCUSSION QUESTIONS
- 12.4 Review and Practice
- Chapter 13 Multirisk Management Contracts: Homeowners
12.3 Possible Solutions LEARNING OBJECTIVES In this section we elaborate on the following:
A number of suggestions have been made to alleviate the problems of product liability and malpractice (professional) liability. Some would limit the right to use or improve the defendant’s defenses; others would reduce the incentive to sue or provide an alternative to legal action. In both areas, proposals would limit the compensation available to plaintiffs’ attorneys. Most plaintiffs compensate their attorneys with a percentage (typically one third) of their award, called a contingency fee. The advantage of a contingency fee system is that low-income plaintiffs are not barred from litigation because of inability to pay legal fees. A disadvantage is that lawyers have incentives to seek very large awards, even in situations that may appear only marginally appropriate for litigation. Reduced contingency fee percentages and/or caps on lawyer compensation have been recommended as partial solutions to increases in the size of liability awards and the frequency of litigation itself. Similarly, shorter statutes of limitation, which determine the time frame within which a claim must be filed, have also been proposed as a means to reduce the number of liability suits. Placing caps on the amount of damages available and eliminating the collateral source rule are recommendations that focus on the size of liability payments. Caps on damages typically limit recovery either for general damages or for punitive damages. Often, when actually awarded, general and punitive damages far exceed the special damages; thus, they dramatically increase the size of the award and can add significant uncertainty to the system. The collateral source rule is a legal doctrine that prevents including information about a plaintiff’s financial status and/or compensation of losses from other sources in the litigation. In a setting in which a plaintiff has available payments from workers’ compensation or health insurance, for example, the jury is not made aware of these other payments when determining an appropriate liability award. Thus, the plaintiff may receive double recovery. Another prominent recommendation is to abolish or limit the use of joint and several liability. As previously described, joint and several liability has the potential to hold a slightly-at-fault party primarily responsible for a given loss. The extent of the use of the doctrine, however, is disputed. Risk Management of E-Commerce Liabilities The first step in the risk management process of e-commerce liability in particular is the development of privacy procedures. This is done to protect consumers and avoid personal injury of defamation of another person or entity. The transfer of e-commerce liability risk is not commonly covered under the usual general liability policy, which is discussed in Chapter 1 "The Nature of Risk: Losses and Opportunities". The commercial general liability policy does not cover all of the liabilities that result from loss of electronic information. Therefore, in the risk management process, the risk manager should look into separate e-commerce policies. An e-commerce liability policy generally will include, in Section I, the definitions of claims, defense costs, the named insured, an Internet site that is noted on the declaration page, policy period, and so forth. Section II usually includes the exclusions. As would be expected, bodily injury and property damage are excluded because they are usually covered under the general liability policy. Additional exclusions are fraud, antitrust activities, breach of contract, employment practices, product liability, patent infringement, lotteries, loyalties, securities, governmental actions, prior claims, and prior pending litigation. Section III emphasizes that the coverage is the liability of only Internet-related activities. The limit of liability is set in the declaration page. The last sections of the policy include additional details relating to reporting of notice, defense and settlement, other insurance, and more. [1] E-commerce liability policies are not standardized. Some provide more coverage while others are more limited. The interested student can find many examples on the Internet and in E-Commerce Insurance and Risk Management by George Sutcliffe (Boston: Standard Publishing Corp., 2001). The Medical Malpractice Crisis The Insurance Information Institute stated in its May 2005 “Medical Malpractice” report the following:
How did the situation get so bad? Doctors blame insurance companies for skyrocketing premiums. Insurers blame personal-injury attorneys who work on contingency. The American Medical Association blames jurors who award exorbitant punitive damages. In fact, much of the problem can be traced to ordinary business cycles and a bit of coincidence. Some studies in no way attribute lawsuits to the premium increases. The 1970s saw sweeping changes in both medicine and jurisprudence; broader liability rulings and rapid advances in medical technologies coparented a rash of record-breaking lawsuits. Insurers raised premiums, and when lawsuits declined in the 1980s, malpractice insurance again became a profit center for insurers—so much so that by the mid-1990s, the field became very competitive. The competition among insurers led to price wars, but lowering premiums depleted the insurers’ reserves just as malpractice lawsuits began escalating again. Horror stories abound of frivolous lawsuits on the plaintiff’s side, appalling negligence on the defendant’s, and exorbitant jury awards in the middle. As in the 1970s, many think the answer lies in legislative reform. Twenty states now have medical malpractice caps on jury awards. West Virginia is proposing a state-managed liability plan. Pennsylvania has banned “forum shopping,” in which lawyers file their suits in jurisdictions where juries tend to award huge damages; lawsuits now must be tried in the county where the malpractice took place. Mississippi, too, has recently instituted sweeping medical malpractice reform law, including a provision against forum shopping. The Bush administration urged Congress to pass a bill that would limit noneconomic damage awards to $250,000, limit punitive damage awards, place limits on the time allowed for injured patients to file a lawsuit, and establish a fee schedule for lawyers’ contingency fees. A provision would also provide liability protection for pharmaceutical firms. In May 2005, the American Medical Association (AMA) reported a decline in medical malpractice claims and improved physician recruitment and retention resulting from some states’ tort reforms. Sources: The Insurance Information Institute is a good source for special timely reports. In addition, see Joseph B. Treaster, “Rise in Insurance Forces Hospitals to Shutter Wards,” New York Times, August 25, 2002; Steven Brostoff, “Medical Malpractice Reform Bill Draws Praise From Insurers,” National Underwriter, Property & Casualty/Risk & Benefits Management Edition, October 7, 2002; Rachel Zimmerman and Christopher Oster, “Insurers’ Price Wars Contributed to Doctors Facing Soaring Costs,” Wall Street Journal, June 24, 2002; Lori Chordas, “A Downward Spiral: Medical Malpractice Insurance Is Losing Its Place as a Top Performing Line of Business in the Property/Casualty Industry,”Best’s Review, August 2001; “Report: Suits Don’t Cause Higher Med Mal Premiums” National Underwriter Online News Service, March 11, 2005, accessed March 16, 2009,http://www.propertyandcasualtyinsurancenews.com/cms/NUPC/Breaking%20News/2005/03/11-Report%20Suits%20 Dont%20Cause%20Higher%20Med%20Mal%20Premiums? searchfor=suits%20cause%20higher%20premiums; Arthur D. Postal and Matt Brady, “President To Unveil Tort Reform Proposals,” National Underwriter Online News Service, January 4, 2005, accessed March 16, 2009,http://www.propertyandcasualtyinsurancenews.com/cms/NUPC/Breaking%20News/2005/01/05-President%20To%20 Unveil%20Tort%20Reform%20Proposals?searchfor=tort%20reform%20proposals. KEY TAKEAWAYS In this section you studied suggestions for reducing liability losses from legal and risk management perspectives:
DISCUSSION QUESTIONS
[1] This discussion is based on Safety ‘Net Internet Liability Policy by Chubb Group of Insurance Companies and Executive Risk Indemnity, Inc. 12.4 Review and Practice
Chapter 13 Multirisk Management Contracts: Homeowners Historically, fires were the most damaging cause of loss. In “Shaped by Risk: The Fire Insurance Industry in America 1790–1920” by Dalit Baranoff, the author describes the major conflagrations in the United States that engulfed parts of cities such as Chicago in 1871. [1] Losses from fire cost society dearly. The cost for firefighting in the 2003 southern California fires alone was estimated to be $2 billion in insured losses. [2] The Rhode Island Station Club fire that took so many lives and the Chicago E2 Club panic led to improved fire codes. It has always been the case that major fire catastrophes prompted improved fire codes. Even though, statistically, nightclub fires account for only 0.3 percent of all fires, their fatality rate is disproportionately high. [3] In February 2009, Australia experienced the country’s highest ever loss of life from bushfires when over 1.1 million acres across eastern Victoria burned for days. At least 210 people were reported killed and over 500 more were treated for injuries. An estimated 7,500 residents were rendered homeless, with over 2,000 homes burned in the bushfires. A combination of intense, dry heat, lighting, and arson has been posited as the catalyst for this national disaster. While the complete toll of the tragedy cannot be quantified, insurers anticipate $2 billion in losses, and the Australian government has pledged aid to the victims. [4] As you saw in previous chapters, fires are not the only cause of catastrophes. Catastrophes are caused by weather, geology, and humans. The last quarter of 2005 broke all records in weather-related catastrophes in the United States, with hurricanes Katrina, Rita, and Wilma responsible for combined insured losses in excess of $42 billion by some estimates. The economic losses are estimated to exceed $150 billion. Much of the uninsured losses were driven by floods from water surges in the Gulf Coast and the subsequent breaches of New Orleans levees. Katrina has been described as “by far the most devastating catastrophe ever to hit the insurance industry, with insured losses at $34.4 billion and counting—surpassing 1992’s Hurricane Andrew.” [5]As noted in Chapter 11 "Property Risk Management", because of Katrina and Rita, Louisiana homeowners 2005 insurance claim payments are estimated to be as high as all homeowners premiums paid in the previous twenty-five years. In Mississippi, the claims are estimated to be as high as the sum of all premiums for the preceding seventeen years. [6] The Insurance Services Office (ISO) defines catastrophe as an event in which losses total at least $25 million. As you have learned, large losses lead to availability and affordability problems. The industry may even decide to pull out of a specific market and not renew policies; the state governments, however, may prevent this action. In the case of the Colorado fires, the state senate passed a bill prohibiting insurers from refusing to issue fire insurance policies within a wildfire disaster area. [7] Regulatory protection appeared to be necessary. If disaster struck your home, no doubt you would be devastated. Lesser risks, too, can be distressing. For example, if a friend is hurt while visiting your home, who will pay her medical bills? As your invitee, she might be forced, through her health insurer, to sue you. These and many other pure risks associated with your home are very real. A partial listing of home risks is shown in Table 13.1 "Risks of Your Home". They need to be managed carefully. One of the most important risk management tools to finance such losses is the homeowners policy. We will discuss this coverage in detail. The policy includes both property and liability coverages. Table 13.1 Risks of Your Home
The chapter includes discussion of the following:
Links At this point in our study, we are drilling down into specific coverages. We first stay within the personal property/casualty line of the home coverage. The current policies combine both property and liability coverage in one package. In the next chapter, we will drill down into the automobile policy, which also combines liability and property coverage in a single packaged policy. As part of our holistic risk management, we need to be assured that the place we call home is secure. Whether we buy our home or rent it, we care about its security and the safety of our possessions. We also want to safeguard our possessions from lawsuits by having some liability coverage within these policies. If we feel that the limits are not high enough, we can always obtain an umbrella policy—liability coverage for higher limits than is available in specific lines of insurance—which is discussed later in this chapter. How the risk management of our home fits into the big picture of a family holistic risk management portfolio is featured in Case 1 at the back of this textbook.
As you learned in Chapter 10 "Structure and Analysis of Insurance Contracts" and Chapter 11 "Property Risk Management", most of the homeowners policies are open peril: everything that is not specifically excluded is covered. Thus, the concepts you have learned until now are coming together in one specific type of coverage. To better complete our holistic risk management puzzle, we need to understand how to read and interpret an open peril policy such as the Homeowners Special Form (HO-3) discussed in this chapter. [1] Dalit Baranoff, “Shaped by Risk: Fire Insurance in America 1790–1920,” Ph.D. dissertation, Johns Hopkins University, 2003.
[6] “Record Homeowners Insurance Claim Payments from 2005 Hurricanes Equal to 25 Years of Louisiana Homeowners Premiums, Says I.I.I. $12.4 Billion in Homeowners Insurance Claims to Be Paid in Louisiana Alone; Homeowners Insurers Will Begin Reassessment of Risk in State,” Insurance Information Institute (III). January 5, 2006, accessed March 20, 2009,http://www.iii.org/media/updates/press.748181/. [7] Joanne Wojcik, “Colorado Bill Would Bar Nonrenewals in Wildfire Areas,”Business Insurance, July 11, 2002. Directory: site -> textbooks textbooks -> This text was adapted by The Saylor Foundation under a Creative Commons Attribution-NonCommercial-ShareAlike 0 License without attribution as requested by the work’s original creator or licensee. Preface textbooks -> Chapter 1 Introduction to Law textbooks -> 1. 1 Why Launch! textbooks -> This text was adapted by The Saylor Foundation under a Creative Commons Attribution-NonCommercial-ShareAlike 0 License without attribution as requested by the work’s original creator or licensee textbooks -> This text was adapted by The Saylor Foundation under a Creative Commons Attribution-NonCommercial-ShareAlike 0 License textbooks -> This text was adapted by The Saylor Foundation under a textbooks -> This text was adapted by The Saylor Foundation under a Creative Commons Attribution-NonCommercial-ShareAlike 0 License without attribution as requested by the work’s original creator or licensee. Preface textbooks -> This text was adapted by The Saylor Foundation under a Creative Commons Attribution-NonCommercial-ShareAlike 0 License textbooks -> Chapter 1 What Is Economics? textbooks -> This text was adapted by The Saylor Foundation under a Creative Commons Attribution-NonCommercial-ShareAlike 0 License Download 5.93 Mb. Share with your friends:
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