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Presented by:

Erike Young, MPPA, CSP, ARM

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Chapter 6

Legal and Regulatory Risk

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Basis for Legal and Regulatory Risk

• Law recognizes that every person/entity has legal interests that are protected by civil law, criminal law, and regulations

• Violating one of those interests is basis for legal and regulatory risk

• Three major categories of legal/regulatory risk – Torts

– Contracts

– Statutes and regulations

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Criminal and Civil Law

• Criminal law – Classification of law that applies to acts that society deems so harmful

to public welfare that government is responsible for prosecuting and punishing perpetrators

– Prescribes standard of conduct by which all citizens must adhere – Written laws specify nature of crimes and punishments – Government must decide to prosecute on society’s behalf

• Civil Law

– Applies to legal matters not governed by criminal law that protects rights and provides remedies for breaches of duties owed to others

– Injured party must file claim to requests reimbursement in the form of monetary damages, for harm

• In some cases, an act can constitute both a civil wrong and a crime

Torts

• Tort – A wrongful act or an omission, other than a crime or a breach

of contract, that invades a legally protected right

– Remedy for a tort is usually monetary damages

– Organization is liable for any tort it commits through its agents (employees, directors, contractors, volunteers, etc…) • Examples Boy Scouts or Little League

– Three categories of wrongful acts that constitute a tort

• Negligence • Intentional torts • Strict liability torts

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Torts

Negligence an unintentional tort. The wrongdoer did not

intend the action or the consequences but exposed others to unreasonable danger by failing to exercise the duty of care the law requires under the circumstances.

The legal responsibility and standard of care established by law are what a reasonably prudent person would do in similar circumstances.

Grocery Store – How to prevent slip/fall claims?

Torts Intentional Torts Intentional torts are actions or omissions that

the wrongdoer intended, although the consequences were not necessarily intended.

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Torts

Strict Liability Torts liability that does not require negligence or

intent. It arises when a company engages in activities that are considered ultra hazardous or involve product liability cases.

Vehicle recalls, poor design, unintended results

Contracts

• Contract is a legally enforceable agreement between two or more parties

– Establish responsibility of each party involved

• Failure to comply with contract’s terms is considered a breach of contract

– Individuals and businesses can become liable base on the contract’s terms or based on the terms inferred from the contract (implied warranties)

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Contracts

• Requirements for Enforceability – 4 Requirements for a contract to be enforceable

• Agreement (offer and acceptance) – One party makes offer that other party accepts. Must agree on terms of the agreement

• Consideration – Each party gives something of value. Money for service or promise to perform

• Capacity to contract – Legal ability to enter into contracts. Adult, sane, sober, etc…

• Legal purpose – Must have legal purpose and not opposed to public policy (service is legal)

– Example – a contract for prostitution may be legal in some counties in Nevada, but not in any other state

– Erike’s Weight Loss Contract

• Contract with my wife that I would lose 35 lbs by November 16 (birthday) with terms of specific weekly weight loss goals and performance requirements (no sodas or beer). Failure to meet weekly goals or breach a term of the agreement requires me to give $100 to my daughters to go shopping.

• Contract contains all 4 requirements – Agreement, Consideration, Capacity to contract, Legal purpose

Contracts • Types of Contracts

– Implied contract – contract whose terms and intentions are indicated by actions of the parties to the contract and the surrounding circumstances

– Express contract – contract whose terms and intentions are explicitly stated

– Valid contract – a contract that meets requirements to be enforceable

– Void contract – despite intentions, an agreement that never reaches contract status and is therefore not legally enforceable (issue of Pawn Stars show)

– Voidable contract – contract that one of the parties can reject (avoid) base on some circumstance surrounding its execution • Contract with a minor or contract to perform illegal acts

– Unenforceable contract – valid contract but that because of a technical defect

cannot be enforced. • Verbal real estate contract

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Statutes and Regulations

• Statutes – are created by federal, state, or local governments and often modify the duties owed to others – Violation of a statutes are the basis for most criminal

cases – Violation of statute may also be used as evidence the

organization breached the duty of care owed to others.

• Regulations are developed as directed/required by statutes and have the force of law – EPA, OSHA, Education code

Legal and Regulatory Risk Consequences

• Major consequences of legal and regulatory risk:

– Monetary Damages

– Defense Costs

– Indirect Costs

– Specific performance or injunction

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Legal and Regulatory Risk Consequences

Monetary Damages – ◦ Compensatory damages indemnify those who incurred losses

because of a breach of legal responsibility, and include special damages and general damages.

◦ Special damages are for specific, known loss amounts such as the cost of medical care.

◦ General damages are for nonspecific, uncertain loss amounts such as pain and suffering or loss of companionship.

◦ Punitive damages are to punish the wrongdoer and discourage future acts. The cost of verdicts, settlements, or fines represents a liability loss to the entity at fault.

◦ Most government entities exempt from punitive damages

Legal and Regulatory Risk Consequences

Defense Costs – investigation and defense costs can be the most expensive liability, and may require intensive investigation, legal work and use of expert witnesses.

The defendant usually pays all costs imposed by the court including jury fees, filing fees, and premiums on court bonds. Even if an organization has not committed a legal wrong, it can suffer a liability loss in the form of defense.

Indirect Losses – Loss of reputation eventually results in loss of

revenue or market share. Another example is bad publicity and loss of goodwill which prompts increased advertising or a public relations campaigns.

Specific Performance or Injunction – Courts may order the wrongdoer to complete the performance specified in the contract. This remedy is called specific performance. A court can also order a party to refrain from doing a particular activity, which is called an injunction. Both cause liability losses because of associated defense costs.

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Modifying Legal and Regulatory Risk

• Overview of the Procedure to modify risk – Risk Avoidance

• Not doing the activity

– Modifying the likelihood of an event • Loss prevention techniques

– Modifying the consequence of an event • Loss Reduction

• In certain circumstances, risk sharing (insurance) or retaining the risk may be appropriate.

Modifying Likelihood of Tort Liability

• Contractual Removal or Limitation of Tort Liability – Waivers

• Waivers are a voluntary relinquishment of a known right

– Hold-harmless agreements • contractual provisions by which one party agrees to assume the

liability of a second party.

– Exculpatory agreements • Contract provisions that enable a party to avoid liability for

negligence or wrongful act • Usually in the form of a “Release of Liability” agreement for

activities specified in the contract. (bounce houses)

– Unilateral notices • Notices that are posted so they are physically apparent, expressed

in language the other party understands, and reasonable in extent – Example; how many warning labels are on a ladder or plastic bag – Signs in parks regarding hiking

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Modifying Likelihood of Tort Liability

• Hazard Control as Removal or Limitation of Tort Liability

– Hazard is a condition that increases the frequency or severity of a loss

– Hazard control is usually specific to the risk exposure covered under an insurance policy • Premises and operations – parking lots, walking surfaces,

merchandise displays, entrances/exits – large exposure is for slip/trip/fall claims

• Products and completed operations – measures vary by product manufactured and/or type of operations, but usually controlled by proper design, testing, quality control, and clear instructions or technical manuals

Modifying Likelihood of Contractual Liability

• Primary measure to reduce contractual liability is to have all contracts reviewed by counsel, before signing.

• Written contracts rather than oral contracts

• Contract must accurately reflect intent of both parties

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Modifying Likelihood of Statutory Liability

• Risk managers must understand statutory and regulatory requirements applicable to their organization • Internal experts • Trade associations • External experts – consultants

– Must assign develop compliance plan and assign responsibilities

– Board of Directors/Owners have role to ensure organization follows laws

• Sarbanes Oxley, OSHA, EPA, etc..

– Corporate Code of Conduct is technique to modify likelihood of statutory

liability • Commitment to ethical behavior and outlines applicable policies and importance of

regulatory compliance • Helps set operational standard when organization operates in different countries

with different laws

Modifying Consequences of Tort Liability

• Development of Defenses and Participation in Settlement Negotiations are two methods to modify consequences of tort liability • Development of Defenses

– Legal Privilege – concept that an organization has the right to invade another’s interests to promote or protect one’s own greater interests. Example - common law places more importance on protecting persons than on protecting property

» Privilege - is a rule of law allowing a person to refuse to disclose confidential communications

– Immunity – defense, that in certain instances, shields organizations or persons from liability.

» Government entities -- State, counties, cities have certain immunity

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Modifying Consequences of Tort Liability

– Development of Defenses • Comparative Negligence is common-law principle that requires both

parties to a loss to share the financial burden of the bodily injury or property damage according to their respective degrees of fault – If damage is $100,000, but comparative negligence is 50% on injured party,

only recover $50,000

• Last Clear Chance Doctrine is a defense that holds the party who has

the last clear chance to avoid harm and fails to do so solely responsible for the harm. – Being hit by car when running a red light – Signage for wet floor

• Assumption of Risk is concept that plaintiff had sufficient

understanding of risk and “reasonable prudent person” voluntarily accepted the risk – Skiing, football, etc..

Modifying Consequences of Tort Liability

– Settlement Negotiations

• Negotiations offer an opportunity to resolve a suit more favorably than would the court – Depending on whether the event was insured will dictate who

takes the lead in negotiations

– Risk manager needs to communicate organization’s goals in reaching a settlement

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Modifying Consequences of Contractual Liability

– Measure that can be taken in contractual liability • Select favorable jurisdiction for adjudication in the event of disagreement

• Include limits of liability – software often limited to purchase price

• Liquidated damages provisions- limits the amount for which one party

might otherwise be liable, or it can ensure that minimum level of payment – Example is event planning with hotels

• Valuation clause – used mainly in transportation or bailment of property in

the event lost, stolen, or damaged – Value of car if stolen while in service shop

• Evaluate Duty to Mitigate – essentially this means that if breach of

contract is identified, other party will be given time to cure or use good faith effort to reduce severity of losses.

Modifying Consequences of Statutory Liability

– Usually the only defenses to reduce fines or penalties are specific to the organization issuing the fine.

• Cal/OSHA has informal conference process followed by process to appeal to a Board

– Most other defenses rely on claiming statute was unconstitutional or too vague to be enforceable

• Only works if statute has never been tested and will most likely be expensive

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Legal Systems

• For most countries, legal system falls into two major categories

– Civil-law system

– Common-law system

Civil Law

• Civil law system uses comprehensive codes and statutes to form backbone of legal system – Relies heavily on legal scholars to interpret the law – More countries use its subsystems then any other legal system

• Judge is a civil servant whose function is to find correct legislative

provision from code of statutes and apply to facts of a case – Not intended to “interpret” law

• Usually Civil Law Case has three stages

– Preliminary hearing to submit pleadings – Evidence stage a “hearing judge” hears evidence and prepares written

summary of proceedings – Decision stage – “presiding judge” decides case based on the record provided

by hearing judge, counsels briefs, and arguments

• No jury trial used in civil law system

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Civil Law

• Roman-French Law – Magistrate is the final arbiter of a private law dispute – Court can rely on appointed experts – Magistrate typically does not reject expert’s opinions

• German Law

– German Private Law is the civil code that took effect in 1900 – Code designed for legal professionals – German code requires a finding of fault on the part of the wrong-doer in a tort

suit – German statutes are fairly specific on compensation based on type of accident

• Scandinavian Law

– Both a civil-law system and an independent system – Codes based on history of customary law and codified business practices

Common Law

• In common law system, a judge interprets the facts of a case, examines precedents, and makes a decision based on facts of current case

– Fact intensive and relies judge’s reasoning for a final decision

– Used in most former British colonial countries

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Other Global Law Systems

• East Asian Law – Tradition of informal compromise, contrasted with

individual parties’ asserting their rights in negotiations to settle contract disputes • Relatively few attorneys, judges, or lawsuits

• Hindu Law – Originated under caste system in which place people

in one of four major castes

– System reflects elements of old caste system, but has statutory code of commercial, criminal and civil procedure

Other Global Law Systems

• Islamic Law – System of law called Shari’ah law based on

foundations of the Book of the Koran

– Koran contains specific precepts about ethics, crime, business transactions, domestic relations, inheritance, and war

– Does not mention legal consequence for disregard of its rules

– Faqh refers to the body of laws developed from the Shari’ah – five schools exist today

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Other Global Law Systems

• Socialist-Communist Law

– System of law emphasizes state’s interest over that of individuals

– Private sector business principles not necessary in socialist system

• Government owns all property and production

• All contract law is public

– Russia changed to Civil-Law country with the fall of the Soviet bloc

International Law

• Public International Law – Law that concerns the interrelation of nation states and that is

governed by treaties and other international agreements • NAFTA • GATT

– Require member countries to amend their national laws to comply with agreements

• Private International Laws

– Law that involves disputes between individuals or corporations in different countries • Issues with system

– Whether court in one country will recognize the decision of another - Comity – Whether court has the right to hear the legal dispute - Jurisdiction

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Commercial Liability Loss Exposures

Premises and Operations Liability Loss Exposures

• Definition

– Liability arising from bodily injury or property damage caused either by an accident that occurs on an organization’s owned, leased, or rented premises

• Slip/trip/fall

– Or by an accident that arises out of the organization’s ongoing operations but occurs away from the premises

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Premises and Operations Liability Loss Exposures

• Owners and occupiers of land owe a different (higher) duty of care to others on premises – Typically jurisdictions follow a reasonable care

standard • If you own a grocery store, care includes regular sweeping,

retrieving carts

• Organization can be held to Strict Liability for certain operations – Hold harmless agreements may transfer liability

Products and Completed Operations

• Products liability – Arises out of the manufacture, distribution, or sale of

an unsafe, dangerous, or defective product or the failure of the manufacturer, distributor, or retailer to meet its legal duties to the user or consumer of the product. • Plaintiff must prove that defendant failed to take reasonable

care in the design, manufacture, distribution, or sale of the article

• In order to prove strict liability must prove three elements – Product was defective when left manufacture or supplier’s

control – Defective condition made the product reasonable dangerous – Defective product was the proximate cause of injury

• Plaintiff can seek damages from any entity in process

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Products and Completed Operations

• Completed Operations liability

– Legal responsibility of a contractor, repairer, or other entity for bodily injury or property damage arising out of the entity’s completed work

– Contractors can be held liable after work is accepted if the contractor knew of a danger or deliberately concealed a defect in a completed work

– Right of action permitted to anyone injured through contractor’s negligence

Automobile Liability Loss Exposure

• Automobile liability – Legal responsibility for bodily injury or property damage arising

out of the ownership, maintenance, or use of automobiles – Most states have passed no-fault auto insurance which means

that the car owner is liable for damages arising from any person’s operation of the auto with owner’s express or implied permission

– Anyone who is injured or property damaged as a result of negligent use of an auto has a right of action against the operator • Joint liability for employee who is negligent in operating an auto

during course and scope of employment – Employees who drive their own vehicle for work purposes should understand

their insurance is primary and employer should require employee to retain higher insurance coverage

– If employer owned vehicle, action usually taken against employer only – Driver selection, training, and monitoring is key prevention technique

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Automobile Liability Loss Exposure

• Liability for Operation by Others

– Person who negligently furnishes defective auto to another person may be held liable to a third person injured as a proximate result of the defect

• Some jurisdictions have exceptions when auto is sold “as is,” on premise that buyer has obligation to have car inspected

– Negligent Entrustment -Person who entrusts an auto to an “unskilled” or “Incompetent” operator may be held directly liable for resulting injuries.

• To establish liability, must be shown that party entrusting vehicle knew of should have know of driver’s incompetence, inexperience, or reckless tendencies

Automobile Liability Loss Exposure

• Auto No-Fault Laws – Goal of no fault-laws is to provide stated benefits for

all persons injured in auto accidents without need to prove fault • Half no-fault systems allow torts – ability to sue

• Some states require that insurance coverage include personal injury protection – First- party benefits for medical expenses, loss of income, or

death

• States have modified no-fault systems that allow owners to retain right to sue or accept limitations on right to sue with lower insurance premiums

• Most states have minimum insurance requirements

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Workers Compensation and Employers Liability Loss Exposure

• Workers compensation is an example of liability imposed by statute

• WC is intended to be “exclusive remedy” means that employee cannot sue, but is compensated for injuries and illnesses on no-fault basis

• May file tort claim under limited circumstances – Injury caused intentionally by employer – Employee spouse may claim loss of consortium due to injury caused

by employer’s negligence – Injury resulting from employer’s negligence or torts while acting in

some capacity other than employer

• WC statutes may exempt certain types of employees

– Farm workers, domestic workers, real estate agents, family employees

Workers Compensation and Employers Liability Loss Exposure

• Hold Harmless Agreements

– Employer’s liability for injuries of employees can also be assumed under contract

• Employer may agree to indemnify another party against certain claims an employee makes against the contracted party if they are injured.

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Case Study

Case Study

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Case Study

Case Study

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Case Study

Case Study

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Case Study

Case Study

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Case Study