Chapter 11

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

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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 (a legal wrong against society that is
punishable by fines, imprisonment, or death)
– Breach of contract
– Tort (a legal wrong for which the law allows a
remedy in the form of money damages)

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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, battery,
trespass, false imprisonment, fraud, libel,
slander, and patent or copyright infringement
– Strict liability means that liability is imposed
regardless of negligence or fault (blasting
operations, mfg of explosives, crop spraying
from airplanes)
– Negligence

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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

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Law of Negligence

• Elements Negligence
– Existence of a legal duty to protect others from
harm
– Failure to perform that duty required by law
– 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
• A cause unbroken by any new and independent cause,
which produces an event that otherwise would not have
occurred.

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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 organizations so that others are
deterred from committing the same
wrongful act

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Exhibit 19.1 Types of Damages

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Law of Negligence- Defenses
Against 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

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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

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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 occurs 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

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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 owner’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

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Specific Applications of the Law of
Negligence
• A licensee is a person who enters the
premises with the occupant’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

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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 of operators if an agency
relationship exists
• Charitable institutions are no longer
immune from lawsuits, especially with
respect to commercial activities

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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

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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
others
• Owners of wild animals are held strictly
liable for injuries to others
• Strict liability may also be imposed on the
owners of ordinary pets, such as dogs

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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

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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
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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

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Exhibit 19.2 Tort Costs Relative to GDP
($billions)

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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

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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

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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

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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

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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 obstruction 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

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