Liability Risk Management
Major Sources of Liability – Part 1
In this section we elaborate on the following:
The liabilities of property owners and property owners’ duties to others
Sources of liability for tenants
Liability in activities and conduct, such as automobile liability, professional liability, product liability, and more
You have a duty to the public not only with regard to your activities but also in connection with real and personal property you own or for which you are responsible.
The duty-the degree of care-varies with the circumstances. The owner or tenant of premises, for example, does not owe the same duty to each person who enters the property. The highest degree of care is owed to invitees, whereas the standard of care is less for licensees and lowest for trespassers.
A trespasser is a person who enters the premises of another without either express or implied permission from a person with the right to give such permission.
Should a trespasser enter your property, he or she is not entitled to care by the owner or tenant, their presence there is illegal. An owner or tenant must not warn trespassers of any dangerous activity or condition of the property. They need not make the place safer, however, than it is normally.
A licensee is a person who enters premises with permission but (1) not for the benefit of the person in possession, or (2) without a reasonable expectation that the premises have been made safe.
If your automobile breaks down and you ask the owners of the nearest house to use their telephone, the permission you receive to enter the house makes you a licensee. Because a licensee is the party who receives the benefit of entering the property, he or she is entitled to a minimum degree of care by the owner or tenant. An owner or tenant must avoid harm to licensees and must warn licensees of any dangerous activity or condition of the property. They need not make the place safer, however, than it is normally.
An invitee is a person who enters the premises with permission and for the benefit of the person in possession. The invitee is entitled to a higher degree of care than a licensee.
Thus, a customer in a store is an invitee, whether or not he or she makes a purchase. The property owner is expected to maintain safe premises for invitees and to warn of dangers that cannot be corrected.
For the most part, it is a person’s reasonable expectation that determines his or her status. If you reasonably expect that the premises have been made safe for you, you are an invitee.
If you should reasonably expect to accept the premises as is without special effort on the part of the possessor, then you are a licensee.
The distinction between a licensee and an invitee is not always clear because it depends on reasonable expectations.
Further, the courts have tended in recent years to place little weight on these distinctions. The question becomes, What is reasonable of the property owner? Generally, the owner has the responsibility to provide a reasonably safe environment.
In one case, a guest who fell on a slippery floor was awarded damages against the homeowner.
In another case, a visitor fell down steps that were not properly lighted because a worker had failed to turn on a light. Although it was the worker who was negligent, the homeowner had to pay because the worker was his representative. Thus, the property owner’s liability was vicarious; he was not negligent, but his employee was.
In another case, a homeowner repaired a canopy and then hired a painter. When the painter crawled onto the canopy, the canopy collapsed. The homeowner was held liable for the injuries sustained.
Tenant’s Liability to the Public
If you are a tenant, you cannot assume that the owner alone will be liable for defects in the premises. In many cases, the injured party will sue both the owner and the tenant. Furthermore, the owner may shift responsibility to the tenant by means of a hold-harmless clause in the lease.
A hold-harmless agreement is a contractual provision that transfers financial responsibility for liability from one party to another.
This is particularly important to understand because many tenants who sign a lease do not realize they are assuming such liability by contract. A typical clause is presented as an example.
A typical clause is as follows:
…That the lessor shall not be liable for any damage, either to person or property, sustained by the lessee or by any other person, due to the building or any part thereof, or any appurtenances thereof, becoming out of repair, or due to the happening of any accident in or about said building, or due to any act or neglect of any tenant or occupant of said building, or of any other person.
The gist of this clause is to transfer the financial aspects of the landlord’s potential liability to the tenant.
Tenant’s Liability to Owner
If your negligence results in damage to premises you lease, you may be liable to the owner. The fact that the owner has insurance to cover the damage does not mean you will not be required to pay for the loss.
After the insurer pays the owner, the insurer receives subrogation of the owner’s right to recover damages, meaning that the insurer is given legal recourse against you for any liability you may have to the owner.
Ownership of animals may also result in liability. Anyone owning an animal generally is responsible for damage or injury that the animal may cause.
In many jurisdictions, if the owner acted reasonably in controlling the animal, no liability will result.
For example, in many places, a pet dog that has been friendly and tame need not be leashed. Once that dog has bitten someone, however, more control is required. If the dog bites a second person, the owner is likely to be held liable for the harm. In this case, the owner had forewarning.
Likewise, anyone owning dangerous animals such as lions or poisonous snakes is held to a higher standard of care. In this case, strict liability may be applied. Knowledge of the potential danger already exists; thus, the owner must be given strong incentives to prevent harm.
In a recent, highly visible California case, a thirty-three-year-old woman was mauled to death by a 123-pound English mastiff/Presa Canary Island crossbreed. The owners were found guilty of second degree murder by the jury, but the judge, in a surprise move, changed the ruling. 
This case illuminates statistics from the Center for Disease Control and Prevention in Atlanta, which reports ten to twenty deaths annually from dog bites. Lawmakers in various states enacted laws concerning dogs. The insurance industry also reacted to curtail the losses caused by dogs.
In the Insurance Services Office (ISO) homeowners policy there are “special provisions that excludes liability coverage for any insured for bodily injury arising out of the actions of a dangerous or vicious, and out of the insureds failure to keep the dangerous dog leashed or tethered or confined in a locked pen with a top or locked fenced yard. The owners are required to control the dogs and assure the safety of passersby.” 
In some cases, small children are attracted by dangerous objects or property. In such circumstances, the owner has a special duty toward the children, especially if they are too young to be responsible for their own safety. This is called the doctrine of attractive nuisance.
An attractive nuisance is anything that is:
Attractive to small children
People who own power lawn mowers, for example, must be especially watchful for small children who may be injured through their own curiosity. If you leave your mower running while you go in the house to answer the telephone and there are small children in the neighborhood who may be attracted to the mower, you may be held financially responsible for any harm they experience.
The most common attractive nuisance is the swimming pool. Although some courts have held that those who own swimming pools are not necessarily babysitters for the community, it appears that pool owners do have the duty of keeping children out. There have been many cases in which children entered a neighbor’s pool without permission and drowned. The result is a suit for damages and in many cases a verdict in favor of the plaintiff.
An increasingly important area of potential liability involving property derives from the possibility that land may be polluted, requiring cleanup and/or compensation to parties injured by the pollution.
Because of significant legislation passed in the 1970s and 1980s, the cleanup issue may be of greater concern today than previously.
The area of pollution liability is very complex. Decisions have been made regularly in pollution cases. In a pollution case that went to the Ohio Supreme Court, Goodyear Tire & Rubber Co. sought to recover the cost of environmental cleanups at some of its sites from its insurers. 
The insurers claimed that the coverage was excluded under the pollution exclusions provisions. The court sided with Goodyear, however, ordering that Goodyear be allowed to choose-from the pool of triggered policies-a single primary policy against which to make a claim.
In 1980, the U.S. Congress passed the Comprehensive Environmental Response, Compensation, and Liability Act (known as either CERCLA or Superfund).
This act places extensive responsibilities on organizations involved in the generation, transportation, storage, and disposal of hazardous waste. Responsibility generally involves cleaning or paying to clean polluted sites that are dangerous to the public. Estimates of total program costs run from $100 billion to $1 trillion, giving an indication of the potential severity of liability judgments. Any purchaser of realty (or creditor for that purchase) must be aware of these laws and take steps to minimize involvement in Superfund actions.
A small amendment to the law was signed by President George W. Bush on January 11, 2002. Under the Small Business Liability Relief and Brownfields Revitalization Act, certain small contributors to Superfund sites were taken out of the liability system. The new law creates incentives for developers to purchase and restore abandoned urban sites known as brownfields. 
Activities and Conduct
In negligence suits, you will be judged on how a “reasonable” person in the same or similar circumstances with your training and ability would have acted.
People also may be liable for damages caused by their own actions or those of someone else. You will be judged according to different criteria for nonnegligence suits.
Ownership and operation of an automobile is probably the most common source of liability any individual will encounter.
As the driver of an automobile, you are responsible for its careful and safe operation. If you do not operate it in a reasonable fashion and someone is injured as a result of such lack of care, you may be held liable for damages.
In some states, the family purpose doctrine makes the owner of the family car responsible for whatever damage it does, regardless of which member of the family may be operating the car at the time of the accident. The theory is that the vehicle is being used for a family purpose, and the owner, as head of the family, is therefore responsible.
Many parents assume responsibility for their children’s automobile accidents without realizing they are doing so. In some states, minors between the ages of sixteen and eighteen are issued driver’s licenses only if their applications are signed by a parent or guardian.
What many parents do not realize is that by signing the application, they may assume responsibility for damage arising from the child’s driving any automobile. Ordinarily, a child is responsible for his or her own torts, but the parent may become liable by contract.
Automobile Liability (Continued )
Vicarious liability is possible in other settings as well.
A special problem for employers is the risk known as nonownership liability, in which an employer is held liable for an injury caused by an employee using his or her own property when acting on the employer’s behalf.
If an employee offers to drop the mail at the post office as he or she drives home from work, the firm may be held liable if the employee is involved in an accident in the process. This possibility is easily overlooked because the employer may not be aware that employees are using their cars for company business.
If you lend your car to a friend, Sid Smith, so he can go buy a case of liquor for a party you are having, he will be your agent during the trip and you may be held responsible if he is involved in an accident. Your liability in this case is vicarious; you are responsible for Smith’s negligence.
On the other hand, if Smith is not a competent driver, you may be held directly liable for putting a dangerous instrument in his hands. In such a case, it is your own negligence for which you are responsible.
Members of a profession claim to have met high standards of education and training, as well as of character and ethical conduct. They are expected to keep up with developments in their field and maintain the standards established for the profession.
As a result, the duty a professional owes to the public is considerably greater than that owed by others. Along with this duty, of course, comes liability for damage caused by failure to fulfill it. People expect more from a professional, and when they do not get it, some sue for damages.
Professionals’ mistakes can result in professional liability claims. The insurance protection for this risk is errors and omissions (E&O) liability coverage.
In light of the Enron/Arthur Anderson debacle and the WorldCom fraud, it is no wonder that the price for E&O has skyrocketed. 
The lack of trust of investors, small or large, in the accounting profession and corporate leadership in the United States led to the creation of the Sarbanes-Oxley Act of 2002.
The failures of the dot.com companies brought about an “onslaught of securities litigation, increasing claims for directors, officers and accountants’ professional liability insurers.” 
Directors and Officers
The outcome of all these accounting irregularities and the pure fraud that was alleged also has caused the rates of directors and officers (D&O) liability coverage to soar. 
Headlines such as “Insurers Likely to Balk at WorldCom D&O Coverage,”  “Lawsuits Send D&O Premiums Soaring,”  and “D&O Mkt. Could Face Catastrophic Year” were just some examples of the reflection of the accounting, telecom, and
In 2005, with added allegations against AIG, there was increased regulatory scrutiny of corporate activities, and insurers became more selective in their underwriting. BestWire reported in 2005 that “typically, D&O insurers offer three types of coverage:
Coverage to companies for settlements, judgments and defense costs
Coverage provided directly to directors and officers who aren’t indemnified by their companies
Coverage for securities-related claims made directly against companies. 
Three Types of Coverage
AIG has been one of the largest providers of D&O coverage. In 2005, it tested its coverage on its own directors and officers. 
As described in earlier modules, AIG’s stock price was hurt because of irregularities in the way the insurer accounted for the sale of finite risk and other loss mitigation products. These actions also led to class-action lawsuits (lawsuits filed on behalf of many plaintiffs) from the employees who invested in their company through their 401(k) accounts. 
If medical doctors fail to use reasonable care, and fail to use their best judgment in exercising their skill, they are guilty of medical malpractice.
The risks to which physicians and surgeons are exposed illustrate the position of a professional. In taking cases, doctors represent that they possess-and the law imposes upon them the duty of possessing-the degree of learning and skill ordinarily possessed by others in their profession.
Unlike the days when a family had one doctor who took care of almost all health problems, the modern health care system is specialized; many patients are dealing primarily with doctors they do not know.
Faith in, and friendship with, the family doctor has been displaced by impersonal, brief contact with a specialist who may be more efficient than friendly.
Furthermore, publicity about fraud by some doctors under the Medicare and Medicaid programs and about the amount of unneeded medical procedures (often performed as a defense against lawsuits) has reduced the prestige of the medical profession.
As a result, there has been a decrease in confidence and an increase in willingness to sue.
Two cases demonstrate the risk to which medical doctors are exposed:
1. A plastic surgeon who made his patient look worse instead of better had to pay $115,000 for the damage.
2. A court awarded $4.5 million to a girl suffering acute kidney failure as a result of malpractice.
Medical Malpractice (Continued)
Some of the increase in lawsuits, however, has been caused by a combination of unrealistic expectations based on news about modern medical miracles and the belief by some that people are entitled to perfect care. When they do not get it, they feel entitled to compensation.
One result of the surge in medical malpractice suits has been a scarcity of professional liability insurance in the private market and a dramatic increase in the cost of protection for both doctors and hospitals. These costs, of course, are passed along by most doctors to the consumer. They represent one factor contributing to rising health care costs.
Another result is the rise of defensive medicine. Doctors and hospitals are guided not only by what is good for the patient but also by their own interests in preventing liability losses.
The latter, of course, leads to practices that may not be medically necessary and that increase the size of the patient’s bill. The total effect of defensive medicine on the cost of health care is difficult to determine, but it is likely significant.
Medical malpractice lawsuits continued to soar into the new millennium and the availability of coverage became scarce in many states. Unable to find liability coverage, many doctors in risky specialties such as obstetrics and neurosurgery simply left the business.
Medical liability rates nearly doubled in some areas, and insurers left many states. In 2005, rates continued to climb but at a slower rate.  Some published studies in 2004 and 2005 concluded that lawsuits against doctors were not necessarily the cause of med- mal rate increases. 
Many firms are exposed to liability from their operations. Contractors are particularly susceptible to operations liability, or liability arising from the ownership, maintenance, and use of premises and conduct of activity.
Because they perform most of their work away from their premises, contractors’ greatest liability exposure is on the job rather than arising from their own premises. Bystanders may be injured by equipment, excavations may damage the foundation of adjacent buildings, blasting operations may damage nearby property or injure someone.
If harm is caused while performing the job, as opposed to a negligently completed job, the liability may be an operations one.
END of Part 1 of UNIT
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