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Major Sources of Liability – Part 2

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Liability Risk Management
Major Sources of Liability – Part 2

E-Commerce Liability

As was discussed in detail in module 1, e-commerce poses not only property and interruption of business risks but also third-party liability arising from the following: [16]

Invasion of privacy and identity theft
Employee-related risks and harassment
Intellectual property risks such as copyright, trademark infringement, defamation, encryption, and discovery
Publishing and advertising risks
Service denial risks (contractual risks)
Professional risks (errors and omissions risks)

E-Commerce Liability – Online Privacy

Online privacy issues continue to top headlines. The results of a survey conducted by the Yankee Group, a consulting firm focusing on global e-commerce and wireless markets, highlight this significantly.

The reputation of the business is at stake if customers’ information does not remain private and protected. Invasion of privacy is an issue of major public concern.

Businesses often collect data about their customers or Web site visitors by having them fill out an online form or by making the user register for permission to use the site. This information, if not protected, can create liability when the privacy of the customer is breached. When so much information is released on the Internet, there are many opportunities for committing public defamation and opening the door to lawsuits.


The results showed that 83 percent of online consumers are somewhat or very concerned about their privacy on the Internet. [17] According to a Fox News/Opinion Dynamics Poll, 69 percent of those polled said they’re “very concerned” about their ability to keep personal information, such as medical and financial records, confidential.

While nearly two-thirds of Americans said they have access to the Internet at work, home, or school, only 7 percent believed their most personal information is secure from the prying eyes of hackers or bosses. [18]

E-Commerce Liability – Encryption/ Employee Privacy

Another e-commerce liability risk is raised with encryption, that is, the coding of Internet messages so information cannot be read by an interceptor.

Employee privacy and the monitoring of employees’ e-mail by employers are also key privacy issues. The courts appear to be on the employer’s side by agreeing that employers have the right to monitor employee e-mails.

Example 2

In the case of United States of America v. Eric Neil Angevine, the Tenth Circuit Court of Appeals held that, when the computer is provided to an employee (in this case, a university professor) by the employer, the employee should not have privacy expectations. [19]

Liability falls on the employer if an employee uses e-mail while at work to commit a federal crime or send a threat. The entire computer
system can be subject to seizure (Federal Computer Seizure guidelines). A firm is liable for any e-mails sent by employees; the e-mails are written proof of what the employee promised. The company can also be held liable for any sexually harassing e-mails sent by employees.

Example 1

Because the terrorists responsible for the September 11 attacks in New York City and Washington, D.C., presumably communicated via encrypted Internet messages, some lawmakers renewed calls for restricting the use of encryption and for giving law enforcement unrestricted access to codes, or keys, for unlocking the encrypted text.

E-Commerce Liability – Intellectual Property

Because a business derives much of its value from the uniqueness of its intellectual property, including trade secrets, copyrights, and trademarks, infringement of these properties opens the firm to liability lawsuits. There is increasing liability risk associated with statements posted on the Internet.

Traditional publishing methods require many different people to proofread the document, checking for potentially harmful statements. None of this is required to place information online.

In the commercial world, advertising on the Internet brought both state and federal agencies into the act of protecting consumers from false Web-based advertisements.


In the early 2000s, the Securities and Exchange Commission (SEC) sued to enjoin an illegal offer and sale of securities over America Online and the Internet without a prospectus, and the Department of Transportation fined Virgin Atlantic Airways for failing to disclose the full price of flights on its home page.

The Food and Drug Administration (FDA) is also looking into online advertisements for pharmaceuticals. The National Association of Attorneys General (NAAG) has formed a thirty-eight-state task force to develop enforcement guidelines for combating illegal activity online. The Federal Trade Commission (FTC) has been involved in cleaning the Internet of false advertising by finding the perpetrators and fining them with large penalties. An example is the advertisers of Super Nutrient Program and Fat Burner Pills, who had to pay $195,000 in
penalties. [20]

E-Commerce Liability – Denial of Service

Denial of service liability is caused when a third party cannot access a promised Web site. This may be a major contractual liability. [21]

Finally, the professional liability of errors and omissions may cause a third party to have a loss of income. This may occur when an Internet provider fails or security software fails to perform.

The possible liabilities outlined above are not a complete list. Many of the causes of losses,may be causes for liabilities as well.

The important point is that e-commerce exposes businesses to liabilities not anticipated prior to the electronic age. These liabilities may not be covered in the traditional commercial liability policy.


For example, if a hacker penetrated a company’s Web site and caused a shutdown, customers and other businesses may file lawsuits contending that their inability to access the site caused them to suffer losses.

These losses are different from the first-party losses of the attacked company. The attacked company is covered under first-party insurance of property and business interruption income or special e-commerce endorsement.

Product Manufacture

Product liability is one of the most widely debated sources of risk for a firm.

The basis for product liability may be negligence, warranty, or strict liability in tort relating to defects causing injury in products sold to the public.

Product liability is a somewhat unusual aspect of common law because its development has occurred primarily within the twentieth century. One explanation for this late development is the doctrine of privity.

Once the privity doctrine was removed, negligence actions against manufacturers surfaced. Demonstrating a manufacturer’s negligence is difficult, however, because the manufacturer controls the production process. You may recall that the doctrine of res ipsa loquitur becomes relevant in such a circumstance, placing the burden of proof on the manufacturer.

Doctrine of Privity

The privity doctrine required a direct contractual relationship between a plaintiff and a defendant in a products suit. Thus, a consumer injured by a product had a cause of action only against the party from whom the product was purchased.

The seller, however, likely had no control over the manufacture and
design of the product, thus limiting potential liability. Consumers’ only recourse was to claim a breach of warranty by the seller; this cause of action is still available. [22]

Breach of Warranty

If you use a product as directed and suffer injury as a result, breach of warranty has occurred and the manufacturer may be held liable for damages.

Many products are warranted suitable for a particular use, either expressly or by implication. The statement on a container of first-aid spray, “This product is safe when used as directed…,” is an express warranty.

On the other hand, if you use the product other than as directed and injury results, the warranty has not been breached. Directions on a container may create an implied warranty. A statement such as “Apply sparingly to entire facial surface” implies that the product is not harmful for such use, thus creating an implied warranty. If the product is harmful even when the directions are followed, the warranty has been breached.


When a firm manufactures a product, sells a commodity, or acts in one of the other points in the marketing chain, it has a duty to act reasonably in protecting users of the commodity from harm.

Failure to fulfill this duty constitutes negligence and may provide the basis for liability if harm results.

According to Noel and Phillips:

“Negligence in products cases is most likely to involve a failure to warn or to warn adequately of foreseeable dangers, a failure to inspect fully or test, a failure in either design or production to comply with standards imposed by law or to live up to the customary standards of the industry.”


Failure to warn that the paint you sell may burn the skin unless removed immediately may result in injury to the buyer and a liability for the seller.

The product liability exposure can extend over the life of a product, which may be a very long time in the case of durable goods. A number of proposals have been made both nationally and at the state level to limit the time period during which such responsibility exists.

Strict Liability

A firm may be held liable for damage caused by a product even though neither negligence nor breach of warranty is established. This is called strict liability.

The doctrine of strict liability has been applied primarily based on the description provided in 1965 by the American Law Institute in section 402 of the Second Restatement of Torts. It reads as follows:

The important aspects of this description are that the product was sold in a defective condition, which makes it unreasonably dangerous, thereby causing physical harm to the ultimate user.

Thus, the manufacturer and/or seller of the product may be held liable even if “all possible care in the preparation and sale” of the product was undertaken, and even if the injured party was not the buyer. Because of the extent of this liability, it is not surprising that manufacturers hope to eliminate or at least limit the use of strict liability.

One who sells any product in a defective condition unreasonably dangerous to the user or consumer or to his property is subject to liability for physical harm thereby caused to the ultimate user or consumer, or to his property, if:

a. The seller is engaged in the business of selling such a product, and

b. It is expected to and does reach the user or consumer without substantial change in the condition in which it is sold.

The rule stated in Subsection (1) applies although:

a. The seller has exercised all possible care in the preparation and sale of his product, and

b. The user or consumer has not bought the product from or entered into any contractual relation with the seller.

Doctrine of Strict Liability

Completed Operations

Closely related to product liability is liability stemming from activities of the firm in installing equipment or doing other jobs for hire off its own premises, called completed operations liability.

Defective workmanship may cause serious injury or property damage, for which the firm may be held liable.

Generally, a firm that hires an independent contractor is not liable for damage or injury caused by the contractor. There are a number of exceptions to this general rule, however, resulting in contingent liability.

Contingent Liability

Contingent liability occurs in situations where the firm is liable for an independent contractor’s negligence because the firm did not use reasonable care in selecting someone competent. If the activity to be performed by an independent contractor is inherently dangerous, the firm is strictly liable for damages and cannot shift its liability to the contractor.

The fact that the contractor agrees to hold the firm harmless will not relieve it from liability. A firm that hires an independent contractor to do a job and then interferes in details of the work may also find itself liable for the contractor’s negligence.

Liquor Liability

Many states have liquor laws-or dramshop laws-which impose special liability on anyone engaged in any way in the liquor business. Some apply not only to those who sell liquor but also to the owner of the premises on which it is sold.

The laws are concerned with injury, loss of support, and damage to property suffered by third parties who have no direct connection with the store or tavern.


If liquor is served to an intoxicated person or a minor and the person served causes injury or damage to a third party, the person or firm serving the liquor may be held liable. In some cases, liability has been extended to employers providing alcohol at employee parties.

Case Study 03- Obesity and Insurance-Litigation or Self-Discipline?

Please download and study the case study entitled “Obesity and Insurance-Litigation or Self-Discipline?” from the module resources section for this module.

The case study describes the difficulties a lawsuit that was made against the fast-food chain, McDonalds, in which a group of teenagers sued the chain for causing their obesity.


In this section you studied the various ways that individuals, families, firms, and other entities are exposed to liability in property and in activities and conduct:
Property owners’ duties vary with respect to invitees, licensees, and trespassers; children must be specially considered when property is an attractive nuisance.
Tenants face liability to the public and to property owners.
Property considered hazardous waste has the potential to be an environmental liability.
The most common source of liability in activities/conduct is the activity of operating an automobile, which also invites vicarious and nonownership liabilities.
Doctors, lawyers, accountants, and other professionals are exposed to professional liability in errors in omissions, activities of directors and officers, and medical malpractice.
Contractors are susceptible to operations liability.
E-commerce entails liability risks such as invasion of privacy, intellectual property risks, and contractual service denials.
The basis for product liability may be negligence, warranty, or strict liability.
Completed operations, contingent liability, and liquor liability are other sources of liability in activities and conduct.


1. Explain why a trampoline in a backyard is considered an attractive nuisance.
2. Ceci Willis sells books door to door. What responsibilities do you owe her when she visits your home? How would the circumstances change if you were the book seller and Ceci came to your home as a potential buyer? What if you owned several pet panthers?
3. Describe when strict liability applies in products. What is the practical effect of this doctrine?
4. Monique rents a one-bedroom apartment. Because she does not own the property, does this mean she is not liable for any injuries that might occur in her home? Give an example of a situation where she would be responsible.
5. When Vivienne and Paul Jensen’s daughter Heather turned sixteen, they signed a form allowing her to get a driver’s license. Two weeks after she received her license, Heather crashed the family car into a tree. He friend Rebecca, who was in the passenger seat, was severely injured. Explain why Heather’s parents are responsible in this case. What are the consequences to them of this liability?


[1] Coverage of the story is available in all media stories in the beginning of June 2002.

[2] Diane Richardson, “Bite Claims Can Dog Insurance Companies,” National Underwriter, Property & Casualty/Risk & Benefits Management Edition, May 14, 2001; Daniel Hays, “Insurers Feel the Bite of Policyholders’ Big Bad Dogs,” National Underwriter Online News Service, January 31, 2001.

[3] Steven Brostoff, “New Brownfields Law Falls Short of Sought-After Superfund Reforms,” National Underwriter Property & Casualty/Risk & Benefits Management Edition, March 25, 2002.

[4] Rodd Zolkos, “Ohio High Court Favors Policyholder in Pollution Case,”Business Insurance, June 27, 2002.

[5] Mark E. Ruquet, “Accountants Under Scrutiny Even Before Enron Failure,”National Underwriter, Property & Casualty/Risk & Benefits Management Edition, February 25, 2002.

[6] Mark E. Ruquet, “Accountants Paying More for E&O Coverage,” National Underwriter, Property & Casualty/Risk & Benefits Management Edition, February 25, 2002.

[7] The citations are too many to list because the issues develop daily. Review information in National Underwriter, Best’s Review, and Business Insurance to learn more. Some parts of these Web sites are open only to subscribers, so students are encouraged to use their library’s subscriptions to search these publications.

[8] Best Wire, July 1, 2002.

[9] National Underwriter Online News Service, June 17, 2002.

[10] Lisa S. Howard, National Underwriter, Property & Casualty/Risk & Benefits Management Edition, February 25, 2002.

[11] “D&O Coverage Evolve in Unstable Regulatory Climate,” BestWire, May 23, 2005, 23&Tab=1&Site=news&refnum=74599 (accessed March 16, 2009).

This article and those in footnotes 14 to 16 are a few examples. During the early to mid-2000s, the student can find related stories in every media outlet.

[12] Dave Lenckus, “AIG Set to Test Its Own Cover,” Business Insurance, May 16, 2005, 16843&a=a&bt=AIG+Set+to+Test+Its+Own+Cover (accessed March 16, 2009).

[13] Michael Ha, “AIG Center of Class-Action Lawsuit,” National Underwriter Online News Service, May 13, 2005,
%20Issues/Issues/2005/20/News/P20AIGUPDATE?searchfor= (accessed March 16, 2009).

[14] Steven Brostoff, “Malpractice Cover Worries Docs: AHA,” National Underwriter Online News Service, June 26, 2002; Daniel Hays, “Another Malpractice Insurer Leaving
Florida,” National Underwriter Online News Service, June 24, 2002; “Study: Tort Costs Still Edging Up, Albeit More Slowly,” National Underwriter Online News Service, January 17, 2005,
%20News/2005/01/17-Study%20Tort%20Costs%20Still%20 Edging%20Up%20Albeit%20More%20Slowly?searchfor=tort%20costs%20edging%20up (access ed March 16, 2009).

[15] Rachel Zimmerman and Christopher Oster, “Insurers’ Price Wars Contributed to Doctors Facing Soaring Costs; Lawsuits Alone Didn’t Inflate Malpractice Premiums,” Wall Street Journal, June 24, 2002; “Report: Suits Don’t Cause Higher Med Mal Premiums,” National Underwriter Online News Service, March 11, 2004, News/2005/03/11-Report%20Suits%20Dont%20Cause%20Higher%20Med%20 Mal%20Premiums?searchfor=suits%20cause%20higher%20premiums (accessed March 16, 2009).; Arthur D. Postal, “More Conflict over What Raises Med-Mal Rates,” National Underwriter Online News Service, May 23, 2005,
%20News/2005/05/23-TORT-dp?searchfor=conflict%20raises%20rates (accessed March 16, 2009).

[16] George Sutcliffe, E-Commerce and Insurance Risk Management(Boston: Standard Publishing Corp., 2001); 2004 CSI/FBI Computer Crime and Security Survey at GoCSI.com.

[17] “Online Privacy Continues to Be a Major Concern for Consumers,” research report, the Yankee Group, July 27, 2001. For its 2001 Interactive Consumer (IAC) report, the Yankee Group surveyed approximately 3,000 online consumers.

[18] Richard S. Dunham “Who’s Worried About Online Privacy? Who Isn’t?”Business Week Online, June 28, 2000, in.

[19] Thomas Jackson, “Protecting Your Company Assets and Avoiding Risk in Cyberspace,” online newsletter of legal firm Phillips Nizer Benjamin Krim & Ballon LLP, July 16, 1996.

[20] Thomas Jackson, “Protecting Your Company Assets and Avoiding Risk in Cyberspace,” online newsletter of legal firm Phillips Nizer Benjamin Krim & Ballon LLP, July 16, 1996.

[21] George Sutcliffe, E-Commerce and Insurance Risk Management(Boston: Standard Publishing Corp., 2001); 2004 CSI/FBI Computer Crime and Security Survey at GoCSI.com.

[22] Dix W. Noel and Jerry J. Phillips, Products Liability in a Nutshell (St. Paul, MI: West Publishing Co., 1981).

[23] Greeman v. Yuba Power Products, Inc., 377 P.2d 897 (Cal 1963).

[24] Many people consider strict product liability to be anything but a subtle shift from negligence. For a discussion of the difference, however, seeBarrett v. Superior Court (Paul Hubbs), 272 Cal. Rptr. 304 (1990).

[25] “Asbestos Trust Could Face Constitutional Challenges,” BestWire, May 23, 2005; Mark A. Hofmann, “Amendments Delay Vote on Asbestos Trust Fund Bill,” Business Insurance, May 16, 2005; Matt Brady, “House Dems Ask Study Of Asbestos Fund Concept,” National Underwriter Online News Service, May 13, 2005; Jerry Geisel, “Insurer Groups Oppose Asbestos Legislation,” Business Insurance, April 19, 2005.

[26] Michael Bradford, “Tobacco Firms Facing String of Legal Defeats,”Business Insurance, July 1, 2002.

[27] Vanessa O’Connell, “Lifting Clouds: New Tactics at Philip Morris Help Stem Tide of Lawsuits: As It Revamps Legal Team, Cigarette Giant Also Gains in Appeals-Court Rulings, Some Big Battles Still Loom,” Wall Street Journal, May 11, 2005, A1.

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