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Liability Risk Management
Possible Solutions


In this section we elaborate on the following:
Methods within the legal system of alleviating liability by limiting use and improvements of defenses or reducing incentives to sue
Risk management for e-commerce liabilities


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.

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.

Introduction (Continued)

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.

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.

Collateral Source Rule

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.

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. 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:

The definitions of claims, defense costs, the named insured, an Internet site that is noted on the declaration page, policy period, and so forth.

The exclusions of the liability policy.

Risk Management of E-Commerce Liabilities (Continued)

An e- commerce liability policy generally will be structured as follows:

Section 1 states 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 2 states the exclusions of the liability policy.

Section 3 emphasizes that the coverage is the liability of only Internet-related activities. The limit of liability is set in the declaration page.

Section 4 includes 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).

Case Study 04- The Medical Malpractice Crisis

Please download and study the case study entitled “The Medical Malpractice Crisis” from the module resources section for this module.

The case study describes the issues that insurance companies have recently encountered with claims of medical malpractice.


In this section you studied suggestions for reducing liability losses from legal and risk management perspectives:
Reduction in attorneys’ contingency fees would reduce the financial incentive of trying liability suits
Shorter statutes of limitation on claims would reduce the overall number of liability cases
Placing caps on the amount of damages and eliminating the collateral source rule are efforts designed to limit award amounts
In e-commerce liability, privacy procedures should first be developed
Risk can be transferred through special e-commerce liability policies


1. How might elimination of the collateral source rule and a shortened statute of limitations affect the availability and affordability of liability insurance?
2. How does the contingency fee system work?
3. How might the contingency fee system affect the frequency and severity of liability exposures?


[1] This discussion is based on Safety ‘Net Internet Liability Policy by Chubb Group of Insurance Companies and Executive Risk Indemnity, Inc.

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