Property Risk, Liability Risk, Tort System, and Workers’ Compensation

1. Property Risk, Liability Risk, Tort System, and Workers’ Compensation Vickie Bajtelsmit, J.D., Ph.D. Colorado State University

2. Outline • Property Risk • Liability Risk • The Tort System • Workers’ Compensation

3. Property risk • Definition: The risk of theft, loss, or damage to your real or personal property. • Direct versus indirect losses • Examples: • Home burns down • Automobile is damaged is accident • Personal property is stolen from your home

4. Major Property Insurance Policies • Homeowners’ • Auto Comprehensive • Building and personal property • Business income • Boiler and machinery • Inland marine • Ocean marine • Crime (Employee dishonesty) • Difference in conditions

5. Homeowners’ Insurance • Standardized and simplified policies • Risk classification and underwriting based on • Location • Construction • Fire protection • Building code adequacy and enforcement • Age • Credit score

6. Homeowner’s Coverages

7. Valuation of recoverable loss • Actual cash value versus replacement cost • Coinsurance clause • Deductibles • Limits and exclusions • Subrogation

8. Current Issues in Property Insurance: Catastrophes! • Earthquake, hurricane, flood, wildfire • Do these risks fit the requirements for insurable risks? • Government insurance available (e.g. National Flood Insurance Program) but many do not buy. • Losses have increased over time due to concentration of population in high risk areas.

9. Liability Risk • Definition: Risk that you will be responsible for an injury to another person or their property. • Legal Basis (1) The Law of Negligence • Breach of duty to another • Causation of Loss • Legal Basis (2) Strict Liability • Causation of Loss

10. Types of Liability Exposures • Professional liability • Contractors liability • Employer liability • Product liability • Principal-agent liability • Auto liability • Landlord-tenant liability • Contractual liability

11. Liability Insurance Policies • Homeowners’ • Personal Auto • Commercial Auto • Commercial General Liability (CGL) • Umbrella Liability (business or personal) • Directors and Officers (D&O) • Environmental Impairment Liability (EIL) • Employment Practices Liability • Professional Liability (malpractice) • Errors and omissions (E&O)

12. Important Concepts in Liability Insurance • Policy Trigger • Accident • Occurrence vs. Claims Made • Policy Limits • Defense Costs • Underwriting Factors • Moral Hazard • Adverse Selection

13. Types of Damages • Compensatory Damages • Medical costs • Lost wages • Pain and suffering • Punitive Damages

14. Auto Insurance Coverages • Liability • Medical payments • Uninsured/underinsured motorist • Personal injury protection (PIP) • Physical damage coverage

15. Minimum Auto Liability Coverage Differs by State: Low Relative to Potential Losses

16. Auto Insurance Rating • Factors in claim costs by jurisdiction • Accident rate, Small cars, Urbanization, Medical costs, Auto repair costs, Fraud, Litigiousness • By person • Driving record, Age, Miles driven, Credit score, Type of vehicle, Marital status, Gender, Territory

17. Auto No Fault Laws • Pure versus modified • Verbal thresholds • Dollar thresholds • Add-on laws • Choice systems • Evidence on cost savings • Number of No Fault States Declining

18. Issues related to the Legal System • Increased Litigation • Class Actions • Insurer bad faith claims • “New risks” • Escalating jury awards • Non-economic and punitive damages • Insurance fraud

19. Evaluating the Legal System • Objectives • Compensation of victims • Improved safety • Deterrence • Are these accomplished? • At what cost? • Are the outcomes equitable?

20. Cost of the U.S. Tort System

21. Inefficiency of the System: Less than Half the Tort Dollar Goes to Claimants Source: Tillinghast-Towers Perrin

22. Factors Driving Tort Costs • Innovative Plaintiff’s Attorneys • Generous Juries and Punitive Damages • More Class Action Law Suits (Product Liability, Discrimination, Shareholder) • Medical Cost Inflation • Media Coverage • Weak Economy • First Party Bad Faith Claims

23. Tort Reform Developments • Medical Malpractice Caps on Noneconomic Damages • Caps on Punitive Damages—What’s Reasonable? • Class Action Reform • Arbitration

24. Tort Reform Proposals • Caps on punitive damages • Caps on pain and suffering damages • Attorney fee limits • Arbitration • Limits on class actions • Modifications to Collateral Source Rule • Modifications to Joint & Several Liability

25. Workers’ Compensation

26. Workers CompensationBackground • Historically, injured workers had to rely on the law of negligence • Employers were rarely held responsible • Proof of negligence difficult • Defenses available • Currently: No fault (strict liability) system • Wage replacement • Medical benefits • Employer strictly liable for injuries arising out of and in the course of employment • Workers give up the right to bring suit

27. Problems in Workers Comp • Variation across states • Benefits and utilization • Financing of the system • Litigation (above threshold) • Fraud (by workers,employers,doctors, lawyers, insurers) • Medical Cost Inflation • Cost of dispute resolution

28. Other Current Issues • Increasing occurrence modern risks such as repetitive motion, mental stress, obesity • Reintegration of veterans • ADA (Americans with Disabilities Act): Must accommodate employees with disabilities • Managed Care • 24 hour coverage

30. Workers’ Comp Summary • Workers’ compensation programs provide a valuable type of insurance for injured workers. • The original trade-off of employer strict liability in return for employees giving up the right to sue is often eroded. • Costs are rising but are a decreasing % of total employee compensation. • Smaller firms feel the cost the most.