Property Risk, Liability Risk, Tort System, and Workers’ Compensation Vickie Bajtelsmit, J.D., Ph.D. Colorado State University Outline Property Risk Liability Risk The Tort System Workers’ Compensation 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 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 Homeowners’ Insurance Standardized and simplified policies Risk classification and underwriting based on Location Construction Fire protection Building code adequacy and enforcement Age Credit score Homeowner’s Coverages Form Type All Policies HO-3 All-Risk Form HO-4 Renter's Contents Coverage Under Each Policy --Personal liability, medical payments for guests, additional living expenses during repair --Losses due to: fire, lightning, windstorm, hail, explosion, riots, damage from aircraft or vehicles, smoke, vandalism, theft, glass breakage, volcanic eruption, All perils, including those listed above, except flood, earthquake, war, nuclear accident Loss to personal belongings caused by perils listed above. Similar as HO-3 but includes endorsements for HO-5 Comprehensive Form replacement cost coverage on contents and buildings. Similar to HO-4; covers personal belongings and additions HO-6 Condominium to the living unit. Covers agricultural buildings and equipment for non-farm HO-7 Country Home Form businesses Valuation of recoverable loss Actual cash value versus replacement cost Coinsurance clause Deductibles Limits and exclusions Subrogation 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. 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 Types of Liability Exposures Professional liability Contractors liability Employer liability Product liability Principal-agent liability Auto liability Landlord-tenant liability Contractual liability 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) Important Concepts in Liability Insurance Policy Trigger Accident Occurrence vs. Claims Made Policy Limits Defense Costs Underwriting Factors Moral Hazard Adverse Selection Types of Damages Compensatory Damages Medical costs Lost wages Pain and suffering Punitive Damages Auto Insurance Coverages Liability Medical payments Uninsured/underinsured motorist Personal injury protection (PIP) Physical damage coverage Minimum Auto Liability Coverage Differs by State: Low Relative to Potential Losses 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 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 Issues related to the Legal System Increased Litigation Escalating jury awards Class Actions Insurer bad faith claims “New risks” Non-economic and punitive damages Insurance fraud Evaluating the Legal System Objectives Compensation of victims Improved safety Deterrence Are these accomplished? At what cost? Are the outcomes equitable? Cost of the U.S. Tort System Inefficiency of the System: Less than Half the Tort Dollar Goes to Claimants Administrative Costs of Settling Claims 21% Actual Economic Losses 22% Defense Costs 14% Attorneys Fees 19% Pain and Suffering (Non-Economic) Losses 24% Source: Tillinghast-Towers Perrin 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 Tort Reform Developments Medical Malpractice Caps on Noneconomic Damages Caps on Punitive Damages—What’s Reasonable? Class Action Reform Arbitration 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 Workers’ Compensation Workers Compensation Background 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 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 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 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.