Arm 55 Chapter 6 - Legal And Regulatory Risk

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Basis for legal and regulatory risk

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Legal and regulatory risk includes uncertainties regarding the financial consequences of legal actions against an organization or noncompliance with statues and regulations. (6.3)

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The bases of legal and regulatory risk fall into 3 categories

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1) torts
2) contracts
3) statues and regulations

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Criminal law and civil law

Back 3

(6.3-6.4)

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Tort

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A wrongful act or an omission, other than a crime or breach of contract, that invades a legally protected right.
The remedy for a tort is usually monetary damages. An organization is liable for any tort it commits through its agents, which can include employees; subordinates; associates; directors and officers, anyone using the organization's property with its permission, etc.

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Wrongful acts that constitute torts fall into three categories

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1) negligence
2) intentional torts
3) strict liability torts

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Negligence

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An unintentional tort. In other words, the wrongdoer (tortfeasor) did not intend the action or the consequences. Instead, the tortfeasor exposed others to unreasonable danger by failing to exercise the duty of care the law requires under the circumstances.
(6.4)

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Intentional tort

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Actions or omissions that the tortfeasor intended, although the consequences of such actions may not necessarily be intended. Examples of legal interests that can be violated by intentional torts include: (6.5)

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Strict liability torts

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Doesn't require negligence or intent to harm. Strict liability torts typically arise when an organization engages in certain activities that are considered ultrahazardous or that involve product liability cases. (6.5)

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Contracts

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Both businesses and individuals form contracts, which are legally enforceable agreements between two or more parties. (6.5)

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Requirements for contract enforceability

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For a contract to be enforceable, four basic requirements must be met:
1) agreement: one party makes an offer that the other party accepts
2) consideration: each party gives up something of value
3) capacity to contract: the parties must have the legal ability to enter into contracts.
4) legal purpose - the contract must have a legal purpose and must not be opposed to public policy.

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Types of contracts

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1) implied
2) express
3) valid
4) void
5) voidable
6) unenforceable

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Implied contract

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a contract whose terms and intentions are indicated by the actions of the parties to the contract and the surrounding circumstances. (6.5)

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Express contract

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a contract whose terms and intentions are explicitly stated. (6.5)

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Valid contract

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a contract that meets all the requirements to be enforceable. (6.6)

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Void contract

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an agreement that, despite the parties' intentions, never reaches contract status and is therefore not legally enforceable or binding. (6.6)

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Voidable contract

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a contract that one of the parties can reject (avoid) based on some circumstance surrounding its execution. (6.6)

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Unenforceable contract

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a contract that is a valid contract but that because of technical defect cannot be enforced. (6.6)

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Statutes and regulations

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in addition to torts and contract, statutes can impose legal liability on an organization. Statutes are created by federal, provincial, or territorial governments and often modify the duties owed to others. (6.6-6.7)

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Legal and regulatory risk consequences

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The financial and other consequences of legal and regulatory risk can be catastrophic for an organization.

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4 main consequences of legal and regulatory risk to an organization

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1) monetary damages
2) defence costs
3) indirect losses
4) specific performance or injunction

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Monetary damages

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4 types:
1) compensatory damages: a payment awarded by a court to reimburse a victim for actual harm.
2) special damages: a form of compensatory damages that awards a sum of money for specific, identifiable expenses associated with the injured person's loss, such as medical expenses or lost wages.
3) general damages: a monetary award to compensate a victim for losses, such as pain and suffering, that do not involve specific measurable expenses.
4) punitive damages (exemplary damages): a payment awarded by a court to punish a defendant for a reckless, malicious, or deceitful act to deter similar conduct; the award need not bear any relation to a party's actual damages. (6.8)

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Defence costs

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When an organization faces a civil suit or criminal charge, it must investigate the circumstances and prepare a legal defence. Investigation and defence costs can be the most expensive liability loss for organizations. (6.9)

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Indirect losses

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As a consequence of the direct liability losses, several other net income losses are possible because of the filing of a claim against an organization. For example, having a director or an officer of a corporate face a criminal indictment can cause severe reputational harm. (6.9)

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Specific performance or injunction

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In a breach of contract claim, a court might order a specific performance: a court ordered equitable remedy requiring a party to perform a certain act, often-but not always-as a result of breach of a contract.
A court can also order a party to refrain from engaging in a particular activity. An injunction is a court ordered equitable remedy requiring a party to act or refrain from acting.

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The potential negative aspects of legal and regulatory risk can be treated in 3 ways.

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1) risk avoidance
2) modifying the likelihood of an event
3) modifying the consequences of an event

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1) risk avoidance

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There are two types of risk avoidance: stopping a current activity or never starting the activity. (6.10)

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2) modifying the likelihood of an event

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Modifying the likelihood of an event arising from legal and regulatory risk is often called loss prevention by some risk management professionals. This risk treatment method can be applied to these bases of legal and regulatory risk: tort, contracts, statutes. (6.10)

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modifying the likelihood of tort liability

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The RM professional can consider contractual removal or limitation of tort liability and hazard control as a means of modifying the likelihood of litigation against an organization. Several different clauses can be added to contracts to remove or limit liability, including:
1) waiver
2) hold-harmless agreements
3) exculpatory agreements
4) unilateral notices
(6.11)

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Hazard

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a condition that increases the frequency and severity of a loss.

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Modifying the likelihood of contractual liability

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Organizations enter into a variety of contractual agreements that subject the organization to a wide range of legal responsibilities. A primary measure to reduce the likelihood for contractual liability is to have most if not all contracts reviewed by counsel, before they're signed. (6.12)

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Modifying the likelihood of statutory liability

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RM professionals can help prevent statutory liability by understanding statutory compliance requirements applicable to their organizations.This understanding can be gained from information acquired from several sources (internal experts, trade associations, legal libraries. (6.13-6.14)

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Modifying the consequences of an event

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For hazard risk, this treatment technique is often referred to as loss reduction. The purpose of this technique is to decrease the severity or effect of an organization's losses. Modifying the consequences of an event can be applied to these bases of legal and regulatory risk: torts, contracts, statutes. (6.13)

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Modifying the consequences of tort liability

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Two methods to modify the consequences of tort liability are the development of defences and participation in settlement negotiations. 5 widely used defences:

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Legal privilege

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a rule of law allowing a person to refuse to disclose confidential communications. (6.14)

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Immunity

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A defence that, in certain instances, shields organizations or person from liability. (6.14)

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Comparative negligence

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A common-law principle that requires both parties to a loss to share the financial burden of the bodily injury or property damage according to their respective degrees to fault. (6.14)

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Last clear chance doctrine

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A defence to negligence that holds the party who has the last clear change to avoid harm and fails to do so solely responsible for the harm. (6.14)

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Settlement negotiations

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An organization's RM professional should take an active interest in lawsuit negotiations. Before a final verdict, settlement negotiations might offer opportunities to resolve the suit more favourably than would the court. (6.15)

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Modifying the consequences of contractual liability

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Measures that can be taken to reduce the loss associated with contractual liability include:
1) select a favourable jurisdiction
2) include limits of liability
3) include a liquidated damages provision
4) include a valuation clause
5) evaluate duty to mitigate
(6.16)

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Modifying the consequences of statutory liability

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Few defences are available to an organization to reduce the fine or penalty it faces when it violates a statute, which is why most organizations work diligently to prevent violations. A common defence is that the statute was unconstitutional or too vague. (6.16)

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Public international law

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A law that concerns the interrelation of nation states and that is governed by treaties and other international agreements. (6.22)

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Private international law

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A law that involves disputes between individuals or corporations in different countries.

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Commercial liability loss exposures

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Potential losses that can arise when an organization is held to be financial responsible to another individual or organization for bodily injury or property damage. Major categories of commercial liability loss exposures:
1) premises and operations liability
2) products and completed operations liability
3) automobile liability
4) workers compensation and employers liability
5) management liability
6) professional liability
7) environmental liability
8) marine liability
9) aircraft liability

Front 44

Premises and operations liability

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Relates to liability arising from bodily injury or property damage caused either by an accident that occurs on an organization's owned, leased, or rented premises or by an accident that arises out of an organization's ongoing operations but occurs away from the premises. (6.25)

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Products and completed operations liability

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Liability for products and liability for completed operations are often treated as components of one loss exposure.
Products liability: arises out of the manufacture, distribution, or sale of an unsafe, dangerous, or defective product and the failure of the manufacturer, distributor, or retailer to meet its legal duties to the user or consumer of the product.
2) Completed operations liability: the legal responsibility of a contractor, repairer, or other entity for bodily injury or property damage arising out of the entity's completed work. (6.26)

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Automobile liability exposure

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Legal responsibility for bodily injury or property damage arising out of the ownership, maintenance, or use of automobiles. (6.27)

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Liability for operation by others

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A person who negligently furnishes a defective auto to another person may be held liable to a third person injured as a proximate result of the defect. (6.27)

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Auto No-Fault laws

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The goal of no-fault laws is to provide stated benefits for all persons injured in auto accidents without a need to prove fault. (6.28)

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Workers compensation and employers liability loss exposure

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An employer's responsibility to pay claims under workers compensation statutes is a common example of liability imposed by statute. (6.29)

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Employees's tort suits against employers

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The typical workers compensation statute is intended to provide an 'exclusive remedy' for occupational injury or illness to all employees subject to the law. However, workers comp statutes exempt some types of employees (real estate agents, farmers, occasional labourers). These employees retain the right to make tort claims against their employers for occupational injury or illness resulting from the employer's wrongful acts or omissions. (6.29(

Front 51

Hold harmless agreements

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An employer who agrees to indemnify another party against certain types of claims may be agreeing to indemnify the other party for claims made by the employer's own employees against the other party.f