The Ins and Outs of Business Insurance and Risk Management
Business is inherently risky, and business owners and entrepreneurs thrive on risk. Nothing is certain when starting a business, trying to keep it going, or deciding to expand it into new markets. Most business owners have studied market statistics, analyzed the competition, crafted a business plan, and gathered at least some of the capital they need to make a go of it. Too often, however, business owners do not think enough about the legal risks involved in running a business—even a thriving business. This article discusses risk management and how to plan for, and deal with, some of the liability and exposure you face as a business owner.
There is no way to eliminate risk. The only thing you can do is try to account for it. Managing risk requires balancing between the costs of insuring against a negative event and the cost of the negative event occurring without insurance. In an ideal world, your insurance coverage would mirror your exposure. In reality, it is nearly impossible to calculate your risk or pay for all of the insurance you might want. In addition, your business is always changing. Customers come and go, new opportunities present themselves, and certain projects fall by the wayside as the market fluctuates.
The most important part of a risk management plan begins with the business owner making sure the organization is running properly and efficiently. When you think about risk, you have to think about how your organization actually operates, not just how it is supposed to operate or how you might want it to operate. Who are your employees? Who are your customers? Do you have adequate policies in place to protect and guide your employees? Do you regularly review and audit your policies or do you draft them up and file them away?
In the context of business liability, your exposure will usually involve claims of negligence. The law of negligence is complicated and full of nuance. Put simply, negligence simply means the failure to act as a reasonable person should under the unique circumstances of the case, which leads to injury or damages. This is a vague standard and leaves a lot of room for litigation.
The key legal elements to support a negligence claim are duty, breach, causation, and damages. First there must be a legal duty to act (or refrain from acting) in a certain manner. Then you have to show the person did not act according to that legal standard. Even if you can prove a breach of duty, you still have to prove that the action (or failure to take action) helped produce an injury. This is known as “causation.” Causation is more complicated than it sounds. For example, if you negligently crashed your car into someone who had a heart condition, your negligent act did not cause or give rise to that person’s heart condition. It may have made things worse, but you can’t be held responsible for the condition in the first place. Similarly, if the damage or injury was inevitable no matter what you did, your negligence may not be considered the true cause.
Another difficult issue is damage and injuries and how to put a monetary value on them. The law entitles victims of negligence to be made whole or paid so that they are in the same position that they were before the accident. There are several types of damages and injuries. For example, most car accidents cause physical damage to the vehicles involved. If your vehicle is stuck in a repair shop for weeks, you suffer from a type of damage called “loss of use,” which is the hassle and expense of obtaining a rental or otherwise being without your vehicle. If the vehicle gets repaired the owner will likely take a hit if he decides to sell it; this type of damage is known as “diminished value.” Many accidents involve damages in the form of medical injuries to drivers, passengers, or pedestrians. This type of damage is known as “bodily injury.” Bodily injury is often the most complicated issue in an accident case.
Bodily injury involves not just medical issues about the nature and severity of an injury, but also pain and suffering. How can you put a monetary value on pain and suffering? How much money will compensate you for a broken leg, a scar, low back pain, a broken finger, or a bruise? There is no precise answer, which is why figuring out the true value of your claim requires experience and training.
Employer Liability (“Vicarious Liability” or “Respondeat Superior”).
An important legal concept to keep in mind is Employer Liability for the acts of an employee. This is sometimes referred to as “vicarious liability” or the latin phrase, “respondeat superior” (literally translated: “let the master answer”). If an employee causes damage in the course and scope of his job, the employer may be held liable along with the employee. For example, consider the case of a pizza delivery driver who crashes into another vehicle and causes serious injury or death. The victim (or surviving relatives in the case of a death), will not only sue your driver, they will also sue your company. This is why it is important to consider the activities of your employees when thinking about risk management.
Arizona law recognizes the concept of “comparative fault” which means that both parties may be partially at fault for an accident. This is easiest to understand using the example of a car accident. If a driver was trying to make a left turn but you were speeding when you hit his car, the other driver might be deemed 80% at fault and you might be deemed 20% at fault. Thus, you will be responsible for up to 20% of the other driver’s damages. The other driver will be responsible for up to 80% of your damages.
Intentional and Criminal Actions
Few, if any insurance policies, will cover you from any intentional damages you may cause. Similarly, insurance cannot cover you for intentional criminal activities like fraud or extortion. This is important to keep in mind as you manage your employees and evaluate your risk management plan. Don’t be lulled into complacency by a high-limit insurance policy.
This article is intended for informational purposes only and does not constitute legal advice or establish an attorney/client relationship.
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