Question

Lori, age 26, works as a waitress at an upscale restaurant in Dallas, Texas. After the restaurant closed one evening, she drove home in a blinding rainstorm. A drunk driver ran a red light, smashed head-on into Lori’s car, and was instantly killed. Lori was more fortunate. She lived but was unable to work for six months. During that time, she incurred medical bills in excess of $100,000 and lost about $20,000 in tips and wages. The restaurant did not provide any health or disability income insurance, whereas the driver had a life and health insurance plan.

Identify the major pure risks or pure loss exposures to which the drunk driver and Lori are exposed respectively with respect to each of the following. Explain your answer.

i) Personal loss exposures

ii) Property loss exposures

iii) Liability loss exposures

Answer 1

i) Personal Loss Exposure

These are risks that directly affect an individual. They involve the possiblity of loss or reduction of earned income, extra expensses, and the depletion of financial assets.Exposure to premature death, sickness, disability, unemployment, and dependent old age are examples of personal loss exposures when considered at the individual/personal level.

Lori: Medical bills expenses, lost opportunity to earn $20,000 in tips and wages, pre-mature death or disability from the accident.

Drunk Driver: Death.

ii) Property Loss Exposure

Property owners face the possibility of both direct and indirect (consequential) losses. If a car is damaged in a collision, the direct loss is the cost of repairs.  Property loss exposures are associated with both real property such as buildings and personal property such as automobiles and the contents of a building. A property is exposed to losses because of accidents or catastrophes such as floods or hurricanes.

Lori: Repairs to the car.

Drunk Driver: Repairs to the car.

iii) Liability loss exposure

The legal system is designed to mitigate risks and is not intended to create new risks. However, it has the power of transferring the risk from your shoulders to mine. Under most legal systems, a party can be held responsible for the financial consequences of causing damage to others. One is exposed to the possibility of liability loss (loss caused by a third party who is considered at fault) by having to defend against a lawsuit when he or she has in some way hurt other people. The responsible party may become legally obligated to pay for injury to persons or damage to property. Liability risk may occur because of catastrophic loss exposure or because of accidental loss exposure.

Lori: Legal expenses to defend a lawsuit by the Drunk Driver's family

Drunk Driver: Legal expenses to defend a counter lawsuit by Lori's family agaisnt the drunk driver for causing harm to Lori.