Risk Management and Liability Flashcards

Which type of business entity generally provides its owners with the greatest personal liability protection?

Answer: Limited liability company (LLC)

An LLC separates personal assets from business liabilities, shielding members from most business debts and claims as long as corporate formalities are maintained.

A licensee refers a client to a home inspector who performs a negligent inspection. The licensee may face liability if:

Answer: The inspector was unlicensed and the licensee knew or should have known

Referring clients to unlicensed or unqualified service providers when the licensee knew or should have known of their deficiencies can create liability for negligent referral.

What is the primary purpose of requiring a surety bond for licensed contractors?

Answer: To guarantee that work will be completed or financial losses will be covered

A surety bond protects clients and the public by ensuring that a licensed contractor will fulfill obligations or that losses caused by non-performance will be financially compensated.

The doctrine of 'res ipsa loquitur' allows a plaintiff to establish negligence by showing:

Answer: The harm would not ordinarily occur without negligence and the defendant controlled the situation

Res ipsa loquitur ('the thing speaks for itself') permits an inference of negligence when the type of accident ordinarily does not occur without negligence and the instrumentality was under the defendant's control.

A licensee is found liable for actual damages of $20,000 and punitive damages of $60,000. Punitive damages are awarded to:

Answer: Punish the defendant and deter egregious conduct

Punitive damages go beyond compensating the plaintiff and are intended to punish defendants for malicious, fraudulent, or reckless conduct and to deter similar behavior.

Which risk management strategy is being used when a business chooses NOT to offer a high-risk service at all?

Answer: Risk avoidance

Risk avoidance eliminates exposure entirely by not engaging in the activity or service that creates the risk.

A contractor's workers' compensation insurance is primarily designed to:

Answer: Provide medical and wage-replacement benefits to injured employees

Workers' compensation provides no-fault benefits including medical treatment and wage replacement to employees who suffer work-related injuries or illnesses.