Regulatory risks, per technical definition, are the risks associated with the potential for laws related to a given industry, country, or type of security to change and impact relevant investments. (investorwords.com, n.d.) A common example of this is torts.
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Tort law addresses civil wrongs arising from non-contractual obligations. A person who suffers injury may use the tort law to oblige the person responsible for his injury to pay for the damages the injury brought about. Tort law differs from criminal law in the sense that in criminal law, the offense is against the State, the State is the plaintiff. In Tort, the offense is against a person and that person is the plaintiff.
Examples of Torts
A very simple example of tort is as follows: Eve lives in the 5th floor of an apartment. On her balcony are pots of plants. One pot accidentally fell off the balcony and onto the ground where Adam was hit on the head and he suffered a concussion, causing his absence from work for two days. Adam here may sue Eve for the damages he suffered (medical bills, unpaid time out of work, sleepless nights). His win depends on whether he can prove that Eve committed a tortious act: failing to exercise the standard care associated with maintaining plants on the balcony.
Since this paper is more about the impact of torts in the economy, I shall provide another example: Consider a restaurant with a logo, “satisfaction guaranteed”. The customer did not like his food. Has the company committed a tortious act? Can the customer sue the company for not enjoying his breakfast? He may just be able to, provided he can prove that the company has not exercised standard care in cooking his breakfast.
Negligence and Standard Care
The main concept behind the Tort Law is Negligence. Those people who have not acted with standard care are considered negligent should an incident arise giving injury to a third person while he is responsible. The person who commits something tortious is called a tortfeasor.
In the USA, the late 20th century saw a substantial increase in lawsuit arising from some form of personal injury. To manage torts, it is imperative that a person or an organization exhibit some form of risk management.
Risk management seeks to control exposure to legal risks and to limit the impact of such negativity to an individual or an institution. William A. Kaplin and Barbara A. Lee, in 1995, identified and described four common methods of risk management: : risk avoidance, risk control, risk transfer, and risk retention.
This entails an effort on the individual to limit risks by eliminating activities that may give rise to the risks. For instance, in the case of Eve and Adam described above, Eve can just put a net around her balcony so the pots will not fall off the ground. In the case of the restaurant, they can very well remove the logo given that no one can please everyone.
Risk control seeks to avoid liability by structuring programs in such a way as to limit or lessen the risk to the person or the establishment. This may entail compromise agreements between the two parties. For instance, Eve may speak with Adam regarding his injury. She can tell Adam that the incident is purely an accident, pay for his hospitalization bills and promise to put a net around her balcony in the future. As for the restaurant, since they have not fulfilled their logo of providing satisfaction, they can just refund the customer his payment for his food.
Insurance may be the most common form of risk transfer. Consider online merchants shipping often to their customer. These online merchants pay for the shipment of the goods to corporations and being the seller, the risk of loss is usually borne by them. As such, in any case the shipment was lost at sea or destroyed during transit, they can just ship to the customer a new package, give some incentive for being late, then claim from their insurance company the broken or lost goods in the shipment.
This is a way for organizations to maintin funds suppose they become exposed to risks in the future. This aspect probably comes hand in hand with risk control as risk control often involves money to remedy the effect of the risk on the organization. For instance, consider the case of an online merchant. The goods he sent to the consumer are defective from the time it was in the warehouse. To avoid any other disputes, the merchant will have to make a new shipment to the consumer with non-defective items without additional cost to the consumer. Essentially, the consumer received two sets of goods and only paid for one. The other set was paid by the risk retention funds of the online merchant.
Given the negative publicity brought about by court hearings and other legal procedures, a company really must exercise risk management, a combination of the four described above may be necessary to preserve the good name of the organization.
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StateUniversity.com (n.d.). Risk Management in Higher Education – Tort Liability, Other Sources of Risk. Retrieved July 23, 2009, from
Wikipedia, the free encyclopedia. (n.d.) Tort. etrieved July 23, 2009, from