Risk_and_Tort_Management

RUNNING HEAD: TORT AND REGULATORY RISK Recognizing and Minimizing Tort and Regulatory Risks Paper LAW 531/Business Law 02/22/2010 Introduction In today’s business environment organizations have to deal with regulatory risks and tort liability on a daily basis. Organizations that do not comply with the state and federal regulations expose themselves to fines, tort liability and criminal penalties. The cost of failure to comply is not limited to fines and legal fees but also the loss of reputation and other tort liability. An organization must develop ways to prevent, detect, correct and manage risk and tort. Organizations that dedicate funds and resources to the management of these risks will reduce their exposure and avoid the costs of regulation violations and tort liability. A detailed plan to prevent, detect, correct and manage regulatory risks will guarantee the organization is pursuing best practices. Prevention The first step of a detailed plan is identifying and preventing regulatory risks. Preventing regulatory risks will ensure that an organization will not have to face fines, tort liability or criminal penalties. Hiring a legal team or advisor who is aware of the regulations will reduce risk by ensuring the organization adheres to the regulations. Once the risks are identified a compliance team should be formed. This team would regularly perform test measure to make sure all regulations are met. The stringent testing by the compliance team would allow for the organization to avoid the common business tort of negligence. The tort of negligence occurs when the conduct of one party does not live up to a certain minimal standard of care (Jennings, 2006 pg 383). The minimum standard of care is often state or federal regulations. In the simulation involving Alumina Inc., the organization failed to meet the Environmental Protection Agency’s (EPA) safe level of PAH. A local resident Kelly Bates claims this negligent tort lead to her daughter developing leukemia (University of Phoenix, 2009). Alumina could have prevented negligent tort if a compliance team had been self testing the water for PAH levels. Detection and Management Prevention is the ideal path to avoiding penalties of tort liability and regulatory risks. Unfortunately, risks cannot always be avoided. Even with the best compliance team, violations can accidentally occur. Early detection and management of these risks should be the second step in a plan to reduce regulation risks and tort liability. Employees should sign accountability and compliance documents. These documents should require employees to report any violations they encounter and be held responsible if they fail to do so. Employees are familiar with the specific aspects of the jobs they perform; they have the best vantage point to detect any malfunctions or errors that lead to violations. This will minimize the tort liability and penalties. Product liability affects all organizations that manufacture a product. Product liability attempts to lessen the losses of a consumer by requiring a manufacturer or their insurer to pay for a defective product and the damages sustained from it (Jennings, 2006 pg 408). To detect product liability early, an organization should test random samples of their products. Random sampling would detect if an irregularity was occurring during the manufacturing process. If an irregularity is detected they would know the time frame, in which the irregularity first occurred, an estimated number of products affected and a forecast of the costs of liability of the products if any were sent to market. Product liability and violation of state and federal environmental regulations are not the only areas where an organization needs to detect and manage risk. All forms of communication are high risk areas for many different torts and regulations. Advertisements and warranties are regulated by the Federal Trade Commission (FTC). The FTC mandates that all advertisements and warranties are accurate to what they state (Jennings, 2006 pg 414). If an advertisement claims that prices are 50% off, they must be half off the original price of that product and not half off of an inflated price. Ensuring that all advertisements and warranties are precisely written to state only what the manufacturer is willing to do will limit liability cases. All statements released by a company should be carefully examined prior to releasing the statements. Facts listed in any statements should be verified for truthfulness before being released to the public especially if they pertain to other organizations or individuals. If statements are not verified for truthfulness, an organization can be accountable for defamation. Defamation is untrue statements written by one party concerning another party that is made with malice and intent to harm (Jennings, 2006 pgs 373-375). In the case, Burnett v. The National Enquirer Inc. (1983), The National Enquirer was found to have made malicious and false statements about Carol Burnett. The National Enquirer was ordered to pay Ms. Burnett for committing defamation (Jennings, 2006 pgs 373-375). Assembling a legal and communications team would help an organization manage the regulation risks and torts associated with communications. The team would be responsible for reading and approving all written statements and verbal statements including but not limited to press releases, advertisements, instructions, warranties and website content. The communications and legal team would have final approval on all these documents to verify that they are truthful and meet all regulations placed on them by the FTC. Any documents rejected by the team would be sent back to the respective departments to be reworded and verified before being sent back to the team for approval. Once the documents are approved by the team, they can be released to the public. Correction In the event that an organization does violate a state or federal reaction or commits a tort liability, they must be prepared to initiate immediate reaction. The longer the problem is ignored or allowed to continue, the greater the risk that fines, penalties and/or tort will occur. A detailed correction plan should be determined by the compliance team and approved by the legal and communications team. Depending on the regulation violated or the tort that transpired, one of several paths of corrective action should be taken. If the tort was from a communication, there are two possible corrective paths. The releasing of untruthful statements to the public that result in the tort of defamation should be corrected by printing a retraction statement. In the Alumina simulation, The Erehwon Reporter released an editorial that contained untruths about Alumina continuing to pollute the water. After tests proved that Alumina had levels of PAH less than the federal mandate, they immediately printed a retraction that stopped Alumina from taking further interaction (University of Phoenix, 2009). If the tort was committed through misleading content in a warranty or advertisement, the organization should honor the warranty or advertisement. While they are being honored, the advertisement should be discontinued and the warrant should be offered on any future purchases. This plan will satisfy the consumers who were wronged while preventing and further tort from being committed. Product liability requires another path of corrective action. If a defective product reaches the public, it should be immediately recalled. The consumer should be offered the cost of the product plus shipping and handling or have the product replaced. The consumer will be compensated for their cost and prevent the tort of negligence. Negligent tort can present in many forms and can often be corrected quickly. Alumina’s original negligent tort of high levels of PAH in the water was remedied quickly and halted the EPA from taking further action (University of Phoenix, 2009). Once negligence has been brought to the attention of the organization, they should fix the situation as soon as possible. A hotline for customer complaints should be set up. As soon as a customer reports an act of negligence, it should be investigated. If the complaint is valid the customer should be offered compensation and the organization should determine the lowest cost option to remedy the negligence which can be any of the mentioned paths or a new one if needed. If the claim of negligence is valid, litigation should be avoided. Litigation is costly to an organization. Conclusion Regulatory risks and tort liability affect all organizations. Prevention is the best method to minimizing tort and regulatory risks. Unfortunately, avoiding tort and violating regulations will often occur despite the best efforts to prevent them. Organizations must prepare for tort and violations. A detailed plan for preventing, detecting, managing and correcting tort and violations will minimize the costs to the company. A compliance team and a legal and communication will be able to minimize the risks effectively and take swift corrective action. Immediate action will prevent tort and violations from entering in litigation. A detailed plan to minimize risk will ensure the organization avoids unnecessary costs and maintains a good reputation. Resources Jennings, M. M. (2006). Business: It's Legal, Ethical and Global Environment (7th ed.). Mason, Ohio: Thomson. University of Phoenix. (2009). Business Regulation Simulation [Computer Software]. Retrieved from University of Phoenix, Simulation, Law531 - Bussiness Law website.