Risk Insider: Shep Tapasak

Supplier Risk and Downstream Liability

By: | December 11, 2017 • 2 min read
Shep is Managing Principal for Integro, and Healthcare Practice Leader for the Southeast. Shep has 25+ years of experience in property/casualty. He is passionate about specialization and innovation. He can be reached at: [email protected]

In the insurance business, the term “deep pockets” is tossed around more frequently than an antipasto salad.   In my opinion, the term “downstream liability” is a better way to describe how risk costs can flow to a party irrespective of the degree of fault.

Downstream liability risks are the risks of inheriting liability from the more culpable party. Laws, which vary by state, can sometimes increase these risks, and quite often, downstream liability flows from suppliers and vendors.

Vicarious and Downstream Liability Contrasted

Vicarious liability is a legal doctrine that, in some instances, makes a party responsible for the actions or inaction of a culpable party based only on the relationship between those parties. In other words, the “duty of care” is imputed to a third party precisely because of their relationship to the culpable party.  Employee-employer and child-parent are common examples of special relationships that can yield vicarious liability.

Sources of Downstream Liability

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  • Product Defects. Defects in a vendor’s product that impact the safety of the subsequent service or product delivered can often result in liability being assigned and/or apportioned. For example, a manufacturer of medical devices produced scopes with a design flaw that made them highly susceptible to bacterial contamination. While the device manufacturer was responsible for much of the settlements, many hospitals that used the “scopes” during surgical procedures were also subject to significant costs and settlements.
  • Catastrophes and Disasters. Highly publicized events that result in multiple injuries or deaths can lead to lawyers placing focus upon how to find enough assets to adequately compensate victims of the tragedy, regardless of the respective degrees of negligence. An example of this would be the Station Nightclub fire in Rhode Island (2003), which injured or killed more than 200 people. In this case, there were 65 defendants involved with the $176 million settlement. The nightclub, headlining band and others responsible for the pyrotechnics that started the fire paid a very small fraction of the settlement. Beverage distributors, TV and radio stations, and the manufacturers and installers of the foam that enhanced acoustics shouldered the majority of the settlement dollars.
  • Environmental/Pollution Legal Liability. There are numerous claims where vendor work has led to substantial liability for property/business owners. Many of these instances involve indoor air quality issues arising from construction activity and defects, as well as HVAC installation and maintenance. In one of the more extreme examples, the deaths of three young cancer patients within a month of each other at a hospital in Tampa, Fla. were alleged to have resulted from toxic mold released from dust generated during a construction project.

There are many other downstream exposures, which might not involve bodily injury, but can result in unforeseen third-party related costs. Timely examples include: vendors that misuse client data; downstream reputational risk; and staffing agency exposures.

 Conclusion

The risks associated with suppliers and vendors can result in significant, unanticipated costs. Risk management programs should include identification and analysis of exposures that could lead to downstream liability costs. These risks can be mitigated, but it is essential to go well beyond supplier audits and certificates of insurance.

More from Risk & Insurance

More from Risk & Insurance

Risk Management

The Profession

As a professor of business, Jack Hampton knows firsthand the positive impact education has on risk managers as they tackle growing risks.
By: | April 9, 2018 • 4 min read

R&I: Who is your mentor and why?

Ellen Thrower, president (retired), The College of Insurance, introduced me to the importance of insurance as a component of risk management. Further, she encouraged me to explore strategic and operational risk as foundation topics shaping the role of the modern risk manager.

Chris Mandel, former president of RIMS and Risk Manager of the Year, introduced me to the emerging area of enterprise risk management. He helped me recognize the need to align hazard, strategic, operational and financial risk into a single framework. He gave me the perspective of ERM in a high-tech environment, using USAA as a model program that later won an excellence award for innovation.

Bob Morrell, founder and former CEO of Riskonnect, showed me how technology could be applied to solving serious risk management and governance problems. He created a platform that made some of my ideas practical and extended them into a highly-successful enterprise that served risk and governance management needs of major corporations.

R&I: How did you come to work in this industry?

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From a background in corporate finance and commercial banking, I accepted the position of provost of The College of Insurance. Recognizing my limited prior knowledge in the field, I became a student of insurance and risk management leading to authorship of books on hazard and financial risk. This led to industry consulting, as well as to the development of graduate-level courses and concentrations in MBA programs.

R&I: What was your first job?

The provost position was the first job I had in the industry, after serving as dean of the Seton Hall University School of Business and founding The Princeton Consulting Group. Earlier positions were in business development with Marine Transport Lines, consulting in commercial banking and college professorships.

R&I: What have you accomplished that you are proudest of?

Creating a risk management concentration in the MBA program at Saint Peter’s, co-founding the Russian Risk Management Society (RUSRISK), and writing “Fundamentals of Enterprise Risk Management” and the “AMA Handbook of Financial Risk Management.”

A few years ago, I expanded into risk management in higher education. From 2017 into 2018, Rowman and Littlefield published my four books that address risks facing colleges and universities, professors, students and parents.

Jack Hampton, Professor of Business, St. Peter’s University

R&I: What is your favorite book or movie?

The Godfather. I see it as a story of managing risk, even as the behavior of its leading characters create risk for others.

R&I: What is your favorite drink?

Jameson’s Irish whiskey. Mixed with a little ice, it is a serious rival for Johnny Walker Gold scotch and Jack Daniel’s Tennessee whiskey.

R&I: What is the most unusual/interesting place you have ever visited?

Mount Etna, Taormina, and Agrigento, Sicily. I actually supervised an MBA program in Siracusa and learned about risk from a new perspective.

R&I: What is the riskiest activity you ever engaged in?

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Army Airborne training and jumping out of an airplane. Fortunately, I never had to do it in combat even though I served in Vietnam.

R&I: If the world has a modern hero, who is it and why?

George C. Marshall, one of the most decorated military leaders in American history, architect of the economic recovery program for Europe after World War II, and recipient of the 1953 Nobel Peace Prize. For Marshall, it was not just about winning the war. It was also about winning the peace.

R&I: What about this work do you find the most fulfilling or rewarding?

Sharing lessons with colleagues and students by writing, publishing and teaching. A professor with a knowledge of risk management does not only share lessons. The professor is also a student when MBA candidates talk about the risks they manage every day.

R&I: What is the risk management community doing right?

Sensitizing for-profit, nonprofit and governmental agencies to the exposures and complexities facing their organizations. Sometimes we focus too much on strategies that sound good but do not withstand closer examination. Risk managers help organizations make better decisions.

R&I: What could the risk management community be doing a better job of?

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Developing executive training programs to help risk managers assume C-suite positions in organizations. Insurance may be a good place to start but so is an MBA degree. The Risk and Insurance Management Society recognizes the importance of a wide range of risk knowledge. Colleges and universities need to catch up with RIMS.

R&I: What emerging commercial risk most concerns you?

Cyber risk and its impact on hazard, operational and financial strategies. A terrorist can take down a building. A cyber-criminal can take down much more.

R&I: What does your family think you do?

My family members think I’m a professor. They do not seem to be too interested in my views on risk management.




Katie Dwyer is an associate editor at Risk & Insurance®. She can be reached at [email protected]