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Definition

Legal hazard

Definition (1):

Legal hazard allows characteristics of the legal system or regulatory environment that increase the frequency or severity of losses.

Definition (2):

A legal hazard is an increase in the possibility of a loss because of legal action.

Definition (3):

A legal hazard is “Increased likelihood that a loss will occur because of court actions.”

For example, huge demand verdicts in liability cases or lawsuits.

Businesses can face legal hazards mainly, because of the following five types of legal risks:

  • Corporate Risk- After defining its governance and legal structure, it is crucial for the business to recognize the corporate risks throughout the total company, like unethical or fraudulent business practices. Then the business should implement controls such as awareness and audit programs to control these risks.
  • Asset Risk- The management of a business needs to protect the obligations and rights associated with the legal assets of the business whether tangible assets, such as equipment and intangible assets, such as human resources and intellectual property.
  • Contract Risk- This legal risk is sometimes defined as the probability of financial loss either because of a buyer breaching the contract or the organization’s failure to properly manage the contractual obligations or benefits.
  • Dispute Risk-These risks involve any dispute where a legal claim has been made, like product liability, accidents, employee misconduct, etc.
  • Regulatory Risk- These are the risks of having the business’s license to function “withdrawn by a regulator, or having conditions applied (retrospectively or prospectively) that adversely impact the economic value of an enterprise”.
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