What it means
A tort is a civil wrong, meaning a harmful act or failure to act that the law says the wrongdoer must pay for. Unlike contract law, which enforces promises two parties made to each other, tort law imposes duties on everyone, such as the duty not to injure others through carelessness.
The most common claim is negligence, which usually requires the injured party to show four things: that the defendant owed a duty of care, that the duty was breached, that the breach caused the harm, and that real loss resulted. Other torts include defamation (damaging someone's reputation with false statements), nuisance, trespass and product liability.
The main remedy is damages, a payment intended to put the injured party back in the position they would have been in. Courts may also award extra punitive damages in some systems where conduct was outrageous, or issue an injunction (a court order to stop doing something).
For a business, tort risk shows up in everyday operations: a customer slips in a shop, a delivery vehicle hits a pedestrian, an adviser gives careless advice, or a product injures a user. Companies manage the risk with training, safety systems and liability insurance, and they set aside provisions in the accounts when a claim is probable and the cost can be estimated.
Finance teams should understand tort exposure because the amounts can be large and the timing uncertain. Accounting standards generally require a liability to be recognised when a loss is probable and measurable, and disclosed as a contingent liability when it is only possible.
The rules differ between countries and between legal systems, and the details of what counts as a duty or how damages are calculated vary widely. Treat this entry as a general guide and take legal advice on any specific claim.
In practice
Real-world examples.
Example
A grocery chain fails to mop a wet floor, and a shopper breaks her wrist in a fall. The shopper sues for medical costs and lost earnings, and the chain's liability insurer handles the claim after the chain pays its excess (deductible).
Example
A software consultancy gives a client careless advice on a data migration, and the client loses a week of sales. Although a contract exists, the client also argues that the firm was negligent, and the claim is settled with the firm's professional indemnity insurer.
Example
A local newspaper publishes a false story that a restaurant failed a hygiene inspection. The owner brings a defamation claim for lost bookings, and the paper agrees to publish a correction and pay damages.
Case study
Seen in the real world.
Marlowe Ladders is an illustrative, fictional manufacturer of aluminium ladders with annual sales of about $40,000,000. After a customer fell from a ladder with a faulty locking hinge, the customer brought a product liability claim seeking compensation for injuries and lost income.
The finance team worked with its lawyers and insurer to assess the claim. Legal counsel judged a loss probable, with a likely range of $600,000 to $900,000, and the company's insurance policy carried a $250,000 excess, so the finance team recorded a provision for the excess and disclosed the remainder as covered by insurance.
The illustrative outcome was a settlement in the middle of the range, followed by a redesign of the hinge. The lesson is that tort claims need early involvement from finance, because accounting, insurance and product decisions all depend on them. Marlowe also reviewed its renewal terms with the insurer after the claim, because a larger claims history can raise premiums or reduce the cover offered. The finance director added a line to the monthly risk report showing open claims, expected costs and insurance recoveries, so that management could see the full picture rather than discovering it at the year end.
Watch out
Common mistakes.
- Assuming that having a contract with the other party means there can be no tort claim, when the same facts can sometimes support both.
- Believing that insurance removes the issue entirely, ignoring excesses, exclusions, policy limits and the effect of claims on future premiums.
- Waiting until a claim is filed before considering the accounting, when a probable loss may need to be recognised as soon as it can be estimated.
Questions
People also ask.
What is the difference between a tort and a crime?
A tort is a civil matter, brought by the injured party for compensation, while a crime is prosecuted by the state and can lead to fines or imprisonment, and one act can be both.
Do companies pay for the torts of their employees?
Often yes, because under the doctrine of vicarious liability an employer can be responsible for wrongs committed by staff in the course of their work.
How long does someone have to bring a tort claim?
Each legal system sets limitation periods, which vary by type of claim and place, so a lawyer should confirm the deadline.
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