Legal Definitions - pure risk

Pure risk refers to a situation where there are only two possible outcomes: either a loss occurs, or no loss occurs. There is no possibility of financial gain or profit from a pure risk event. These types of risks are often insurable because the potential for loss can be assessed and quantified.

Here are some examples to illustrate pure risk:

• Property Damage from Natural Disasters: Imagine a homeowner whose house is located in an area susceptible to wildfires. This homeowner faces a pure risk.

  Explanation: The homeowner either experiences a wildfire that damages or destroys their property (a loss), or no wildfire occurs near their home, resulting in no damage (no loss). There is no scenario where the homeowner could financially benefit or gain from a wildfire impacting their property; the outcomes are strictly loss or no loss.

• Business Interruption due to Equipment Failure: Consider a restaurant that relies heavily on a specific piece of kitchen equipment, like a commercial oven, to operate.

  Explanation: The restaurant faces a pure risk related to the oven's functionality. The oven might break down, leading to repair costs, lost revenue from missed sales, and potential spoilage of ingredients (a loss), or it might continue to function perfectly with no issues (no loss). The restaurant cannot financially gain from its oven breaking down; it can only incur a loss or experience no change.

• Personal Liability for Accidents: Think about an individual who hosts a party at their home, and a guest accidentally slips and falls, sustaining an injury.

  Explanation: This situation presents a pure risk for the host. They might face a lawsuit from the injured guest, leading to legal fees, medical expense reimbursement, and potential damages (a loss), or no such accident might occur, and no liability claim arises (no loss). The host cannot financially benefit from a guest being injured on their property; the potential outcomes are limited to loss or no loss.