Legal Definitions - risk of loss

The term risk of loss refers to the legal responsibility for bearing the financial cost if property or goods are damaged, destroyed, or lost. It determines who must pay for the harm or replacement of an item when an unexpected event occurs, especially during a transfer of ownership, during shipment, or while one party is temporarily in possession of another's property.

This responsibility can be determined by specific laws (such as those governing the sale of goods), by the terms of a contract between parties, or by an insurance policy. Essentially, it answers the question: "Who is financially on the hook if something goes wrong with this item?"

• Example 1: Online Furniture Purchase

  Imagine you order a custom-made dining table from an online retailer located in another state. The retailer ships the table via a freight company. During transit, the truck carrying your table is involved in an accident, and the table is severely damaged. The question of risk of loss determines whether you, the buyer, or the retailer, the seller, is financially responsible for the damaged table. If the contract or applicable law states that the risk of loss remains with the seller until the table is successfully delivered to your home, then the seller would be responsible for replacing the table or refunding your money. If, however, the risk of loss transferred to you once the seller handed the table over to the shipping company, then you might be responsible for the loss, potentially needing to file a claim with the shipping company or your own insurance.

• Example 2: Rented Construction Equipment

  A construction company rents a specialized excavator for a week-long project. The rental agreement includes a clause stating that the renter (the construction company) assumes all risk of loss for damage to the equipment during the rental period, regardless of fault, unless caused by a manufacturing defect. On the third day of the project, a tree unexpectedly falls on the excavator, causing significant damage. Because of the contractual clause, the construction company is financially responsible for the repairs or replacement of the excavator, even though the damage was caused by an unforeseen natural event.

• Example 3: Home Sale Before Closing

  A buyer and seller sign a contract for the sale of a house. The closing date, when ownership officially transfers, is set for 30 days later. Two weeks before the closing, a severe hailstorm strikes, causing significant damage to the roof and windows of the house. The purchase agreement contains a provision addressing risk of loss, stating that the seller bears the risk of any damage to the property until the closing date. In this scenario, the seller would be responsible for repairing the hail damage before the sale can be completed, or the buyer might have the option to terminate the contract or negotiate a price reduction, because the seller held the risk of loss until the property was officially transferred.