Casualty Insurance: Unit 1

December 8, 2012 by

Liability Basics

 

Overview
 The significance of liability exposure rests on the possible severity of a loss. The extent of the loss to a person’s own property is normally limited by the value of the property. In liability exposures, the amount of loss is virtually limitless. The size of a judgment may not only cause loss of existing assets but could also risk future assets. The understanding of this section is important because it represents the foundation of liability insurance covering various definitions, terms, concepts and principles used in liability policies. 

 

Glossary

 

Accident
 A sudden, unforeseen, unintended, and unplanned event.  Example: A person hits another car at a red light.

 

Advertising Injury Liability
 Legal liability arising from the misappropriation of advertising ideas or style of doing business; infringement of copyright, title or slogan; and oral or written material that violates a person’s right to privacy.

 

Attractive Nuisance
 An important exception to the usual liability for injuries to trespassers is in cases of injuries to children. Courts have held that some properties, such as artificial or uncommon objects, attract and are a threat to children because they don’t realize the possible danger, yet the court doesn’t expect children to be able to resist these objects. Example: Ladders, pools, refrigerators with the door left on, trampolines and other kinds of property around a home or business.

 

Arbitration
 A process where a third party settles a disagreement between the claimant and the insurer.

 

Bodily Injury Liability
 Legal liability arising from physical injury to a person, including sickness, disease, and death caused by the negligent or purposeful acts of omissions of an insured. Damages can include medical expenses, lost wages, mental anguish, disfigurement, etc.

 

Business
 One’s profession, occupation, trade, or job.

 

Certificate of Insurance
 A document (ID card) proving the fact that an insurance policy has been written.

 

General Damages
 Compensation to an injured party for pain, suffering, mental anguish, disfigurement, and similar types of losses.

 

Gross Negligence A willful, wanton, or reckless disregard of the consequences affecting the life or property of another. Example: Speeding in a car in a school zone with children present.

 

Liability Insurance
 An unendorsed liability policy provides coverage for unintentional torts. It provides protection in the event the insured’s negligence causes bodily injury or property damage to others and the insured becomes legally obligated to pay damages. Liability insurance is sometimes referred to as a third party insurance, or as a two party contract with payments made to a third party. The insured or defendant is the first party, the insurer the second party, and the plaintiff or claimant the third party.

 

Libel
 The spreading of any written or printed matter tending to unjustly injure a person’s reputation.

 

Loss of Consortium
 Compensation to a person for the loss of companionship of their spouse.

 

Medical Payments Coverage
 Provides payment of medical, surgical, x-ray, dental, ambulance, hospital, nursing, and funeral expenses incurred by invitees and licenses on the insured’s premises. These payments are made regardless of fault or negligence, and payment is an admission of fault.

 

Notice of Loss
 The insured must notify the insurer as soon as practical of any loss. The notice should be written and should include the identity of the policy and the named insured; reasonably available on the time, place, and circumstances of the occurrence; and names and addresses of any claimants and witnesses.

 

Occurrence
 An event that results in a loss. It includes an accident, but is a broader definition because it includes continuous or repeated exposure to harmful conditions that results in a loss. Example: A person taking the same medication for a period of time and develops a rash.
Personal Injury Liability Legal liability arising from wrongful conduct of the insured resulting in injury other than bodily injury.

 

Proof of Loss
 A document that verifies how and when a loss happened and includes the cost of damages.

 

Property Damage Liability
 Legal liability arising from damage to tangible property, including loss of use of that property caused by the insured’s negligence. Damages might include the actual repair or replacement of the damaged property, as well as loss of rent, income, or revenues sustained because of damage to the property.

 

Punitive Damages
 Damages assessed in addition to specific and general damages as a punishment for extreme, objectionable conduct by a negligent party, as in the case of gross negligence.

 

Slander
 The oral spreading of any written or printed matter tending to unjustly injure a person’s reputation.

 

Specific Damages
 (Special)
 Compensation to an injured party for actual or known expenses such as bills, loss of earnings, or costs of repairing or replacing damaged property. Specific damages do not include pain and suffering.

 

Tort
 A civil or private wrong committed by one person against another, other than breach of contract, for which the law provides a remedy (monetary). Liability usually results from invasion of the rights of others. There are intentional and unintentional.A. Intentional – a deliberate act or omission, such as assault, battery, trespassing, etc.

B.  Unintentional – the failure to act as a reasonably prudent person would act under similar circumstances resulting in harm to another.

 

Vicarious Liability
 The imposition of liability on one person for the actionable conduct of another, based solely on a relationship between the two persons. The indirect or imputed legal responsibility for acts of another.  Example: The liability of an employer for acts of its employees, or the liability of a principal for acts of its agents.

 

Liability Insurance Principles and Concepts

 

Negligence
 A type of tort (civil or private wrong) defined as the failure to act in a reasonable and prudent manner (a prudent person standard or rule) and is usually reprimanded by a monetary penalty. The mere fact that there was an accident doesn’t itself establish a presumption of negligence. The person claiming damages, in almost every case, must prove the actions of another were the direct or proximate cause of the injury or damages.

 

1. Elements
 The four major elements in determining the tort of negligence are:

  1. A.    Legal Duty – The obligation to conform to a certain standard of conduct for the protection of others. When the insured and a third party can’t agree on legal liability, the courts make the decision.
  2. B.     Standard of Care – The degree of care that a reasonably prudent person should exercise in the same or similar circumstances.
  3. C.    Proximate Cause – A natural and continuous sequence, unbroken by any efficient intervening cause, that produces injury and without which the result would not have occurred.
  4. D.    Actual Loss of Damage – Loss or damage resulting from the real and substantial destruction of property of another or physical injury to another.

 

 

2. Defenses
 a)      Common Law – (judicial or court decisions)

  1. Contributory Negligence – Prevents recovery for damages caused by a negligent party if the claimant was also negligent.
  2. Assumption of Risk – The plaintiff who consciously exposes himself to danger assumes some risks of possible injury. Example: a white water rafting excursion participant.
  3. Intervening Cause – A disrupted chain of events, thus freeing the defendant from liability. Example: Children teasing a dog provoking the dog to bite them.

b)     Statutory Law – (enactment of legislatures )

1.   Comparative Negligence – Damages are reduced in proportion

             to the degree of negligence. A degree of fault is assigned to both

parties.  There are different types that may be used in determining

the degree of negligence and statues vary by state.

2.   Statue of Limitations –  The length of time in which a person

              may file suit. Statues of Limitations can vary by the type of

liability insurance, and from one state to another.

 

 

Absolute or Strict Liability

Responsibility without fault or negligence

 

1. Absolute Liability
 A doctrine that applies only in particular circumstances. It is imposed on activities that present a likelihood of harm to others when mistakes happen.Examples:

A. Employers are absolutely liable for employee work- related injuries.

B. Owners of wild animals kept in captivity are absolutely liable for injuries caused by the animals.

C. Contractors are absolutely liable for injuries caused from blasting operations.

 

 

2. Strict Liability (applies to products)
 Manufacturers are held strictly liable for damages to others caused by their products. If a claimant can prove that a product caused the injury, the manufacturer will be held liable whether or not the product was defective.

 

Property Owner’s Obligation

The degree of care owed to different persons varies with the particular circumstances. The three general classes of persons that a property owner may or may not have an obligation to protect are:

 

1. Invitee
 Someone who is invited on the premises. The property owner must warn of hidden dangers. Example: A business or a social guest.
2. Licensee
 Person on the premises with the owner’s knowledge and tolerance, but possibly without benefit.  A property owner has a lesser duty than to an invitee. Example: A hunter who is hunting on the insured’s property with the insured’s permission.
3. Trespasser
 Person on the premises without the owner’s permission. It is not necessary them of hidden dangers.

 


Liability Policy Structure

 

Declarations
 Specifies basic information as to who and what is insured, when the policy goes into effect and expires, where and how much coverage is provided, and how much premium is charged.

 

Definitions
 Clarifies the policy language. May be found in different places in various policies, depending on how the policy is organized.

 

Insuring Agreement

(covered perils)

 Contains information on the coverages provided. The insurer promises to pay those sums for which the insured becomes legally liable for damages caused by an occurrence to which coverage applies.

 

Additional Coverage
 Specifies the insurer’s claim-related expenses, including the expenses at the insurer’s request, premium on appeal, or bail bonds. These payments are paid in addition to the policy limits.

 

Conditions
 Specifies the general rules that the insured and insurer have agreed to follow throughout the policy period.

 

Exclusions
 Names the exposures that are not covered in the policy. They policy may deny coverage for certain persons, locations, or circumstances.

 

Endorsements
 An addition to the policy made by the insurer to broaden coverage, restrict coverage, or further define certain policy provisions.

 

Definitions

Meaning of wording of policy for the company and the client.

Common Policy Provisions

Insureds

 

Named Insured
 The person specifically designated in the policy as the one protected; the person with whom the contract of insurance has been made.

 

First Named Insured
 The person whose name appears first on the list of those defined as insureds.

 

Additional Insured
 Other person, firm, or entity covered by the policy, in addition to the named insured.

 

Policy Period and Territory
 Specifies when and where coverage applies.

 

Cancellation and Nonrenewal
 A provision that permits the parties to cancel or discontinue their obligations.

 

Deductibles
 The amount of loss retained by the insured. Most liability policies do not have a deductible.

 

Other Insurance

 

Nonoccurrence
 A situation where liability policies that are in a layered program, such a primary or excess policies, don’t agree as to their policy effective dates or other policy provisions, creating a gap in coverage.

 

Primary
 The policy that pays first with respect to other policies.

 

Excess
 A policy that pays only after a primary policy has been exhausted.

 

Pro Rata Liability
 A clause designed to prevent the insured from collecting more than the actual extent of loss by allowing each policy to pay it’s share of a loss in the proportion that the coverage of that policy relates to the total of all insurance on the risk. The clause reinforces indemnity.Example: Company A issues a $750,000 liability policy, and company B issues a $250,000 liability policy for a total of $1,000,000 for the risk. In the event that a $300,000 liability loss, Company A would pay $225,000 and company B would pay $75,000.

 

Contribution by Equal Shares
 When two or more insurers’ policies cover at the same level (Primary or Excess), each insurer contributes an equal amount to the loss settlement until the loss is paid, or until each insurer has exhausted its limits of insurance, whichever comes first.
Example: If there are three insurers, each one would pay 33.3% of the loss; if there are four insurers, each would pay 25% of the loss, etc.

 

Limits of Liability

The restriction a Liability policy places on the dollar amount of coverage is called the Limit of Liability. Liability policies specify this limit in the following ways.

 

Per Occurrence Limit
 The most the coverage will pay for a loss arising out of any one occurrence, regardless of overall policy limits.Example: Section II (Liability) of a Homeowners Policy pays on a “per Occurrence” limit for bodily injury and property damage liability.

 

Per Person Limit
 The maximum amount that the coverage will pay for loss to any one person regardless of the overall policy limits.Example: The liability coverage part of the Personal Automobile Policy is typically written with a “per person” limit that is the most it will pay for bodily injury to any one person, even if several people are injured.

 

Aggregate Limits
 The maximum amount payable for loss (per location and/or per person) from all occurrences within a policy period regardless of the number of separate accidents. Payment under the policy reduces the amount of insurance available to pay additional claims during that policy year.Example: The commercial package policy and business owners’ policy are written subject to “aggregate” liability limits.

 

Split Limit
 The amount of coverage is divided between bodily injury and property damage.Example: The Personal Automobile Policy, when written on a “split” limit basis, has distinct limits for bodily injury per accident and separate distinct limits for property damage per accident.

 

Combined Single Limit
 The limit of the policy may be applied to either bodily injury or property damage, whatever needed, or in any combination.Example: The section II (liability) limit of a Home Owner’s Policy can be used all for bodily injury or all for property damage, or in combination in any one occurrence.

 

Restoration of Limit The limit of the policy is fully reinstated following a covered loss or on a policy anniversary date.Example: A policy written subject to an “aggregate” limit typically allows that limit to be restored, or start over, on the anniversary date.

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Filed Under: Casualty Insurance