1. LIABILITY LOSSES
Picture an irate citizen creeping out from under a pile of wreckage, standing shakily erect, waving a fist and shouting, “I’m gonna sue you for everything you’ve got!” The irate citizen could win the suit and leave you or your business in financial ruin.
It happens. To help protect people against this happening, insurance companies provide liability insurance.
As we’ve already mentioned, an individual may incur losses as a result of his actions toward other people or their property.
Such losses are called liability losses.
A liability loss occurs when a person is determined to have been responsible, or liable, for loss to another person or another person’s property and is required to make financial restitution.
A person becomes liable to another by committing a tort. A tort is a civil wrong that violates the rights of another.
Unlike the commission of a crime, in which the government prosecutes the wrongdoer, torts are a part of civil law and are concerned with the private relationships between people.
A tort can be either intentional or unintentional. Liability insurance generally provides no protection for the insured against liability arising out of intentional torts.
It does, however, provide coverage for unintentional torts.
Another term for an unintentional tort is negligence.
If the insured is to be held liable for a certain event or action, the individual must have been negligent.
Negligence is the lack of reasonable care required to protect others from the unreasonable chance of harm.
2.2. Establishing Negligence
Generally, a court of law must determine negligence.
To establish negligence, the following four factors must be involved:
■Legal duty owed
■Breach of legal duty owed
2.2.1. Legal Duty Owed and Breach of That Duty
First, there must be a legal duty owed and a breach of that duty.
The legal duty owed to different people varies, but as a general rule, each person owes a duty to another to protect the other’s rights and property.
Each person is expected to behave like a reasonable or prudent person, following those ordinary considerations that guide human affairs.
This is sometimes known as the reasonable person rule.
The duty owed by one person to another is sometimes expressed as a degree of care or standard of care.
For instance, a property owner owes the greatest degree of care to an invitee, a person invited onto the premises involving potential benefit to the property owner.
A little less responsibility is owed to a licensee, a person on the premises with the owner’s consent but for the sole benefit of the visitor.
The least degree of care is owed to a trespasser, one who is on the premises without permission, either expressed or implied.
2.2.2. Proximate Cause
To establish the fact that one person’s actions toward another were negligent and that this negligence caused damage to another person or that person’s property, the negligent act and the damage must be tied together.
The negligent act is then the proximate cause of loss.
The proximate cause of a loss is an action that, in a natural and continuous sequence, produced the loss.
This sequence is unbroken by any other factors or events, and the loss would not have occurred without the proximate cause.
When an independent action breaks the chain of causation and sets in motion a new chain of events, this intervening cause becomes the proximate cause.
Here is an example.
Farmer Jones has a grain silo that is blown over in a windstorm. Five weeks later, he allows his neighbor’s cattle to feed on the water-soaked grain that was left lying on the ground. Seventeen cows contract an intestinal ailment as a result and die.
In this case, the windstorm was the proximate cause of the loss to the silo but not the cattle.
Farmer Jones’s intervening negligent act (allowing the cattle to eat water-soaked grain) was the proximate cause of the loss to the cattle.
At times, additional events may occur between the proximate cause of the loss and the loss itself, but these events occur as a chain reaction, with no other causal element interrupting the sequence.
Consider this example.
Linde Gas and Electric Company had a small fire in a control unit. This fire caused a short in the electrical wiring, which made a machine stop operating.
Because this machine regulated another machine, the second machine ran out of control and flipped a flywheel off its shaft, which badly damaged adjacent machinery
. In this case, the fire is the proximate cause of the damage to the machinery because it started the chain reaction and there were no intervening causes.
The final factor used to establish negligence is that another party suffered damages. If no one was adversely affected by an individual’s actions, there is no finding of negligence.
3. DEFENSES AGAINST NE GLIGENCE
3.1. Contributory and Comparative Negligence
Traditionally, to establish liability an individual must show that the other party was negligent and that the individual did not contribute to the loss through any negligence on his own part.
So if a person contributed to his own damages in any way, another party cannot be held liable for them.
Some states retain this system, ruling out liability when there has been contributory negligence.
In other jurisdictions, this doctrine has been softened to some degree by comparative negligence laws, which allow a finding of liability to be made even when both parties have contributed to the loss, with an award based on the extent of each party’s negligence.
3.2. Other Defenses Against Negligence
In some states, a doctrine known as assumption of risk may apply. Assumption of risk applies when a person knowingly exposes himself to danger or injury.
When a person assumes this risk, the person may be prevented from recovering from a negligent party.
This doctrine is frequently associated with injuries incurred by spectators at sporting events.
Intervening cause—when an independent event affects the chain of events—may also serve as a defense against liability.
Another defense can be found in the statutes of limitations enacted in various states. Such laws provide that certain types of lawsuits must be filed within a specified time of the occurrence to be valid under the law
4. ABSOLUTE /STRICT LIABILITY
Earlier, we said that negligence had to be present to hold someone legally liable for an action.
There are some exceptions, however. Absolute liability is imposed by law on those participating in certain activities that are considered especially hazardous.
Individuals involved in such operations may be held liable for the damages of another, even though the individual was not negligent
. Absolute liability is most frequently applied to activities involving dangerous materials, hazardous operations, or dangerous animals.
Another term that is sometimes used for absolute liability is strict liability. Strict liability is usually used in reference to products liability.
Suppose Larry keeps seven boa constrictors in a trailer for use in his nightclub act. Despite precautions, one of the reptiles escapes and seriously injures a child.
Larry may not have been negligent, but he could still be held responsible by virtue of absolute liability.
5. VICARIOUS LIABILITY
There are times when a person may be held responsible for the negligent acts of another person. This is called vicarious liability, or imputed liability.
A very common form of vicarious liability involves the relationship between an employer and an employee.
Often, the negligence of an employee can be imputed (charged) to an employer because the employer has control over the employee.
For example, a pizza delivery driver may negligently cause an accident that injures two pedestrians.
The employer becomes responsible for the negligence because the employee was driving a company vehicle and the accident occurred on company time.
6. LIABILITY INS URANCE
6.1. Third-Party Losses
Liability losses are known in the insurance business as third-party losses.
The insured is the first party. The insurance company legally representing or defending the insured is the second party. The third party is the person
who suffered the injury or damage. (Property losses are considered first-party losses. The insured is the first party .)
6.2. Damages: Compensatory and Punitive
The financial consequences of a liability loss can be devastating. If an individual is liable for the loss of another, the courts may require the individual to pay damages (monetary compensation) to the injured party. A number of different types of damages can be awarded.
Compensatory damages reimburse the injured party only for losses that were actually sustained. There are two types of compensatory damages: special and general.
Special damages include all direct and specific expenses involved in a particular loss, such as medical expenses, lost wages, funeral expenses, and the cost to repair or replace damaged property.
General damages compensate for such things as pain and suffering and disfigurement. General damages also include mental anguish and loss of companionship.
If the courts feel that the individual acted wantonly or willfully in causing the injured party’s damages, it may award punitive, or exemplary, damages.
Punitive damages are intended to punish the defendant and make an example of him to discourage others from behaving the same way.
6.3. Purpose of Liability Insurance
Now that you’ve seen the potential consequences of a liability loss, the question becomes, “How can I protect myself against financial loss due to liability claims?” The answer is liability insurance, which protects an insured from financial loss arising out of liability claims by transferring the burden of financial loss from the insured to the insurance company.
6.4. Insuring Agreement
Most liability policies agree to pay on behalf of the insured all sums for which the insured becomes legally liable to pay as damages because of bodily injury and property damage.
Terms are always defined in the policy, but in general, bodily injury (BI) means injury, sickness, disease, and death arising out of injury, sickness or disease.
Property damage (PD) means damage to or destruction of property, including loss of use of the property.
Some liability policies also cover the insured’s liability for personal injury (PI), such as slander, libel, false arrest, and invasion of privacy.
(In the insurance business, “bodily injury” and “personal injury” have different meanings and are not used interchangeably.)
Note that the insured must be directly liable for the damage before the company will pay damages on the insured’s behalf.
Earlier, we said that an insured could be found legally liable in a court of law.
However, if the insurance company believes its insured was negligent, it is common practice to settle the claim out of court.
6.4.2. Defense Costs
In addition to paying for bodily injury or property damage, liability policies promise to defend the insured in any suit seeking BI or PD damages, even if the charges are groundless or false.
Defense costs are paid in addition to payments for claims.
The insurer pays for the defense, but its duty to defend ends once the amount it pays for damages equals the policy limit.
6.4.3. Prejudgment Interest
A court will sometimes award a third-party interest on an award for damages to compensate for the interest the third party might have earned if the party had received compensation at the time of injury or damage rather than at the time of judgment.
Most liability policies cover this prejudgment interest. Some policies cover it along with the actual damages, up to the policy limits.
Other policies may include it as a supplementary, or additional payment that is not subject to the limit of liability.
6.4.4. Supplementary Payments
Liability policies also provide certain supplementary payments that are paid in addition to the policy’s regular limit of liability.
These coverages vary from one type of liability policy to another, but in general they include:
■expenses incurred in the investigation of a claim;
■premiums for certain types of bonds, such as bail bonds, appeal bonds, and release of attachment bonds;
■first aid to others at the time of an accident;
■reasonable expenses incurred by the insured at the company’s request in the investigation or defense of a claim;
■loss of earnings (such as when the insured is required to miss work for court appearances);
■prejudgment interest (when it is not included as a part of damages); and
■postjudgment interest (interest accruing on the judgment after an award has been made but before payment is made by the company).
Suppose James has a liability policy with a $10,000 policy limit and a supplementary payments section that covers up to $250 for lost wages.
A neighbor is injured because of James’s negligence and files a lawsuit against him. The neighbor wins the suit, and a $10,000 judgment is awarded against James.
In addition, James loses $250 in wages when he missed work to appear in court for the lawsuit.
James’s insurance company will pay $10,250. Supplementary payments are paid in addition to the policy’s limit of liability, so the company will pay the $10,000 judgment and the $250 for lost wages.
6.4.5. Policy Limits and Restoration of Limits
Although the purpose of liability insurance is to protect the insured from financial loss by shifting the burden of payment from the insured to the company, there is a limit beyond which the company will not go.
The maximum amount the company will pay on behalf of the insured is stated in the policy limits.
The policy may stipulate separate limits for BI and PD (split limits), or there may be one limit that applies to both BI and PD (single or combined single limit).
In general, these limits apply per occurrence.
The word occurrence can mean either a loss that occurs at a specific time and place, such as when a person trips over a toy, or a loss that occurs over time, as when fumes escaping from an activity on the insured premises eventually damage the paint on a neighboring house.
Some liability coverage limits apply per accident, an older and more restrictive term that limits covered losses to those that occur at a specific time and place.
But you need to be careful here. Some policies use the term accident because it’s a more familiar word.
But they define it so it means the same as occurrence. Only a careful inspection of the policy will determine how it should be interpreted.
Some liability policies have a per person limit that states how much will be paid for injury to any one person in an occurrence or accident.
Others also have an aggregate limit. This is a limit that applies to all losses occurring within any one policy period.
With the exception of the aggregate limit, most policy limits are restored after payment of a loss.
Suppose the insured’s liability policy has a $50,000 aggregate limit and a $1,000 per occurrence limit. If the insured has a $500 covered loss, it will be subtracted from the aggregate limit.
However, the full $1,000 per occurrence limit will be available for other covered losses that occur during the policy period as long as the aggregate limit has not been exhausted.
All liability policies contain certain exclusions.
We’ll examine these in detail when we look at specific policies, but we’ll mention some common exclusions here. In general, there is no coverage for:
■damage to property owned by the insured;
■damage to property in the insured’s care, custody, or control;
■bodily injury to an insured;
■losses covered under workers’ compensation laws;
■losses covered under nuclear energy liability policies; and
■injuries or damages caused intentionally by the insured.
6.6.1. Duties after Loss
A number of conditions are commonly found in liability policies, many of which we’ve already discussed, such as cancellation, assignment and misrepresentation, and concealment and fraud.
The duties after loss condition has some unique requirements in liability policies. The insured must notify the insurance company in writing of all losses.
In addition, the insured is required to forward all applicable demands, notices, or summonses and give any necessary assistance to the case, such as testifying as required. The insured cannot voluntarily assume any liability or make any restitution to another party without the knowledge and consent of the insurer.
6.6.2. Other Insurance
Like property policies, liability policies contain other insurance clauses. In addition to the methods we’ve already discussed for handling other insurance, liability policies may provide for contribution by equal shares.
Under contribution by equal shares, all insurers pay equal amounts, up to the limit of the policy having the smallest limit.
Then that company, having paid its policy limit, stops paying, and the other companies share the remainder of the loss.
This continues until each company has paid its policy limit or the loss is paid in full.
Here’s an example. The insured’s $24,000 liability loss is covered by two policies—one issued by Company XYZ with a $5,000 limit and one issued by Company PDQ with a $25,000 limit. XYZ pays $5,000, and PDQ pays $19,000 ($5,000 + $14,000). If the loss had been $4,000, XYZ would pay $2,000 and PDQ would pay $2,000.