3 Casualty (Liability) Basics LEARNING OBJECTIVES Upon the completion of this chapter, you will be able to: 1. Define basic casualty or liability insurance terms 2. Recognize the liability insurance principles and concepts of negligence 3. Recall the component parts of a liability policy 4. Identify the common liability policy provisions 5. Define the terms used to express limits of liability OVERVIEW This chapter represents the foundation of liability insurance and discusses the various terms, definitions, principles, and concepts used in liability policies. A liability policy provides protection for legal liability arising from unintentional torts for bodily injury or property damage to others. Liability insurance is also referred to as third-party insurance because loss payments benefit someone other than the insured. If you recall, the insured is the first party to an insurance contract, the insurer is the second party, and an unknown party that suffers harm is the third party. 3.1 Liability Insurance Terminology Liability insurance only provides coverage when the insured is legally liable for causing injuries or damage. Legal liability is the responsibility under law or contract for an act or failure to act. Tort Vicarious Liability Negligence Gross Negligence A tort is a wrongful act, other than a breach of contract, that violates a duty or the rights of another and for which compensation may be sought from the responsible party. Torts may be either criminal or civil. Torts are either intentional, or unintentional. An intentional tort is a deliberate act that harms another and for which the injured party is permitted by law to sue the wrongdoer. An unintentional tort, also known as negligence, is an act, or failure to act that is committed without the same level of care a reasonable individual would have exhibited given the same knowledge and set of circumstances. Liability insurance provides coverage for most unintentional torts and excludes intentional torts. The liability assigned to one party for the conduct of another, based solely on a relationship between the two. Examples include employer/employee relationships and parent/child relationships. Failure to use ordinary care. For example, running a red light. Failure to exhibit any sort of care through recklessness or deliberate indifference to the well-being of others. For example, driving while under the influence of alcohol. 35
CHAPTER THREE Attractive Nuisance Loss of Consortium Compensatory Damages Punitive Damages Bodily Injury Liability Property Damage Liability Medical Payments Coverage Personal Injury Liability Accident Occurrence Notice of Loss Proof of Loss Certificate of Insurance An artificial condition on land that attracts children, such as a swimming pool, and requires the owner to exhibit a special duty of care. Legally, children are considered invitees to the premises if it contains an attractive nuisance even when they are not expressly invited. Compensation to a husband or wife for the loss of companionship of a spouse. Awarded to the injured party for the actual loss sustained. Damages are Special or General. Special damages are an award to an injured party for actual and known expenses such as bills, loss of earnings, and the costs of repairing or replacing damaged property. Special damages are paid for tangible loss or damage. General Damages are an award to an injured party for pain, suffering, mental anguish, disfigurement, and similar types of losses. General damages are paid for losses that cannot be calculated objectively and assigned a specific dollar value. An award to an injured party, in addition to compensatory damages, to punish and discourage a wrongdoer from repeating negligent acts or omissions. Most liability policies do not provide coverage for punitive damages. Legal liability arising from physical injury, including sickness, disease, and death caused by the acts or omissions of an insured. Bodily injury liability expenses include medical bills, lost wages, mental anguish, pain and suffering, etc. Legal liability arising from physical damage to tangible property, including loss of use of that property, caused by the acts of an insured. Property damage liability expenses include the actual cost of repair or replacement of the damaged property as well as the inability to use damaged property (loss of use). Coverage for the bodily injury of third parties sustained on an insured location or as a result of the insured s activities. Coverage is provided for the payment of necessary medical, surgical, x-ray, dental, ambulance, hospital, professional nursing, and funeral expenses. Payments are made regardless of the insured s negligence. This coverage is provided to discourage liability claims and lawsuits and, when payments are made, are not an admission of liability. Legal liability arising from specific offenses committed by an insured that results in injury other than bodily injury or property damage. Examples of personal injury include libel, slander, false arrest, invasion of privacy, and copyright infringement. Personal injury is generally understood to affect one s reputation or emotional well-being and is not bodily harm or property damage. A sudden, unforeseen, unintended, and unplanned event from which loss or damage results. An accident includes continuous or repeated exposure to the same general harmful conditions. Insured must notify the insurer in writing as soon as possible in the event of any Loss or occurrence. The written notice should include the named insured, policy number, and details about the time, place, circumstances of the occurrence, and names and addresses of any claimants and witnesses. A formal statement made by the insured and provided to the insurer that provides necessary details for the insurer to determine its liability under a policy. A document that shows evidence that specific types of insurance were purchased by the insured, at certain limits, and that they were in place on the date the certificate of insurance was issued. A certificate of insurance is not proof of insurance, as a binder is. 36
CASUALTY (LIABILITY) BASIC Retention Question 1 A(n) is a civil wrong committed by one person against another. a. Tort b. Accident c. Breach d. Punitive damage Retention Question 2 Which of the following damages is awarded to the injured party for the actual medical expenses incurred? a. General b. Punitive c. Special d. Consortium Retention Question 3 Which of the following document reports how and when a loss happened? a. Certificate of insurance b. Notice of loss c. Proof of loss d. Occurrence report Retention Question 4 Payment of necessary medical expenses without regard to negligence is covered by which of the following insurance coverages? a. Medical Payments b. Bodily Injury c. Property Damage d. Personal Injury Liability 3.2 Liability Insurance Principles and Concepts Negligence Negligence, in a broad sense, is the failure to use ordinary care. Specifically, it is a wrongful act that is neither criminal nor a breach of contract that violates a duty or the rights of another and for which the injured party may demand compensation. It is the failure to use the same degree of care a reasonable and prudent person would use when given the same knowledge and set of circumstances. 1. Elements In order for an act or failure to act to be negligent, it must contain 4 elements: a. Duty Owed Requires the injured party to prove the alleged wrongdoer owed a duty to the injured party or to the public. b. Violation of Duty Requires the injured party to prove the alleged wrongdoer not only owed a duty but also violated that duty. Basically, the alleged wrongdoer didn t exhibit reasonable care. 37
CHAPTER THREE c. Violation of Duty is Proximate Cause Requires the injured party to prove the alleged wrongdoer s negligent actions or inactions were the proximate cause of actual injuries or damages. d. Foreseeable Consequence Requires the injured party to prove the actual injuries or damages were a reasonably foreseeable consequence at the time the negligent action or inaction occurred. Note If any of the four elements is absent, an act, or the failure to act, is not considered negligent. 2. Defenses When a claimant accuses an insured of negligence, the insured may use one of several defenses: a. Common Law Law practiced as the result of judicial or court decisions (i.e., case law and precedents). 1) Contributory Negligence Prevents recovery for damages caused by a negligent party if the claimant was negligent to any extent. For example, if the claimant is 5% negligent and the wrongdoer is 95% negligent, the claimant is not permitted to collect damages. 2) Assumption of Risk Prevents recovery if the claimant knowingly assumed the risk. 3) Intervening Cause Prevents or limits recovery from the wrongdoer when a second, distinctly separate negligent act occurs after the original negligent act, but before damage occurs, and interferes with the chain of events that brings about the loss. The intervening cause must be unexpected and unforeseen. b. Statutory Law Written law enacted by legislatures. 1) Comparative Negligence Damages are reduced in proportion to the degree of the claimant s negligence. For example, if the claimant is 5% negligent and the wrongdoer is 95% negligent, the claimant may only recover 95% of damages. 2) Statute of Limitations The length of time during which legal proceedings may be initiated. This time period is established by federal or state law and usually begins on the day an event occurs. Strict and Absolute Liability Strict and Absolute liability is a legal principle that imposes legal liability based on conditions, activities, or products that exhibit very high hazards; the degree of care exercised by the insured isn t considered when making a determination of liability. 1. Absolute liability is most often associated with dangerous animal ownership, abnormally dangerous activities, and employers liability for injuries sustained by their employees. Dangerous animals include lions, bears, and certain dog breeds such as pit bulls and rottweilers. Absolute liability applies to the storage of explosives, highly flammable material and weapons or firearms. 2. Strict Liability Applies to 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. 3. Liability may be asserted even in the absence of negligence. For example, the manufacturer of a dangerous product is always legally liable if the product causes injury or damage. 38
No-Fault Liability CASUALTY (LIABILITY) BASIC When a no-fault liability system or law is in place, the injured party collects insurance benefits from his or her own insurance as if it were first-party coverage, thus eliminating the process of determining negligence or legal liability. No-fault laws vary by state and typically apply to auto insurance. 1. Most no-fault laws restrict the rights of the injured party to sue unless the injuries are severe (e.g., paralysis or death) and meet certain conditions. These conditions are called a threshold and can be either a monetary limit (e.g., $5,000) or described verbally (e.g., death, facial injuries, or broken bones). 2. Some no-fault laws allow the insured to choose whether their policy operates under a nofault or tort basis. Other states allow policyholders to add-on no-fault benefits to their auto policies that are otherwise subject to tort liability. 3. Some states refer to their no-fault laws and coverage as personal injury protection (PIP). Retention Question 5 Each of the following is an element of negligence, except: a. A duty is owed b. The duty is violated c. There is a foreseeable consequence d. There is an intervening cause Retention Question 6 Which of the following is a common law defense used by the plaintiff when the injured party is partially responsible for his own injuries? a. Proximate cause b. Contributory negligence c. Absolute liability d. Comparative negligence Retention Question 7 A party injured in an auto accident is not allowed to sue the negligent party who caused the accident under which of the following laws? a. No-fault b. Civil c. Pure d. Tort 39
CHAPTER THREE 3.3 Common Policy Provisions Insureds 1. Named Insured The person or organization designated on the Declarations page of the policy as being protected by an insurance contract. 2. Insured A person or organization protected by an insurance contract. 3. First Named Insured The name of the person or organization that appears first on the Declarations page of a policy as named insured. 4. Additional Insured(s) A person or organization not ordinarily protected by a policy but which, through the addition of an endorsement to the policy, is granted status as an insured. Under a liability policy, an additional insured is often a party to an indemnification or hold harmless agreement. Other Insurance This provision specifies the process to be followed when more than one policy covers the same loss. 1. Primary If the policy is primary, it makes payment before all other policies in place make payment for a loss. 2. Excess If the policy is excess, it makes payment only after all other insurance in place exhausts its limits or denies coverage. 3. Pro Rata Liability Specifies the process to be followed when more than one policy covers the same loss. Each policy pays no more than its share of the loss and the method of sharing varies by contract. Some policies require sharing of losses by the ratio of applicable limits of insurance each insurer writes with respect to the total of all limits available for the loss (pro rata). Other policies require the insurers to share the loss by contributing equal shares until each insurer has paid its limit of insurance (contribution by equal shares). Example Policy A insures a dwelling for $250,000 and Policy B insures the same dwelling for $500,000. If both policies covered the same loss, Policy A would pay one-third of the loss because $250,000 represents 1/3 of all the insurance available to cover the loss ($250,000 equals 1/3 of $750,000, which is the sum of $250,000 on Policy A and $500,000 on Policy B). Limit of Liability/Limits of Insurance Each policy includes a provision that specifies the most it will pay in the event of loss. Certain limits of liability apply to any one loss; other limits apply to the total of all losses that occur within the policy period. In addition, the manner in which limits of liability are designated vary by coverage and policy type. The limit of liability, or limits of insurance, are shown on the policy declarations page and are the most paid by the policy regardless of the number of insureds, claims made, lawsuits filed, or parties making claims or filing lawsuits. 1. Per Occurrence Limit The most the policy will pay for all losses arising out of any one occurrence, regardless of other policy limits. Example The limit of liability for personal liability on a homeowners policy is a per occurrence limit. 40
CASUALTY (LIABILITY) BASIC 2. Per Person Limit The most the policy will pay for loss to any one person injured in any one loss, regardless of other policy limits. For example, the limit of liability for medical payments coverage on an auto policy is a per person limit. 3. Aggregate Limit The most the policy will pay for all losses submitted during the policy period, regardless of other policy limits. a. Each loss payment made under a per occurrence limit or per person limit reduces the aggregate limit of liability. b. For example, if a commercial general liability policy has a medical payments coverage per person limit of $5,000, a liability per occurrence limit of $1 million and a $2 million general aggregate limit, payment of a $3,000 medical payments claim would use up $3,000 of the general aggregate limit, leaving $1,997,000 available for the payment of future claims submitted during the balance of the policy term. 4. Split Limits The most the policy will pay for loss of different types that occur as a result of any one loss, regardless of other limits. For example, the limits of liability on an auto policy for bodily injury might be represented as 100/300/100 ($100,000 is the per person limit for bodily injury liability, $300,000 is the per occurrence limit for bodily injury, and $100,000 is the per occurrence limit for property damage liability). 5. Combined Single Limit The most the policy will pay for all losses of all types resulting from any one occurrence, regardless of other limits. For example, the per occurrence limits on homeowners and general liability policies provide coverage for the sum of all bodily injury liability and property damage liability claims that arise from one occurrence. Named Insured Provisions 1. Assignment The owner of a liability policy cannot transfer policy ownership without the insurer s written consent. For example, a business owner cannot sell his business and then transfer ownership of the business general liability insurance policy to the new owner without the written consent of the insurance company. 2. Subrogation After an insurer pays a loss, it is granted the insured s rights to seek recovery from the party responsible for the loss. For example, if Bob is legally responsible for injuring Sue in a car accident, Sue s insurance company may seek reimbursement from Bob for the claim payments it made to Sue. 3. Liberalization When coverage under a particular form of insurance issued by an insurer is broadened without an additional premium charge, it automatically applies to all policies currently in effect. For example, Carrier A adds coverage enhancements to its Special Form homeowners policy, without an additional charge. Those changes automatically apply to all policies currently in effect. Retention Question 8 Which of the following is designed to prevent the insured from collecting more than the actual extent of a loss? a. Excess insurance b. Primary coverage c. Pro rata liability d. Contribution by equal shares 41
CHAPTER THREE Retention Question 9 The is the most the policy will pay for the sum of all the losses occurring within a policy period. a. Contribution b. Excess c. Combined d. Aggregate Retention Question 10 The Limit of liability applies to bodily injury, property damages, or both. a. Contribution limit b. Excess limit c. Combined Single d. Limit Chapter Three Lightning Facts 1. A tort is a wrongful act, other than a breach of contract or a crime that violates a duty or the rights of another and for which compensation may be sought from the responsible party. 3.1 2. An intentional tort is a deliberate act that harms another and for which the injured party is permitted by law to sue the wrongdoer. 3.1 3. Liability insurance provides coverage for most unintentional torts and excludes intentional torts. 3.1 4. Vicarious liability is assigned to one party for the conduct of another, based solely on a relationship between the two. 3.1 5. Compensatory damages are awarded to an injured party for actual loss sustained. 3.1 6. Special damages are compensatory damages for tangible expenses such as bills, loss of earnings, and the costs to repair or replace damaged property. 3.1 7. General damages are compensatory damages for pain, suffering, mental anguish, disfigurement, and similar types of losses that cannot be objectively calculated. 3.1 8. Bodily injury liability is the legal liability arising from physical injury, including sickness, disease, and death caused by the acts or omissions of an insured. Bodily injury liability expenses include medical bills, lost wages, mental anguish, disfigurement, pain and suffering, etc. 3.1 9. Property damage liability pays for the legal liability arising from physical damage to tangible property, including loss of use of that property, caused by the acts of an insured. Property damage liability expenses include the actual cost of repair or replacement of the damaged property as well as the inability to use damaged property (loss of use). 3.1 10. Medical payments coverage pays for necessary medical, surgical, x ray, dental, ambulance, hospital, professional nursing, and funeral expenses incurred by a third party on the insured s premises regardless of fault. 3.1 11. Personal injury liability is the legal liability arising from the wrongful conduct of the insured resulting in injuries to one s mental or emotional wellbeing and not bodily injury or property damage. 3.1 12. An accident is a sudden, unforeseen, unintended, and unplanned event from which loss or damage results. 3.1 42
CASUALTY (LIABILITY) BASIC 13. Negligence is a tort and, specifically, the failure to use the same degree of care a reasonable and prudent person would use when given the same knowledge and set of circumstances. 3.2 14. Contributory negligence is a defense for negligence in which the claimant was also negligent to any degree. 3.2 15. Comparative negligence involves fault on the part of all parties and the damages are reduced in proportion to the degree of negligence. 3.2 16. Under absolute liability, a claimant does not have to prove fault in order to collect damages. 3.2 17. Strict liability applies when a manufacturer is held liable whether or not its product was defective in causing injuries. 3.2 18. An excess policy pays a covered claim after the primary policies exhaust their limits or deny coverage. 3.3 19. A pro rata loss payment provision requires each insurer to pay its share of a loss in proportion to the coverage of that policy as it relates to the total of all insurance on the risk. 3.3 20. The limit of liability is the dollar amount of coverage specified for a liability loss. 3.3 21. The aggregate limit is the maximum amount payable for loss per location or per person from all occurrences within a policy period regardless of the number of separate accidents. 3.3 22. A split limit of liability is the amount of coverage divided between bodily injury and property damage. 3.3 23. A combined single limit is the policy limit applied to either bodily injury or property damage as needed or in any combination. 3.3 Lightning Facts available in audio MP3 format. Visit our website. 43