CHAPTER ONE – LIABILITY AND TORTS
According to “Black’s Law Dictionary”, the word “Liability” is defined as “…a broad legal term.” and “It has been referred to as the most comprehensive significance, including almost every character or hazard or responsibility, absolute, contingent, or likely”, “the word is not synonymous with ‘loss or damage’ ”, and “the term is therefore broader than the word ‘debt’ or ‘indebtedness’.”
One would usually assume that narrowing the definition to “Legal Liability” would help. However, that definition is “A Liability which courts recognize and enforce as between parties litigant.” Further, most legal definitions that are derived from case laws pertain to the relationship between debtor and creditor. Obviously, this “liability” is not covered under a commercial liability policy.
Historically and in a simplistic sense, “liability” as discussed herein, would pertain to determining who is at fault in a particular loss. Derived from the laws of cause and effect, and in trying to determine who is at fault, mankind has attempted to define the cause of loss since the beginning of time. Still under discussion is whether Eve was at fault for eating the apple in the garden, or was it the fault of the snake, or of that which the snake represented? Wars have been started over trying to determine who was at fault for some event. Battles have been won or lost because someone was “at fault.” The old story of the battle that was lost because the general’s horse threw a shoe so the general could not lead his army successfully; because the battle was lost – the war was lost. And because the war was lost, a nation fell and a king was exiled. So, in respect to the ultimate liability, was the blacksmith that did a poor job on the horse at fault for the kingdom falling? Or was the provider of the nail negligent, as the nail was inferior? Or was the general’s orderly at fault for not checking the horse before the general mounted? And so, on it goes.
In order to determine who is at fault in a particular loss situation, obviously there are laws that state that an individual may not cause a particular loss and to do so, is an action against the “state” (read – “society). Other losses and causes of loss, pertain only to those situations involving an individual personally, and not against the state.
CRIMINAL LAWS AND TORTS
Crimes against Society are created by the government(s) who represent the Society in persecuting an individual for violations of its laws or statutes. The punishment for these violations are either monetary fines or some form of imprisonment. These laws can be passed and enforced by any level of government – city, county, state or federal. Some laws become laws by court decree or by executive fiat – but that is for another discussion.
Liability insurance does not ordinarily pertain to criminal law, but is concerned with civil liability. It is possible for a person to become involved with both criminal law and civil law in a single act – such as a person who drives a car while intoxicated, and injures another person &/or demolishes personal property. In this case, the individual would be prosecuted for driving while intoxicated (obviously a crime) and for injuring the individual, and at the same time, would be liable for the damage to the individual and his property. Of recent vintage is the O. J. Simpson trial wherein he was found not guilty of a criminal offense by a jury, but was found liable for damages for the injury and death of two individuals in a civil trial.
TYPES OF WRONGS:
Plus ca change, plus c’est la meme chose (The more things change, the more they remain the same). While liability in its various forms, has been present since recorded history, modern society raises new liability questions continually. While determining liability in a particular situation is extremely difficult in many cases, and has always been so, the question as to what is an action (or inaction) that creates liability continues to reach new heights almost every week.
Everyone’s life and every business existence, is concerned with the liability question. Even the moral climate of today leans toward blaming everyone (except ones-self) for every wrong, real or imagined. Situations where the individuals involved agree that the situation was caused by an accident and that no one is really to blame, are rare indeed in today’s litigious society. The result has been that entire industries have suffered severe financial problems because of those situations that in earlier times would have been thought of as “accidents” where everyone had to take responsibility for his or her own actions.
Medical malpractice lawsuits have created huge insurance costs which are (1) partially passed on to the patient, (2) caused medical insurance premiums to rise to where employers have a difficult time financially in providing benefits to employees, and (3) created a large malpractice liability insurance market. Well-known and effective Directors of Corporations will not consider serving without liability insurance. The small airplane industry has nearly collapsed because of lawsuits involving 20 year-old airplanes. A business owner will not open the doors for business until there is insurance in place to protect them against a customer falling on their sidewalk or getting food poisoning from fruit purchased at the store. A community will not open a community-owned pool without liability insurance to protect them against some mishap at the pool.
The recent lawsuits against the tobacco industry points out how the courts can stretch the written law to where a major industry is in peril of surviving. Even though the cigarette packages have warnings posted clearly in simple English, in full compliance with regulations, the consumer who ignores such warnings and who smokes several packages of cigarettes a day (and therefore suffers the illnesses warned about on the side of the cigarette package) – bands together with others in similar situations and sues the tobacco industry for millions and millions of dollars.
Many years ago, it was discovered that a substance called “asbestos” would not burn at the heat ranges involved in structural fires. Also, it also had sound-deafening properties so it could be used between rooms so that the activity in one room would have a minimum effect on adjacent rooms. After serving its purpose for several decades and preventing untold fires, it was discovered that in certain circumstances asbestos could cause a lung condition. Again, after millions of dollars in lawsuits, the asbestos industry has all but disappeared and insurance companies have paid and continue to pay for the removal and elimination of this substance.
Dow Corning manufactured a breast implant that had been thoroughly tested and had passed the highest standards for safety. After several years of successful implants, a very few isolated implant recipient suffered illnesses or disabilities, which they blamed on the implants. It did not take long for attorneys and the news media to take up the hue-and-cry until many women started having “symptoms” that they had not had before and Dow Corning found itself involved in lawsuits to the extent that they could not afford to fight them all. Now that the producer of the implant has declared bankruptcy, strong evidence has come to light that indicates that the implants – even when ruptured – have caused injury or disability to only a miniscule number of recipients – if, indeed, any at all. But it is too late for the stockholders and employees of Dow Corning.
There are books written just on such matters, and liability lawsuits are now an accepted way of life and of doing business. In addition to the “blame-someone-else” attitude of today, another factor that has caused concern to businesses and insurers (and great glee to attorneys) is the concept of “punitive damages.” Even though liability insurance usually does not cover punitive damages, the mere threat of punitive damages has caused chaos in settling liability claims.
When a liability claim is settled, the actual damages will be awarded based upon the actual loss sustained by the plaintiff. However the court (a jury) will award additional damages because (1) the defendant – usually a business – can afford to pay the additional damages, (2) the plaintiff had suffered more than actual damages, and (3) the jury felt that the defendant should be “punished” monetarily. In some jurisdictions, the punitive damage amount may be “capped” by law, but in others, the “sky is the limit.” Usually there is no relationship between the actual damages and the punitive damages awarded. Therefore, attorneys will jump at the opportunity to sue for damages if punitive damages can be awarded. Since they will take most of the cases on a contingency basis, there will be many more lawsuits in those jurisdictions that allow for unlimited punitive damages.
CONSUMER APPLICATION
The Southern Health Insurance Company had been selling individual health insurance policies for 10 years. The owner and President of the company were well known locally and were active in local social and political events. The company was small and wrote business only in one state and had only the minimum of capital and surplus required by the state, requiring reinsurance from a large reinsurer for the risks. However, the President lived beyond his means, and money that was to be used for claims reserves was spent on personal items, such as a corporate jet.
When local hospitals and doctors started complaining about not being paid on a timely basis, some of their policyholders found themselves being sued for unpaid medical bills. They instituted lawsuits against Southern, with the result that all unpaid medical bills were paid. The State Insurance Department stepped in and took over operation of the company in order to make sure that policyholders were protected.
The courts determined that the actual damages were to be paid, but in addition, the plaintiffs (insureds) filed for punitive damages. They (11 plaintiffs) were awarded $500,000 each for punitive damages.
Incidentally, the reinsurer did not participate in the punitive damages, as punitive damages are not reinsurable. The “punitive” award is to “punish” those responsible for the specified actions, and these “punishments” are usually determined not to be transferable to another.
CONSUMER APPLICATION
An actual situation that demonstrates damages, in particular punitive damages, is before the Supreme Court of the U.S. as this text is being prepared. The following are the details as reported by the news media:
In 1994, Douglas Axen, age 56, collapsed when running. He was rushed to the hospital and the cardiologist diagnosed him as having life-threatening cardiac arrhythmia and prescribed a drug marketed under the name of Cordarone, which the FDA had approved in 1985.
Medical students as early as 1986 had linked this drug with vision loss and optic neuropathy, and the company was well aware of these findings. However, the warning for side effects on the package contained no warning about optic neuropathy.
After taking this medicine for a month, Axen noticed changes in his vision. His doctor took him off the medication but the deterioration continued and Axen is now legally blind.
Axen sued the American Home Products for intentional failure to warn that Cordarone could cause permanent loss of vision. Eventually a jury awarded his wife, who had joined in the suit, $936,000 (reduced to $500,000). The total award was $22,843,657, which included $20 million in punitive damages. The company protested that the award was irrational, ill considered and excessive. This amount was $207,000 awarded for “economic damages, plus $1.5 million for “non-economic damages.” Then the jury tacked on $20 million to punish American Home Products.
The Oregon’s Court of Appeals ruled that, given the gravity of the company’s misconduct and the extent of Axen’s injuries, the sum was not constitutionally excessive.
(Interestingly, the reason the case has gone to the U.S. Supreme Court is that under the laws of the State of Oregon, Oregon automatically takes 50% of any punitive damage awards in that state – several other states have enacted similar laws. Since the 8th Amendment prohibits “excessive fines”, the company has maintained that the 50% retained by Oregon is a “fine.”)
Even as this text is being composed, there are discussions about liability arising out of persons doing work in their homes. The government has threatened to enforce OSHA regulations regarding safety in the home because of performing work in the home, and various other conceived problems. The public outcry has stopped this bureaucratic invasion, at least temporarily. At the same time, the highly publicized forecast Y2K problem frightened much of the business section of the country because of the fear that they could be liable for any problems with their customers that would arise because of computer problems. Many attorneys were salivating at the prospects of high-limit liability lawsuits because of a computer glitch. .
DAMAGES
Punitive Damages have already been discussed, but it is important to recognize the various types and degrees of Damages. The legal definition of “Damages” is “a pecuniary compensation of indemnity, which may be recovered in the courts by any person who has suffered loss, detriments, or injury, whether to his person, property or rights, through the unlawful act or omission or negligence of another.” One might say that liability is the risk, negligence is the changing of a risk into a claim, and damages are the form in which the claim is awarded. Forms of Damages or Types of Damages, can be listed as follows:
Actual Damages
Real, substantial and just damages, or the amount awarded to a complainant in compensation for his/her actual and real loss or injury, as opposed to “nominal”, “punitive” or “exemplary” damages.
Civil Damages
Those damages awarded, as an example, against a liquor-seller to the relative, guardian or employer of the person to whom the sales were made, in a showing that the plaintiff has been thereby injured in person, property or means of support.
Compensatory Damages
Compensatory Damages are such as will compensate the injured party for the injury sustained, and nothing more. Compensatory Damages are designed to simply make good or replace the loss caused by the wrong or injury.
Consequential Damages
Such damage, loss or injury as does not flow directly and immediately from the act of the party, but only from some of the consequences or results of such act.
Continuing Damages
Continuing damages are such as accrue from the same injury or from the repetition of similar acts, between two specified period of time.
Damages ultra
Additional damages claimed by a plaintiff not satisfied with those paid into court by the defendant.
Direct Damages
Direct damages are those damages that follow immediately upon the act done.
Double Damages
Twice the amount of actual damages as found by the verdict of a jury allowed by statute in some cases of injuries by negligence, fraud, or trespass. In most cases this has been replaced by punitive damages.
Excessive Damages
Damages awarded by a jury which are grossly in excess of the amount warranted by law on the facts and circumstances of the case – unreasonable or outrageous damages.
Exemplary Damages
Exemplary damages are damages on increased scale, awarded to the plaintiff over and above what will barely compensate him for his property loss, where the wrong done to him was aggravated by circumstances of violence, oppression, malice, fraud, or wanton and wicked conduct on the part of the defendant, and are intended to solace the plaintiff for mental anguish, laceration of his feelings, shame, degradation or other aggravations of the original wrong, or else to punish the defendant for his evil behavior or to make an example of him, for which reason they are also called “punitive” or “punitory “ damages or “vindictive” damages and (vulgarly) “smart money.” This definition was the result of the case of Springer v. Fuel Co., a Pennsylvania case and is quoted because of the detail of the definition of “Exemplary Damages” which will arise frequently in liability judgements. (It can also be used to illustrate the length of a single sentence in legal definitions).
General Damages
General damages are such as the law itself implies or presumes to have accrued from the wrong complained of, for the reason that they are its immediate, direct, and proximate result, or such as necessarily result from the injury, or such as did in fact result from the wrong, directly and proximately, and without reference to the special character, condition, or circumstances of the plaintiff. (Another wordy legal definition).
Inadequate Damages
Inadequate damages are those damages that occur when such a recovery at law would not compensate the parties and place them in the position in which they originally stood.
Necessary Damages
This is used in a wider scope than “pecuniary” damages. It embraces all those consequences of an injury usually called “general” damages, as distinguished from special damages. Pecuniary Damages per se covers a smaller class of damages within the larger class of “general” damages.
Nominal Damages
Nominal damages are a trifling sum awarded to a plaintiff in an action, where there is no substantial loss or injury to be compensated, but the law still recognizes a technical invasion of his rights or a breach of the defendant’s duty or in cases where, although there has been a real injury, the plaintiff’s evidence entirely fails to show its amount.
Pecuniary Damages
Damages that can be estimated in and compensated by money. Not merely the loss of money or salable property or rights, but all such loss, deprivation or injury as can be made the subject of calculation and or recompense in money.
Prospective Damages
Damages which are expected to follow from the act or state of facts made the basis of a plaintiff’s suit; damages which have not yet accrued, at the time of the trial, but which, in the nature of things, must necessarily, or most probably, result from the acts or facts complained of.
Proximate Damages
Proximate damages are the immediate and indirect damages and natural results of the act complained of, and such as are usual and might have been expected.
Remote Damages
The unusual and unexpected result, not reasonably to be anticipated from an accidental or unusual combination of circumstances – a result beyond which the negligent party has any control. (Note that this is the reverse of the Proximate Damages described immediately above).
Speculative Damages
Prospective or anticipated damages from the same acts or facts constituting the present cause of action, but which depend upon future developments which are contingent, conjectural or improbable.
Substantial Damages
A sum assessed by way of damages, which is worth having; opposed to nominal damages which are assessed to satisfy a bare legal right. Consideration in amount and intended as a real compensation for a real injury.
Temporary Damages
Damages allowed for intermittent and occasional wrongs, such as injuries to real estate, where cause thereof is removable or abatable.
CONTRACT AND TORT LAW
Civil Law may be divided into two sections: (1) Contract Law and (2) Tort Law. Since they are both part of Civil Law, it is important to be familiar with both, and to be able to determine which law would apply in certain situations.
Contracts
The law of contracts specifically applies in insurance, as the insurance contract (policy) is the very basis of insurance. The laws of Contracts are extensive and voluminous; most of which are beyond the scope of this text. Certain elements of contract law should be learned and reviewed on a regular basis as many questions regarding insurance should be answered and explained to the satisfaction of a policyholder or applicant, if the laws of contract are invoked.
To review the structure of Contracts, there are four elements to a Contract:
Agreement.
One party has to make an offer and the other party must accept it. The offer must specifically express the intent to make an agreement in terms that may be so construed, and they must be communicated to the other party. These terms are accepted if transmitted to the person to whom the offer is made, the terms are unconditional and definite, and the terms are transmitted to the person making the offer. An insurance agent is normally considered as a solicitor of the offer, and the offer is the insurance application. A policy is considered as an acceptance. In some types of insurance, the agent has binding authority, and in others they do not have the authority (usually in life and health insurance).
Competent Parties.
A party to a contract may be considered as incompetent if they are a minor, insane, under the influence of alcohol or drugs, or possibly a corporation (considered by law as an “artificial person”) which doesn’t have the authority to enter into such a contract. By law, many incompetents are given the opportunity to extract themselves from a contract if it was entered into while they were incompetent. In nearly all situations involving insurance, the policy may be cancelled by the insured by law. Even if the insured is found by a court to be incompetent without the knowledge of the insurer, the law usually allows a full return of premium to the insured.
Consideration.
Consideration is whatever one persons asks another to do in return for the promise offered under the contract. Insurance consideration is the payment of premium or the promise to pay a premium at a specified later date. In some insurance policies, pre-payment of premiums is required. Life insurance coverage will not be effective until the full first premium is paid, however in Property & Liability insurance pre-payment is not usually required, but the insured has an obligation to pay the premium as soon as coverage commences.
Legal Purposes.
Insurance contracts must involve a legal subject matter and this is usually not a serious problem. However, articles that may not be legally possessed may not be insured. For instance a vehicle used for illegal purposes cannot be insured under an automobile insurance policy.
Insurance Contracts
Insurance contracts have certain unique features in addition to the qualifications listed above. These features are discussed below, but a more detailed discussion or explanations are beyond the scope of this text.
Conditional Contracts
Insurance policies are dependent upon an uncertain event. Under most other contracts, the contracts are based upon some acts being performed. In insurance, the acts may never occur and therefore are considered as “conditional.”
Contracts of Adhesion.
The normal contract can be added to or subtracted from, but an insurance contract is a “take-it-or-leave-it” type of offer. In other words, the insured must adhere to the agreements of the contract; hence it is a contract of “adhesion.”
Aleatory Contracts.
A typical contact involves items of similar value; e.g. an automobile is purchased for a stated amount, which approximates the value of the automobile. An insurance contract consideration, conversely, is usually uneven. Rarely does the consideration of both parties become equal. The Aleatory concept is that the contract is dependent upon an uncertain event.
Unilateral Contracts.
Only one party in an insurance contract makes an enforceable promise. The policyholder pays a premium; the other party makes a Unilateral promise.
Contracts of Utmost Good Faith.
Insurance contracts by their very nature are considered as a contract of utmost good faith. The applicant must disclose all material facts, and the insurer must deal with its clients in complete honesty and good faith.
Contracts of Indemnity.
Insurance contracts are contracts of indemnity by which the injured party is compensated for the losses suffered by means of a financial settlement.
TORT LAW
Black’s Law Dictionary defines “Tort” as “A private of civil wrong or injury. A wrong independent of contract”, “A violation of a duty imposed by general law or otherwise upon all persons occupying the relation to each other which is involved in a given transaction,” “There must always be a violation of some duty owing to plaintiff, and generally such duty must arise by operation of law and not by mere agreement of the parties.”
FThere are three elements of every tort action:
1. Existence of legal duty from defendant to plaintiff,
2. Breach of duty, and
3. Damage as proximate result.
A Tort is a legal wrong committed upon the person or property independent of contract. It may be either (1) a direct invasion of some legal right of the individual; (2) the infraction of some public duty by which special damage accrues to the individual; (3) the violation of some private obligation by which like damage accrues to the individual. In the former case, no special damage is necessary to entitle the party to recover. In the latter two cases, such damage is necessary.
CONSUMER APPLICATION (Contract Law)
Johnson Air Conditioning contracts with Nosam Advertising to develop an article for the newspapers in the neighboring cities and towns introducing a new product that “cuts air conditioning bills in half” and such advertising was to appear in a special section that would appear only on a particular weekend. Nosam informed Johnson that they were on schedule, but when it came time to place the ad, Nosam claimed to have lost part of their paperwork and had a key employee resign, so they were unable to meet the deadline. The following week Johnson’s principal competitor introduced the same new product, with the result that Johnson lost new customers and even old customers who went with the other air conditioning firm in order to take advantage of the new product. Since this was a valid contractual agreement, Nosam would be held legally responsible for the damage caused by the failure to perform under the contract.
CONSUMER APPLICATION (Tort Law)
Beacam Pharmacy was located in downtown Spruce Falls, Wisconsin, which was subject to heavy snowfall. After a blizzard struck Spruce Falls, Paul Beacam, the owner of the pharmacy, got into an argument with the City Works Department about the snowplow throwing snow onto his sidewalk. To “prove his point”, he refused to shovel the snow and ice from his sidewalk, even though all of the other business owners in the area had cleaned their walks.
Helen needed a prescription filled for her arthritis, and drove to the pharmacy, parking in a cleared section of the street. However, when she attempted to enter the pharmacy, she slipped on the ice and broke her hip.
The pharmacy had a legal duty to make every effort to avoid all hazards to its customers (cleaning the walk), which it failed to do (breach of duty), and with the result that Helen suffered serious injuries and incurred medical bills because of the fall (damage as a proximate result).
Interestingly, a court has very recently ruled that if a business does not shovel the sidewalk in a similar situation, the business is not liable if someone is injured because of the accumulation, as the snow and ice were beyond the control of the business. However, if the business had made an effort to clear the sidewalk on a person slipped on ice that remained, then the business would be liable for any injured.
To further describe Tort Law, the point must be made that in the insurer’s society and under the laws of the United States, a person owes a duty to other to not deliberately do anything to (deliberately) injure another person, or to cause damage to another person’s property. Note the emphasis on “deliberate.”
A person who commits a tort (a “Tortfeasor”) and is subsequently judged liable for his/her actions, normally must pay damages to the party who was injured (or wronged). Liability insurance usually does not apply to intentional torts – even though the wronged individual may in may cases, have the right to sue for damages for those intentional acts. Conversely, if the acts were unintentional, liability insurance usually does apply.