Every individual and business entity must exercise reasonable care in inflicting injury on others, damaging their property, or in some other fashion – causing them loss. The amount of care required in any given situation depends upon the circumstances, and any negligence attributed to the individual or business, must be determined after consideration of all pertinent facts and standard of care required.
There are many forms of Public Liability insurance, which are designed specifically to protect an insured business or person from liability in his/her personal, business or professional life. Therefore, it is most important that the legal liability facing the insured be covered under the Liability policy purchased by the insured.
Liability Insurance policies (as are all insurance policies) consist of provisions, conditions and exclusions. While some insurance policies protect against a simple risk (life insurance, for example, protects against the risk of early death), liability policies cover so many situations that they can become complicated and complex.
Those insurance practitioners, who provide policies covering liability exposures, must be familiar with all risks and hazards that could affect the insured. In today’s high-tech world, it is quite possible that the insured would be facing liabilities, which are not covered in any of the regular policies. Depending on the particular circumstances, additional coverage must be obtained, either through endorsements, additional policies, or special arrangements with insurers.
Several of the various types of liability policies will be discussed in some detail later in this text
If the Liability policy has performed as expected, as the individual that has been found liable for monetary losses and such losses are paid partially or entirely by the policy, then the Insurer has interposed themselves as a party to the action.
Under an insurance policy, the “First Party” is identified as the one who causes the course of action (causes injury, damages property). The “Third Party” is the one who is injured or wronged. This leaves the “Second Party”, or the insurance company, which is “in the middle.” In actual practice, the Insured transfers part of their liability exposure to the insurer. Therefore, simply put, a liability policy promises to pay – on behalf of the insured (Party of the First Part) judgements for which they (the insured) is liable.
Before an Insurer will pay under a Liability Policy, the insured must be legally liable. This can be accomplished by the simple fact that a court has determined that the insured has committed a tort and is liable. Or, as an alternative, the facts of the case are such that the insurer feels that if the case went to court, the insurer would – more than likely – be found liable.
If the insurer determines, prior to trial, that the insurer would probably be found liable, the insurer has the right to make a settlement which would (1) eliminate court costs and/or (2) limit the amount of payment to the person who is seeking damages. In the following study of the provisions of the liability policy, this right to settle is an integral part of the policy.
Liability Insurance policies covers the three categories of liability exposures, (1) Personal liability, (2) Professional liability, and (3) Business Liability.
Personal liability arises from the personal activity of an individual, such as participating in sports, automobile usage, or home ownership. While Personal Liability is not covered in detail in this text, as stated earlier, it is important to be aware of its relationship to general liability exposures.
An individual can be personally liable because of the
CONSUMER APPLICATION
Ludwig is a Certified Public Accountant (CPA) and has recently established and incorporated his own business, with himself as the sole owner. He purchased a Professional Liability policy to protect against such things as errors and omissions. He has a personal automobile policy with $500,000 of liability. He also has a personal liability umbrella policy for protection against himself in case of lawsuit for which he would be held personally liable.
Ludwig was driving to court in his personal car and was talking on his cell phone. He dropped some papers that he was referring to in his telephone conversation, reached for the papers on the floor and momentarily took his eyes off the road, striking another car in the rear. The driver and passenger of the other car were seriously injured, and the other car was demolished.
Ludwig’s personal automobile policy will cover the liability of the accident. If, however, the other party sues Ludwig’s corporation, believing it to have more value than Ludwig personally, his liability company would join in the defense. However (as is discussed later) the typical Professional Liability policy will not cover the auto unless it is specifically covered. The umbrella personal liability policy will cover anything over the $500,000 limit on the personal auto policy. Ludwig could have purchased a Commercial Automobile Policy if he felt that there was to be a lot of business usage of his car, or if he would have others drive cars that he owned, for business purposes.
Professional Liability (or Personal Liability) is not covered under the Commercial General Liability policy, and as discussed later, there are a wide variety of Professional Liability insurance forms.
Simply put, Professional Liability covers the exposure of claims arising as the result of a profession. The best known of these policies are Medical Malpractice, but also covers Insurance Agents, Attorneys, Accountants, Architects, Engineers, etc. Liability claims arise because of either (1) rendering services of a professional nature, or (2) failing to render professional services.
FBefore Professional Liability can be determined, it must be established that the individual was acting in a professional capacity, and the actions were of a professional nature.
CONSUMER APPLICATION
Doug is an architect and operates from his home. He designs office buildings for local businesses. A large law firm from Chicago contracts with him to design a regional office for them, with a stipulation that the building must be only two stories tall and have a lobby that extends the full two stories. After drawing up the plans, Doug discovers that the proposed building goes over the agreed-upon budget, so he changes the plans to allow for a one-story lobby. The building is still built, and Doug is then sued by the firm for malpractice.
While driving to the building under construction, Doug accidentally strikes the rear end of a van that stopped suddenly in front of him because of a truck entering the construction zone. Doug cannot be sued for professional malpractice in this case, as the act of driving was not of a professional nature.
Business Liability insurance will be covered in detail in this text as it is the type of coverage that is provided under a Commercial General Liability Policy. Business Liability arises from the conduct of business such as:
Liability Insurance is the type of insurance that is used to cover the risk of incurring legal liability to pay money damages. Liability Insurance further guarantees financial protection to an insured that may be required to pay damages as the result of a legally negligent conduct. This negligent conduct could be one that causes personal injury, death, or property damage. Liability for negligence may result not only from the conduct of the insured, but can also result from the conduct of his/her agents and/or employees. The Liability Insurance policy, as a rule, provides for investigation, negotiations for private settlement of claims, defense of lawsuits brought against the insured, and the payment of judgements or settlements awarded by the courts (up to the policy limit).
Automobile liability insurance policies assume the risk of financial loss arising from liability for bodily injury or property damage to other parties caused by automobile accidents.
Liability insurance protection is also provided by various policies that assume the risk of legal liability of those who own, operate, or occupy residential or business premises, who manufacture or distribute commodities, or who render services. Special policies are available to manufacturers and merchants to cover possible legal suits arising from defective products that cause injury of death to the purchaser. Professional (malpractice) liability protection is an important kind of insurance, especially for members of the medical profession. Comprehensive personal liability insurance is used widely by tenants and homeowners to protect themselves against legal liability for negligent maintenance and operation of the premises, as well as for personal activities away from the premises. The list goes on and on, and many of these forms will be discussed later in this text.
Commercial General Liability Insurance policies do not provide protection against all liability risks. For example, Workers Compensation provides coverage to injured employees, regardless of liability, and also provides death benefits and disability benefits.
Employers Liability is another type of Liability insurance not covered in the General Liability policy. This will be discussed later in the text.
Commercial General Liability policies also do not cover Auto, Aviation, or Boiler & Machinery policies. These policies can be purchased separately which are designed for these purposes.
CONSUMER APPLICATION
Bernard is the Executor of his late-father’s estate and inherits an apartment building, which contains 15 tenants, but it is over 30 years old and is obviously in need of repair. After receiving this inheritance, Bernard feels that he can afford to get married, so he and his girlfriend marry and purchase a home in a nice suburban area. Bernard is an architect by profession, so he puts the operation of the apartment house in the hands of a building manager and starts his own architectural firm, hiring 2 architects and several office employees.
Bernard contacts his late-father’s insurance agent, Scruggs, for advice on insurance. Scruggs suggests that Bernard protect himself against liability claims as he has several exposures that need to be covered. Besides, being wealthy now, he is a natural target for many “con-men” and other unscrupulous individuals who will try to share in his good fortune.
At Scrugg’s suggestion, Bernard purchases a Homeowners policy with high liability limits to protect his residence. He purchases a liability policy to protect against claims from tenants or others that may file claims against the owner of the building. When he started his architectural firm he obtained Professional Liability Errors & Omissions Insurance with his Commercial General Liability policy. Bernard felt that all of the liability insurance policies were perhaps “overkill.” However, during the first five years the following suits were filed:
1. Pipes in the walls of the apartment building broke due to faulty plumbing, destroying a tenant’s property,
2. When remodeling the apartments, a contractor left material in the stairwell and a person looking for an apartment fell over the material and broke an arm.
3. He interviewed a secretary but did not hire her. She is claiming racial discrimination as she is of a minority race.
4. A customer files suit because of what they considered a design flaw, even though it was the customer’s idea and the firm simply followed the customer’s desires.
5. An elderly neighbor slipped on the ice in front of their home early one morning, and is suing Bernard for injuries sustained in the fall.
6. His wife drove their new car into the trunk of a late-model Buick.
7. His brother believes that the estate was not divided evenly and since Bernard is the Executor of the estate, he is suing Bernard as he believed Bernard did not exercise proper fiduciary responsibilities in settling the estate.
STUDY QUESTIONS
1. Liability is a form of
A. Casualty Insurance.
B. Property Insurance.
C. Marine Insurance.
D. Inland Marine Insurance.
2. Before Professional Liability can be determined it must be determined that the individual was acting in a
A. Normal manner.
B. Manner consistent with nonprofessionals in that geographic area.
C. Professional manner.
D. Obstructive manner.
3. Under a Commercial General Liability policy, what type of liability is covered?
A. Professional
B. Business
C. Individual
D. Automobile.
4. Which of the following would be covered under a Commercial General Liability policy?
A. Workers Compensation
B. Group Health insurance.
C. Manufactured Products Defects.
D. Boiler and Machinery coverage.
5. Professional liability claims can arise because of
A. The failure of the professional to render professional services.
B. Chronic illness of a foreman.
C. an automobile accident in the doctors parking lot (no doctor involved).
D. children drowning in a motel pool next door to the doctor’s office.
6. Business liability arises from the
A. negligence of others.
B. laws of trespass,
C. conduct of business.
D. personal acts at home.
7. An individual can be personally liable because of
A. ownership and/or maintenance of a home.
B. professional acts committed during course of employment.
C. the negligence of a professional.
D. performing corporate duties.
8. Insurance agents can be liable for misrepresenting a policy to an applicant.
A. They should carry Commercial Liability policies.
B. They should carry Errors and Omissions insurance.
C. Their homeowners insurance will normally cover them.
D. There is no insurance they can buy to protect themselves from misrepresentation.
9. A liability insurer discovers that they (the company) can settle a lawsuit and they feel that they would probably lose in court anyway.
A. They have the right to settle out of court.
B. The insurer can only settle a lawsuit if the insured agrees to the settlement.
C. The insurer has no legal right to settle a lawsuit regardless of the circumstances.
D. If the settlement would limit the amount to go to the person seeking damages, they cannot legally make a settlement.
10. If the liability policy performs as expected, and the insured has been found liable for monetary losses, and such losses are paid entirely or partially by the policy, then the insurer is said to have
A. interposed themselves as a party to the action.
B. cancelled the policy ab initio.
C. subrogated themselves.
D. been fortunate to not have been sued by the policyholder.
ANSWERS TO STUDY QUESTIONS
1A 2C 3B 4C 5A 6C 7A 8B 9A 10A