Liability insurance arises mainly from the operation of the law of negligence. Individuals, who in the eyes of the law fail to act reasonably or to exercise due care may find themselves subject to large liability claims. Court judgments have been have been issued for sums so large as to require a lifetime to pay. There are at least four major types of liability insurance contacts:
- Liability arising out of the use of automobiles.
- Liability arising out of the conduct of a business.
- Liability arising from professional negligence (applicable to doctors, lawyers, etc).
- Personal liability, including the liability of a private individual operating a home, carrying on sporting activities, and so on.
Practically all liability contracts falling in these four categories have some common elements. One is the insuring clause, in which the insurer agrees to pay on behalf of the insured all sums that the insured shall become legally obligated to pay as damage because of bodily injury, sickness or disease, wrongful death or injury to another person’s property. The liability policy covers only claims that an insured becomes legally obligated to pay; voluntary payments are not covered. It is often necessary to resort to legal or court action to determine the amount of these damages. Although in a vast majority of cases the damages are settles out of court by negotiation between the parties.
All liability insurance contracts contain clauses that obligate the insurer to conduct a court defense and to pay any settlement, including premium on bonds, interest on judgments pending appeal medical and surgical expenses that are necessary at the time of the accident and other costs. Liability has sometimes been termed defense insurance because of this provision. The insurer agrees to defend a suit even though it is false or fraudulent, so long as it is a suit stemming from a peril insured against. The insured is required to cooperate with the insurer in all court actions by appearing in court, if necessary to give testimony.
Practically all liability insurance policies contain limitations on the maximum amount of a judgment payable under the contract. Further, the cost of defense, supplementary payments, and punitive damages may or may not be paid in addition to the judgment limits. Separate limits often apply to claims for property damage and bodily injury. An annual aggregate limit may also be purchased, which puts a maximum on the amount an insurer must pay in any one policy period.
Limits may apply on a per-occurrence or a claims-made basis. In the former, which gives the most comprehensive coverage, the policy in force in year one covers a negligent act that took place in year one, no matter when a claim is made. If the policy is made on a claims-made basis, the insurance in force when a claim is presented pays the loss. Under this policy, a claim can be made for losses that occur during the policy period but have their origins in events preceding its starting date; the period of time before this date for which claims can be made is, however, restricted. For an additional premium the discovery period can be extended beyond the end of the policy period. The claims-made basis for liability insurance is considered much more restrictive than a per-occurrence policy.
Liability insurance contracts have in common the fact that the definition of “the insured” is broad. An automobile liability policy, for example, includes not only the owner but anyone else operating the car with permission. In business liability insurance, all partners, officers, directors, or proprietors are covered by the policy regardless of their direct responsibility for any act of negligence. Other parties may be included for an extra premium.
Another element common to all liability insurance policies is certain exclusions. Policies covering business activities almost invariably exclude liability arising out of the personal activities of the insured. Each kind of liability contract tends to exclude the liability for which another contract has been devised: a personal liability coverage in the homeowner’s contract, for example, excludes automobile liability because a special contract has been created for this particular type of liability.
Another common element in liability policies is subrogation: the insurer retains the right to bring an action against a liable third party for any loss this third party has caused.
Business Liability Insurance
Business liability contracts commonly written include the following: liability of a building owner, landlord, or tenant; liability of an employer for acts of negligence involving employees; liability of contractors or manufacturers; liability to members of the public resulting from faulty products or services; liability as a result of contractual agreement under which liability of others is assumed; and comprehensive liability. The latter contract is designed to be broad enough to encompass almost any type of business liability, including automobiles. There has been increasing use of coverage for liability stemming from defective products, because some court judgments have awarded huge compensations.
Business liability contracts may be written to cover loss even if the act that produced the claim was not accidental. The only requirement is that the result of the act be accidental or unintended. Thus if a contractor is making an excavation that produces large amounts of dust and this dust causes loss to neighboring property, the contractor’s liability policy would respond to claims for loss, even though the act that produced the dust was a deliberate act.
Professional Liability Insurance
Known as malpractice, or errors-and-omissions, insurance, professional liability contracts are distinguished from general liability policies because of the specialized nature of the liability. Professional persons requiring liability contracts include physicians and surgeons, lawyers, accountants, engineers, and insurance agents. Important differences between professional and other liability contracts are the following:
- No distinction is made between bodily injury and property damage liability, and there is no limit on the number of claims per accident but rather a limit of liability per claim. This recognizes the fact that one negligent act on the part of a professional person may involve more than one party, each of whom could bring a legal action against the professional person. Thus a doctor might administer the wrong medicine to a number of patients, each of whom could bring a legal action.
- Claims against a professional person may have an adverse effect upon his or her reputation. The policy therefore permits the insured to carry any action to court, since an out-of-court settlement might conceivably imply guilt in the eyes of the professional’s public or clientele.
Personal Liability Insurance
The most common from of personal liability insurance is issued as part of the homeowner’s liability insurance policy. It is an all-risk agreement and contains relatively few exclusions. The policy covers any act of negligence of the insured of residents of the home that results in legal liability. It may also include medical payments insuring covering accidental injury to guests and other nonresidents without regard to the question of negligence.
Automobile Insurance
Nearly half of all property-liability insurance written in the United States is in the area of automobile insurance. Set up as a comprehensive contract in most parts of the world, automobile insurance covers liability, collision loss of the vehicle, all other types of loss(called comprehensive loss), and medical expenses incurred by the driver, passengers, and other persons. Coverage usually applies to anyone driving the car with permission of the owner. Thus, drivers are insured whether driving their own or someone else’s car.
Automobile liability coverage is mandated by law in many countries up to specified monetary limits. The policy states what happens if the driver is covered by other automobile policies that may cover the loss. It also covers the liability of persons, such as parents, who have legal responsibility for actions of the driver. Coverage includes defense costs, usually in addition to the policy liability limits. Many policies exclude coverage for the time the automobile is driven in a foreign country.
Theft Insurance
Theft generally covers all acts of stealing. There are three major types of insurance contracts for burglary, robbery, and other theft. Burglary is defined to mean the unlawful taking of property within premises that have been closed and in which there visible marks are evidencing forcible entry. Such narrow definition is necessary to restrict burglary coverage to particular class of criminal act. Robbery is defined as that type of unlawful taking of property in which another person is threatened by either force or violence.
In robbery peril, therefore, the element of personal contact is necessary. Perhaps the most common of all burglary coverage is on safes. Often the loss in the form of damage to the safe itself from the use of explosives and other devices is as great as the loss of the money, jewelry, or securities it contains. Accordingly, the policy covers both types of claims. Another common burglary policy applies to mercantile open stock. In this type of policy, there usually a limit applicable on any article of jewelry or any article contained in a showcase where susceptibility to loss is high.
In order to prevent underinsurance, the mercantile open stock policy is usually written with a coinsurance requirement or with some minimum amount of coverage. Another common theft policy for business firms is a comprehensive crime contract covering employee dishonesty as well as losses on money and securities both inside and outside the premises, loss from counterfeit money or money orders, and loss from forgery. This policy is designed to cover in one package most of crime protection for individuals is offered both as a separate contract and as part of a “homeowner’s policy.”
Aviation Insurance
Aviation insurance normally covers physical damage to the aircraft and legal liability arising out of its ownership and operation. Specific policies are also available to cover the legal liability of airport owners arising out of the operation of hangars or from the sale of various aviation products.
These latter policies are similar to other types of liability contracts.
Perhaps the major underwriting problem is the “catastrophic” exposure to loss. The largest passenger aircraft may incur losses of $ 300,000,000 or more, counting both liability and physical damage exposures. The number of aircraft of any particular type is not large enough for the accurate prediction of losses, and each type of aircraft has its special characteristics and equipment. Thus a great deal of independent individual underwriting is necessary. Rate making is complex and specialize. It is further complicated by rapid technological change and by the constant appearance of new hazards.
Policies are written to cover liability of the owner or operator for bodily to passengers and for property damage. Medical costs, including loss of income, are usually paid to passengers suffering permanent total disability without the requirement of proving negligence. This type of coverage has been called admitted liability insurance.
Worker's Compensation Insurance
Worker’s compensation insurance, sometimes called industrial injury insurance, compensates workers for losses suffered as a result of work-related injuries. Payments are made regardless of negligence. The schedule of benefits making up the compensation is determined by statute.
The scope of employment injury laws, originally limited to persons in forms of employment recognized as hazardous, has, as the result of associating the right to compensation with the existence of a contract of service, been gradually extended to clerical employment. Nevertheless, the large exception of agricultural employees continues in some Third world countries, Canada, much of the United States, and the countries of Eastern Europe. Other classes of exception are employees in very small undertakings and domestic servants. The exclusion of employees with middle-class salaries persists in parts of the former British Empire. In a few countries, working employers are permitted to insure themselves as well as their employees.
The notion of employment injury was at first confined to injuries of accidental origin, but during the 20th century it was extended to include occupational diseases in increasing number. To entitle the worker to benefit, the accident must occur during employment, and many laws also require the accident to have been caused by the employment in some way; however, the trend seems to be toward accepting the former condition as sufficient.
Following the German law of 1925, some 30 countries included accidents occurring on the way to and from work. Injuries due to the employee’s willful misconduct are generally excluded. Occupational diseases are covered to some extent by virtually all national laws.