Liability Insurance
Chapter 2
General Liability
Introduction
In this chapter of Liability Insurance there are three broad areas included in general liability insurance and comparisons of the three basic business liability forms. This chapter will also go into defining the reasons for coverage offered and the issues involved in workers' compensation programs.
The first chapter discussed some liability exposures and two types of losses that can result from them. One of the ones that affect people the most is the cost of a defense against a law suit. The other is the obligation to pay damages awarded to the plaintiff. The insurance coverage that can protect a person from such losses on behalf of the insured is called liability insurance.
Insuring One's Liabilities
Liability insurance is third-party coverage. The first and second party is the insurance company and the policyowner. Liability contracts are divided into three sections:
1. a declaration sheet,
2. a policy jacket which contains all the supplementary payments, and
3. coverage parts which include the insuring agreements and exclusions.
These three sections are put together to form a complete policy. The declarations and policy jacket sections contain many standard terms. Then the coverage parts are added to complete the contract. Thus, various personal, business, and professional liability policies are developed. The liability policies contain the equivalent of the usual four sections of insurance contracts which are declarations, insuring agreements, conditions, and exclusions. One benefit that liability policies offer is the understanding of the coverage. The standard definitions and conditions for all liability contracts are contained in the jacket of the policy, while the coverage part intentionally requires the insuring agreements to be immediately followed by the exclusions pertaining to that coverage.
Declarations
The declarations include statements which identify both the insured and the insurance company. Essential information about the contract terms are typed in on the form to show who, what, where and when the liability insurance covers something. The declarations provide that by accepting the policy the names insured agree with the representations made and that the policy is issued in the reliance upon the truth of these statements.
The Policy Jacket
The provisions common to all general liability insurance policies are contained in the standard policy jacket. Three sections are identified as:
1) Supplementary Payments: This is the first section of the policy jacket, which is applicable to all of the coverage parts that may be used with it. It mentions several extra costs which are payable by the insurance company in addition to the policy liability limit. These would include:
a) premiums on bonds to release attachments relating to lawsuits defended by the insurance company,
b) bail bond costs up to $250 per bond required for traffic law violations arising out of vehicles to which the contract applies, and
c) to reimburse the insured for reasonable expenses incurred at the insurance company's request in assisting the company in the investigation or defense of any claim or suit, including actual loss of earnings not to exceed $25 per day.
2) Definitions: More than the usual number if definitions appear in the policy jacket. Some of these are more important than others for particular types of liability insurance contracts. Some of the definitions covered by the policy jacket would include the definition of an accident, which the insured is, the basic of an occurrence, what bodily injury means, how property damage is defined or clarifications of words such as product liability and completed operations coverages.
3) Conditions: The policy jacket would also include several important conditions upon which the obligations of the insurance company and the insured are based. This spells out clarifications of the duties of each of the parties in the event of an occurrence, claims, or suit. The other insurance condition determines what happens when there is more than one insurance company. Instead of prorating or apportioning with other applicable insurance, this condition states that when the insurance is intended to be primary coverage, it shall pay before excess or contingent liability contracts contribute to the loss. If both insurance contracts are primary coverage, then the two would pay on an "equal shares" basis. Conditions of less importance are those pertaining to financial responsibility laws, premium bases and assignment. Conditions that have stayed the same are those permitting policy changes in writing, cancellation, the right of subrogation by the insurer and action against the insurance company by the insured only after the insured has complied with all policy provisions and the final judgment of settlement of the claim has been determined.
Just about all liability policies require the insurance company to pay the injured party directly rather than reimburse the insured. The insurance company's obligations are restricted to claims under civil law and will not cover criminal prosecution. Obviously, the insurer will not serve the insured's jail sentence or pay the fine. In addition to the insurance coverage covering all expenses of negotiating settlements, defending suits and paying damages the insurance company agrees to pay premiums on appeal and release-of-attachment bonds, all reasonable expenses incurred by the insured at the insurer's request and in most policies immediate medical and surgical expenses of others needed at the time of the accident.
Coverage Parts
The addition of a coverage part includes the insuring agreement and exclusions pertaining to the insurance, which completes the contract. Many different coverage parts can be used to develop completed general liability insurance contracts.
The more common types of coverage parts added to the standard policy, known as the jacket, to complete a coverage are divided into three basic types of liabilities that individuals and employers face. They are:
1. general liability,
2. automobile liability, and
3. employer's liability.
This chapter will not discuss automobile liability and employer's liability. Chapter three will discuss automobile liability. Chapter four will discuss employers' liability along with workers' compensation laws which expose individuals and businesses to a loss.
General Liability
The general liability insurance program is similar to many fire and inland marine programs available. A form must be attached to a standard policy to complete the contract. The standard policy contains the common provisions, conditions and definitions applying to all policies in the program. Coverage for general liability can be written as a separate policy rather than as a form attached to the standard policy. The forms added to the standard policy divide the general liability exposure into three broad categories:
1. personal liability,
2. professional liability, and
3. business liability.
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The standard policy contains the common provisions, conditions & definitions applying to all policies in the program. |
Personal Liability Forms
Personal liability forms provide coverage for liability losses stemming from bodily injury and property damage to others. These losses must result either from the conditions of the insured's premises or the personal activities of the insured. The business activities of the insured must be covered under a business liability contract or policy. There are two types of personal liability forms written, one for nonfarmers and the other for farmers.
The comprehensive personal liability policy: The personal liability exposure may be covered either by a separate comprehensive personal liability policy or by section II of the homeowner’s policy. The latter method is much more common. The basic policy limit is $25,000 but it can be increased for additional premium.
Individuals need liability protection for numerous personal or individual situations that we all encounter every day. The ownership of property, participation in sporting events, the owning of pets or animals and many other normal everyday activities place us all in a position of responsibility to prevent injury or damage to other persons or their property.
In the past, a person could own several separate liability policies such as residence liability, a sport liability or even a dog liability insurance policy. Now these coverages are almost always insured by the comprehensive personal forms. In the liability insuring clause, the comprehensive personal liability policies cover under a single limit the liability of the insured for damage on account of bodily injury to members of the public and to employees, and for damage to the property of others caused by an occurrence. This is unlike most liability insurance policies. The minimum single limit is $10,000, but (there is always an exception) in the case of other liability coverages, policies can be written for larger limits.
The farmers' personal liability policy: A farmer needs liability protection which is offered by the farmers' comprehensive personal liability policy. This type of coverage is also available to farmers in the farmowner’s-ranchowner’s program. These policies cover the insured while they are farming. It includes some business liability coverage. For additional premium the insured can add a rider to cover the loss from death of any cattle, horses, mules, hogs, sheep or goats owned by the insured if the animal is struck while straying on a public highway. There is a $25,000 single per-occurrence minimum limit written for the liability coverage. The accidental death benefit for covered farm animals is limited to $400 each. The form includes limited contractual coverage and products liability coverage. Liabilities incurred as injuries to employees are excluded, except by endorsement.
The farmers' personal liability policy is an example of a multiple-line insurance contract which combines personal and business multiple-line insurance. This type of coverage is very similar to that of the homeowners' forms.
Professional Liability Forms
This type of protection is taken out by professional individuals who need liability protection against malpractice suits and may even be deemed as malpractice liability insurance coverage. The malpractice suit must result from either faulty services or failure to meet a standard of service expected under the circumstances. Professional liability insurance was first written to indemnify medical professionals for loss or expense resulting from claims on account of bodily injuries. Today, many other professional individuals need this type of coverage which includes physicians, druggists, beauty parlor operators, architects, engineers, lawyers, employee benefit managers, real estate agents, financial planners, corporate directors and officers, fiduciaries, insurance agents, stockbrokers, actuaries, and any other profession that has become increasingly important in this "sue-happy" society. Professional liability insurance has been extended into these fields to cover losses where monetary damages are a consequence of the negligent professional services of the insured.
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Professional liability insurance was first written to indemnify medical professionals for loss or expense resulting from claims on account of bodily injuries. |
Professional liability policies are written on either:
1. a claims-made basis, or
2. an occurrence basis.
The difference between the two is obvious in the name. Claims-made basis means the insurance company is responsible for only claims filed during the policy period. Occurrence basis means the insurance company is responsible for all claims resulting from events occurring during the policy period regardless of when these claims are filed.
When a policy is written on an occurrence basis, the insurance company is contracted to pay for any and all claims filed long after the policy expires. These kinds of delays make it hard for insurance companies to plan their financial future. The claim-made basis was designed and invented to remedy this problem. Normally delays do not occur in auto liability and general liability coverages, so these policies can be written on an occurrence basis. With product liability and professional liability coverages the delays are frequent, so these policies are written on a claims-made basis.
There is also something new to the insurance industry in relative terms to claims-made basis and occurrence basis policies that is called discovery basis. Under discovery basis policies the insurance company is responsible for liability for injuries or damages discovered during the policy period. The discovery basis can be questionable because of the moral hazard it creates. The plaintiff can wait until the defendant increases their insurance before revealing a covered injury.
Moral hazard is the possibility that an insured will deliberately bring about a loss that is covered by the insurance policy. Moral hazard usually arises from a combination of moral weakness and financial difficulty.
Morale hazard is closely related to moral hazard. Morale hazard arises from indifference concerning loss, often brought about by feeling secure under their insurance protection, which may lead to carelessness. The morale hazard is difficult to recognize. People leave cars unlocked; keys in the ignition, garage doors open in the middle of the night, and so on. Morale hazard may tend to merge into moral hazard.
Many of the professionals today buy the professional liability coverage to protect their reputations. They know that their liability insurance carrier use some the best defense attorneys available. Winning the case brought against them is important since losing can tarnish their reputations.
Some professional liability claims can be settled out of court saving the insurance company time and money by not having to deal with lengthy court battles. Though, with the case of physicians and surgeons, the court battle may not be avoided. The voluntary settlement could be construed as an admission of guilt. This interpretation can tarnish their reputations. Thus, many professional liability policies are written so that the insurance company cannot settle out of court without the permission of the policyowner. The insurance company must receive the written consent of the insured before settling any claim. Some new forms are limiting this risk by prescribing arbitration for certain conditions or by deleting the requirement that the insured consent to claim payments.
Business Liability Forms
For business liability coverage, one of three forms may be added to the standard general liability policy to complete a business liability policy. These added forms are:
1. owners', landlords' and tenants' (OL&T),
2. manufacturers' and contractors' (M&C),
3. comprehensive general liability (CGL).
All of these forms contain coverage extensions and exclusions designed to meet special needs of the policyowners. There is, however, a common set of exclusions that apply to all three forms. The exclusions are for coverage for automobile liability, employers' liability and workers' compensation. These types of liability exposures are handled by separate forms, that in the case of automobile liability may be written in combination with the CGL. Some other exclusions that apply to all three are for personal injury liability, such as libel, slander and/or defamation, the pollution hazard, and there is only limited coverage for liability assumed under a contract. Personal injury liability and expanded coverage for liability assumed under contract may be added by endorsement or riders. A business needs to be aware of the exclusions that apply to their liability policies in order to arrange adequate coverage. An agent needs to be aware of the exclusions themselves.
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The Comprehensive General Liability (GCL) provides the broadest coverage. |
The comprehensive general liability (GCL) includes coverage for the products and completed operations liability exposure. Liability coverage for the exposure generally may not be written with the owners', landlords' and tenants' (OL&T) form or the manufacturers' and contractors' (M&C) form. For businesses that have products and completed operations exposure, purchase of the CGL form is necessary. The comprehensive general liability (GCL) also covers liability exposures arising from new construction, structural alterations, and demolition operations. Under manufacturers' and contractors' (M&C) forms these exposures are excluded only if the work is performed by an independent contract. The owners', landlords' and tenants' (OL&T) form excludes the exposures regardless of who performs the work. Both forms can be amended to cover these exposures. The comprehensive general liability (GCL) provides the broadest coverage which means that it is the most flexible of the three forms when covering business liability exposures.
The owners', landlords' and tenants' (OL&T) form is purchased mainly by retailers, wholesalers, service firms, owners and operators of movie and other entertainment industry businesses, hotels, office buildings and apartment complexes. This form provides insurance for liability claims resulting from the ownership or use of the covered premises. It covers liability for damages to those who incur bodily injury or property damages in and about the designated premises. The owners', landlords' and tenants' (OL&T) form covers liability for damages off the premises if these damages are related to the business.
The owners', landlords' and tenants' (OL&T) form cannot be used for coverage in activities other than those arising from the designated premises. Building contractors would need liability coverage that existed at the job site as well as the contractor's office. Obviously then, the OL&T form would not provide adequate coverage for the contractor.
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The OL&T form cannot be used for coverage in activities other than those arising from the designated premises. |
The manufacturers' and contractors' (M&C) form provides liability coverage for those businesses when the OL&T is not adequate enough. The manufacturers' and contractors' (M&C) form covers liability arising from new construction, demolition operation and structural operations changing the size and/or location of buildings, only if the operations are performed by the policyowner's own employees. This coverage is excluded in the OL&T form. The M&C form is similar to the OL&T form in that it does not cover liability arising from the use of independent contractors in either demolition operation or construction operations that change the size and/or location of buildings.
The owners', landlords' and tenants' (OL&T) form and the manufacturers' and contractors' (M&C) form are not suitable for businesses that need broad all-risk insurance coverage.
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The OL&T form and the M&C form are not suitable for businesses that need broad all-risk insurance coverage. |
There are two features of the comprehensive general liability (GCL) form that qualify it as a broad all-risk form.
1. The form automatically includes several liability exposures normally excluded in the owners', landlords' and tenants' (OL&T) form and the manufacturers' and contractors' (M&C) form.
2. The policy does not limit coverage to premises and operations existing when the policy is put into force. The CGL form will automatically cover the liability exposure from the additional premises and operations. The insured is not required to notify the insurance company of these changes within a specified period of time. An additional premium will be collected at the end of the policy period. Liability exposures resulting from additional premises and operations are covered under the owners', landlords' and tenants' (OL&T) form and the manufacturers' and contractors' (M&C) form if the insurance company is notified within 30 days of the acquisition.
Other Liability Coverages
Physicians', Surgeons' and Dentists' Liability Form
The physicians', surgeons' and dentists' liability policy form can be attached to the general liability jacket to provide coverage for liability arising out of professional acts or omissions committed by the insured or by any person for whom the insured is legally responsible. Negligence is not required as many medical acts are performed intentionally and these are covered because the injury does not have to result from an accident.
The physicians', surgeons' and dentists' liability policy form does not cover the personal liability of the insured for claims that cannot be traced to the professional practice of the insured. The policy excludes claims arising by reason of the liability of the insured as a proprietor, superintendent or executive officer in any hospital, clinic, laboratory or other business enterprise.
The distinguishing features of the medical forms of professional liability insurance contracts, as compared to other liability insurance, include:
1. importance of the defense factor for maintaining professional reputation,
2. consent of the insured before settling claims,
3. very broad coverage of negligence and even intentional acts on an occurrence basis,
4. per claim and per occurrence limits,
5. insuring clause for all damage claims, and
6. high-coverage limits needed, but high cost and limited market for some professional fields.
With malpractice suits on the rise, a crisis of market availability occurred in malpractice insurance beginning about the mid-1970s as claims and awards increased substantially. Several insurance companies dominant in the malpractice field of insurance restricted or eliminated the writing of these insurance contracts. The result was a severe shortage of markets for buying malpractice insurance coverages, which in turn increased annual premiums more than tenfold.
To combat this, many states have legislation to permit the use of joint underwriting associations (JUAs) in which all insurance companies writing liability insurance contracts are required to participate in providing malpractice coverage for hospitals and medical professionals.
The insurance industry has also come up with ways to combat this by enacting more restrictive underwriting requirements. The newer coverage is written on a claims-made basis instead of the occurrence basis. Only claims made or reported during the current contract are covered. This allows the insurance company pricing of the protection easier by eliminating the need to estimate claims that may occur long after an alleged malpractice incident. Another solution that evolved is that medical societies have formed their own insurers in order to provide malpractice insurance to their own medical practitioners.
Druggists' Liability Form
The druggists' liability form is a malpractice coverage which also extends to provide product liability insurance protection. The policy provides insurance against claims for damages on account of bodily injury or death that resulted from actual or alleged error on the part of drugstores or their employees in preparing, dispensing, selling, or delivering drugs, medicine, or merchandise. Policy coverage is also provided for claims arising out of the consumption or use of beverages, food or other products including merchandise of every character. The policy coverage extends to losses caused by errors in labeling or delivery, or in reading or interpreting the physician's handwritten prescriptions.
An exclusion of this policy with respect to claims attributable to illegality assumes some significance in connection with this coverage. This means that if an unqualified person issues a prescription that is not under the pharmacist’s supervision, the druggists' liability policy will not cover so far as these acts give rise to claims. However, if the insured or manager does not intentionally violate the law, the policy protects the drugstore from the illegal actions of the employees who may not have knowingly committed an illegal act.
Hospital Liability Form
The hospital liability form is a malpractice coverage which also extends to provide product liability insurance protection. It is designed for use by hospitals, clinics, nursing homes and mental-psychopathic and other health care institutions.
The hospital liability form provides coverage for liability arising out of malpractice, error or mistake made in rendering or failing to render medical or nursing treatment, including the furnishing of food or beverages. Product liability is included, both on and off the premises, for drugs or medical supplies or appliances furnished or dispensed by the insured.
Miscellaneous Medical Liability Form
The miscellaneous medical liability form provides coverage by endorsing one of the other professional liability policies. The policy to be used depends on the professional classification of the applicant for the insurance.
Errors and Omissions Insurance
Normally, professional liability insurance is called errors and omissions insurances when it applies to nonmedical professionals such as insurance agents. These policies often use deductibles of $1,000 or more and ordinarily do not require the consent of the insured to settle a claim. A limit of liability on a per claim and in the aggregate for the policy period applies. Individual contracts are written, although many of these exposures are written in group policies offered to all members of professional agents or advisors.
With the growing responsibilities of insurance agents, financial planners and investment advisors comes the need to reserve special attention for them, especially with many persons and agencies expanding to offer broader financial services. Potential legal problems and liability claims are serious, as written financial plans involving purchase or sale of securities require federal registration and compliance with many state licensing and regulatory acts. A planner must be loyal to clients and disclose any conflicts of interest to meet the essential requirements of the Investment Advisers Act and in avoiding liability for damages under the Securities and Exchange Commission (SEC) regulations for any unsuitable recommendations.
One of the major purposes of errors and omissions insurance is to provide the best possible defense for any claims which may damage the reputation of the professional individual(s). Errors and omissions insurance is not for bodily injury claims. It is property damage liability losses which are insured, and only a few exclusions apply:
1. fraudulent or criminal acts, and
2. libel or slander.
There is a type of error and omissions insurance which protects mortgagees. It actually provides the insured mortgagee with property insurance against indirect losses, rather than liability insurance against third-party claims. However, it is known as E and O insurance and is very similar to what we've already talked about. This insurance protects against losses arising out of failure to have in force proper insurance to protect the mortgaged property as a result of error or omissions. True, lenders require such insurance, and even though they may painstakingly check that proper insurance is in force, exceptions can and do happen. The insurance policy protects only the mortgagee, not the mortgagor (owner) and it applies only when through error and omission, specific insurance is invalid, insufficient or has not been provided. Failure to record changes in ownership, insufficient insurance to coinsurance requirements, incorrect description, failure to report change of occupancy or increase of hazard when known, error in ordering or renewing coverage, incorrect statements of ownership are some examples of the protection provided by E and O insurance.
Director' and Officers' Liability Insurance
Directors' and officers' liability insurance is an example of a specialized type of professional liability insurance policy. Directors' and officers' liability insurance pays on behalf of the executives for claims arising out of wrongful acts such as error, neglect, breach of duty, misleading statements, or to reimburse their organization if the executives receive indemnification. Directors' and officers' liability insurance protects one of the most important assets of an organization - its management.
Directors' and officers' liability insurance can be written with policy limits from $5 million to $50 million. Early forms of the important coverage were written only for the very large corporations, but in today's world the markets have expanded to include many smaller companies also. The need for what can be referred to as D&O liability insurance protection is evident from the increasing lawsuits by stockholders or even competitors for antitrust or unfair competition, this in spite of the yearly premium costs which often run into the thousands. Deductibles of $5,000 to $20,000 are common and participation of five percent or more by the insured in loss payments is frequent. The intent is to cover negligence of innocent and loyal directors and officers and defense of such claims except for active and deliberate fraud by someone.
This type of professional liability coverage is being inundated with new exposures. For instance, an alleged discrimination suit under the Equal Employment Acts or equivalent state or local laws is an example of an exposure that few insurance companies insure for. Court rulings may award punitive damages in liability cases which go beyond ordinary compensatory payments to the insured party. The Insurance Services Office excluded punitive damages in any liability insurance but then decided to leave such protection in the standard CGL forms. Many D&O liability insurance policies exclude this coverage unless it is specifically endorsed on the insurance contract.
Contractual Liability Form
The owners', landlords' and tenants' (OL&T) form, the manufacturers' and contractors' (M&C) form and the comprehensive general liability (CGL) form cover only limited liability assumed under contract liability exposures arising from incidental contracts. Incidental contracts means that contractual liability is covered under most liability policies, limited to the liability exposures that are those found in lease of premises, elevator maintenance agreements and sidetrack agreements. A sidetrack agreement is a contractual agreement obligating a railroad to construct and maintain a switch track on a business premises in exchange for which the business releases the railroad, partially or totally from liability. Thus if a lease requires the tenant to assume the owner's liability for bodily injury and property damage in the tenant's OL&T, M&C, and CGL forms it will cover this exposure.
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Incidental contracts means that contractual liability is covered under most liability policies, limited to some liability exposures. |
There are, however, special contractual liability insurance forms that can require the policy to cover liability assumed under other-than-incidental contracts. As exposures of this type increase, business owners must read every contract to identify any need for special contractual liability coverage. As an agent, you can be aware about the type of business the individual is running. If the individual owns a business which leases equipment for use in its operations, the policyholder may find the lease requires the business to assume the owner's liability for bodily injury and property damage caused by the equipment.
Owners' and Contractors' Protective Liability Insurance
The manufacturers' and contractors' (M&C) form can be amended to include liability coverage for structural alterations, new construction and demolition operations performed by independent contractors. The owners', landlords' and tenants' (OL&T) form can also be amended to include liability coverage for these activities regardless of who performs the work. These amendments that can be added to the M&C form and the OL&T form provide additional insurance known as owners' and contractors' protective liability insurance coverage. This type of coverage protects the insured against liability claims resulting from:
1. actions of independent contractors hired by the insured, and
2. the insured's failure to supervise the independent contractors.
The owners' and contractors' protective liability insurance coverage is automatically included in the comprehensive general liability (CGL) form. It also may be purchased as separate policy by an independent contractor for the benefit of the property owner or general contractor.
Products and Completed-Operations Liability Form
Consumers have affected the insurance market heavily in this category. Because of increased consumerism, they are turning to the courts for rewards as a result of an injury from goods or services. In anything whether it be a product or service, some characteristic may be present that subsequently may lead to a lawsuit. Numerous court awards have held manufacturers and their agents liable for damages suffered by consumers, even where no contract or direct relationship exists between the two and no negligence is shown. The insurance industry can exercise social responsibility by becoming as strong a force in product safety as they are in fire safety. A study done in 1970 by the National Commission on Product Safety found that there were not enough laws protecting consumers. With that report came the passage of the Consumer Products Safety Act (CPSA) designed to protect the public from the unreasonable injury risk resulting from consumer products. This act created the Consumer Products Safety Commission (CPSC) to do a number of services for the public. These services include researching a product, investigation and information disseminating agency, an enforcement authority to file actions in federal district courts for product recalls. The Consumer Products Safety Commission (CPSC) has the power to place heavy fines on people, not to mention subjecting violators to prison sentences.
The comprehensive general liability (CGL) form automatically includes coverage for the products and completed-operations liability exposure. This type of coverage may be excluded from the CGL only by endorsement. This type of coverage may not be added by endorsement to the OL&T form or the M&C form. The on-premises products hazard is usually covered by the OL&T form and the M&C form. The key phrase would be either on-premises or off-premises.
The coverage for the Products hazard is defined in the CGL form as follows:
Products hazard includes bodily injury and property damage arising from the named insured's products or reliance upon a representation or warranty made at any time with respect thereto, but only if the bodily injury or property damage occurs away from premises owned by or rented to the named insured and after physical possession of such products has been relinquished to others.......
It may be interesting to note that products and completed-operations liability insurance coverage, first written in 1910, provides protection against products liability claims arising away from the premises (off-premises). The basic premises coverage under the OL&T form, the M&C form and the CGL form offers on-premises protection for the products liability exposure.
If an insured does not withdraw a product from the market because of known or suspected defects, damages claimed for losses resulting from this action will not be covered by the products and completed operations liability coverage. In addition to this, coverage can be denied for subsequent product liability claims if the insured fails to recall a product following a damage claim. A separate products recall policy is available to cover the cost of withdrawing products with known or suspected defects.
Under the coverage for the completed-operations hazard, liability insurance is provided for injury or damage caused by accidents due to operations performed by the insured at a place away from the insured's premises. The accident must occur after all operations have been completed or abandoned. Liabilities resulting from accidents involving pickup, delivery and/or the existence of tools, uninstalled equipment, and abandonment of unused materials are not part of the completed-operations hazard and are covered under the OL&T form and the M&C form. Bodily injury and property damage liability insurance is provided under the products and completed-operations liability form. The property damage is restricted to other than the products involved and there are basic policy limits for bodily injury claims. Medical payments coverage is not available.
Products Recall Insurance
The general liability standard provisions requires the insured to take and pay for reasonable steps to prevent additional bodily injury or property damage from the same or similar conditions following the occurrence, claims or suit caused by defects in products sold by the insured. This provision, called the "sister-ship" exclusion, precludes coverage for subsequent claims if the insured failed to recall the product following a damage claim. This exclusion applies not only to known which, but also to suspected defects. Product recall insurance, which can be referred to as product recapture or product withdrawal expense, is available to cover the cost of this exposure. This type of policy is always written with at least a $1,000 deductible and requires the insured to share all losses above the deductible to an amount of 10 to 20 percent of the loss. The covered expenses would include telephone, radio and/or television announcements, newspaper advertising, stationery and postage, necessary overtime wages or even disposal of the product if normal methods cannot be used without further harm. The loss of the product is not covered by this liability insurance contract.
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Product recall insurance can be referred to as product recapture or product withdrawal expense. |
Personal Injury Liability Policy
The personal injury liability policy protects against liability claims for other than physical harm and property damage allegations. It covers claims covering intentional torts such as false arrest, detention or malicious prosecution, libel or slander and wrongful entry or eviction or even invasion of privacy. This type of coverage was considered a specialty line for many years. Now this coverage can be added by endorsement to the general liability contracts. Two limits of liability are used:
1. an aggregate limit per person, and
2. a general aggregate limit.
The first limit is the maximum the insurance company will pay to one person during the contract period. The second is the maximum paid for all claimants during the contract period. The policy always is written with a percentage participation in all losses, which is typically 15 percent. Some policies require the insured to participate in the defense costs, while other insurance companies follow the usual role of paying for the full cost of a defense.
The Storekeepers' Liability Policy
The storekeepers' liability form is a comprehensive liability policy tailored to meet the needs of owners and operators of small businesses. This form is attached to the standard general liability policy. It is unique in that it uses a single insuring clause with a single liability limit covering both bodily injury and property damage liability. The insurance company will pay all sums which the insured will be legally obligated to pay as damages because of bodily injury or destruction of property arising from ownership, maintenance or use of the premises, or from operations necessary or incidental to the use of the premises. The coverage under the basic limits is subject to a $25,000 maximum for any occurrence and medical payments coverage is included in the basic policy. The base rate based on the store's area.
The storekeepers' liability form may be written for any retail store as classified in the owners', landlords' and tenants' (OL&T) form except:
1. stores selling principally products manufactured by the insured at a separate location,
2. stores or refreshment stands with automobile parking areas used for curb or tray service, and
3. auction stores, chain stores with more than ten locations, cleaning and dyeing establishments, department stores, drugstores, barber shops, beauty parlors, variety stores, mail-order houses, open-air markets and supermarkets with annual sales of at least $500,000 occupying a minimum of 3,000 square feet.
Newly acquired premises are covered if the insurance company is notified within 30 days of acquisition. Parking areas, private storage garages, fair booths and areas used temporarily for meetings or employee recreation are included in the definition of premises. The storekeepers' liability form provides limited contractual and products liability protection and full elevator liability coverage and contains most of the usual exclusions in general liability contracts.
The Dramshop Liability Policy
Establishments serving alcoholic beverages can be held liable for the actions of their drunken patrons under the dramshop or liquor control laws found in numerous states. Any individual injured by an intoxicated person has the right to take legal action against the establishment, tavern, bar or pub who, by selling liquor, has caused the intoxication in whole, in part, first or last. In some states the injured person may have the right of action against the owners of the premises where the liquor was sold. If a person causes an injury to another person or to property, the establishments could be held responsible. Even if the intoxicated person went to four different bars, they could all be held liable. The owners of these establishments could be held liable to the injured members of the general public and to the intoxicated person's family for loss of support. Yes you read that correctly.
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The owners of liquor establishments could be held liable to the injured members of the general public and even to the intoxicated person's family for loss of support. |
The owners', landlords' and tenants' (OL&T) form excludes liability arising from liquor control laws, so taverns faced with this exposure must purchase separate coverage. In some states with no dramshop law, tavern owners have been held liable under common law for damages resulting from the sale of liquor to minors or intoxicated person. Owners of such liquor serving establishments in these states also need liquor liability insurance.
The general liability forms fully or partially exclude the liquor liability hazard depending on the nature of the business owning the policy. For businesses engaged in the manufacture and distribution of the alcoholic beverages, liability arising from liquor control laws and common-law suits are excluded.
Businesses not engaged in manufacture or distribution of alcoholic beverages are covered under the OL&T form or the M&C form for any common-law liability arising out of serving liquor to a drunken customer, if the claim was caused by an accident. Insurance companies write liquor liability coverage with understandable reluctance. For businesses occasionally serving alcohol at social functions, the general liability forms provide full liability coverage. However, host liquor liability coverage written as part of the broad form CGL endorsement may be added to the general liability forms to protect the owners of non-liquor-related businesses in the event of an unusual incident.
Accountants' Professional Liability Policy
Accountants' professional liability insurance covers all sums which the insured must legally pay as damages because of acts or omissions of the insured. Any business predecessor of the insured to any other person for whose acts or omissions the insured is legally responsible for are also covered. The act or omission must result from performing professional services for others in the insured's capacity as an accountant. The policy does not cover bodily injury or death or damage to tangible property. Dishonest, fraudulent, criminal or malicious acts or omissions of the insured are normally not covered unless these acts are committed for the insured by an employee without the insured's knowledge. Some states require accountants to post a bond. Where this is applicable the policy often can be used instead.
Insurance Agents' and Brokers' Liability Policy
The insurance agents' and brokers' liability policy is classified as a professional liability form which protects agents and brokers from claims cause by errors, omissions or negligence in business conduct. The insurance agents' and brokers' liability policy may be extended to cover agents' liability to insurance companies for losses caused them through failure to follow instructions. The policy generally is written with a single limit per policy year and is subject to a per loss deductible.
Lawyers' Professional Liability Policy
Lawyers can purchase insurance to cover their liability because of any act or omission attributed directly to them or to any person for whose acts or omissions the insured is legally responsible for arising from the performance of professional services for others in the insured's capacity as a lawyer. The insuring agreement provides broad coverage, but because lawyers perform many different services, borderline cases concerning whether or not a service was rendered in the insured's capacity as a lawyer arise.
Trustees' and Fiduciaries' Liability Insurance
The Pension Reform Act of 1974 holds trustees and fiduciaries personally liable for damage resulting from a breach of their fiduciary duty. The Pension Reform Act imposes certain responsibilities on trustees, officers, employers and others acting as fiduciaries for employee benefit plans. Liability coverage is available to cover this exposure, but it is not standardized among insurance companies. Limit of liability coverage ranges from $250,000 up to $15 million, but most contracts require a minimum $1,000 deductible. This deductible may or may not apply to defense costs, which are sometimes paid in addition to the stated aggregate limit. After cancellation of the contract, usually a period from six months to a year is given to discover errors which occurred during the contract period. The insurance company will pay for such errors discovered within the time period allotted.
Employee Benefits' Manager Liability Policy
The employee benefits managers' liability policy protects against suits alleging negligence for improperly advising employees and for incompetent bargaining with insurance companies for benefits where employees must pay part of the cost.
Actuaries Professional Liability Policy
The actuaries’ professional liability policy protects actuaries from liability arising under the terms of the Pension Reform Act of 1974. It covers actuaries for negligent acts, errors, or omissions performed in a professional capacity relative to their duties as employee benefit plan consultants. Limits are up to $5 million plus court costs and legal fees.
Medical Payments Insurance
Medical payments insurance can be a valuable supplement to many general liability contracts. It is optional with most of the business liability policies but is automatically included in the comprehensive personal liability insurance policies. It is not written as a separate policy but as a part of liability and some other insurance policies.
Medical payments insurance pays for all necessary and reasonable medical, surgical, ambulance, hospital, professional nursing and funeral expenses for a person injured or killed in an accident arising out of the premises or operation of the insured, regardless of negligence or liability. It is a form of no-fault insurance.
The main benefit of the medical payments insurance is that it avoids delay, difficulty and costs involved in proving legal liability. The goodwill of the business can be enhanced greatly by medical payments coverage because the injured person does not have to prove liability or bring lawsuit against the business.
Medical payments insurance is often written in connection with the owners', landlords' and tenants' (OL&T) form and the comprehensive general liability (GCL) form. It is rarely written with the manufacturers' and contractors' (M&C) form. This is because the type of premises and the changing nature of the locations is an exposure much different from that of the usual owner, tenant or business firm dealing with customers from fixed locations used regularly by the public. Medical payments insurance may not be written with coverage of the products liability hazard at all. Some reasons for this include the possibility of many small claims from poisonings or faulty products, the potential cost of multiple injuries from one accident and the probable encouragement of carelessness by the insured.
There is not medical payments insurance coverage for injury to the named insureds, any partner of the insured, or any employee while engaged in the insured's employment. Thus, it is not accident insurance for a whole family or other persons residing regularly on the premises covered by the liability insurance policy. In this respect, medical payments insurance coverage under general liability policies differ from automobile medical payments coverage where injuries to the insured and the insured's family are among those covered by the insurance policy.
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There is not medical payments insurance coverage for injury to the named insureds, any partner of the insured, or any employee while engaged in the insured's employment. |
Excess Insurance
Liability contracts can be classified as covering personal, business and professional exposures. Liability contracts may also be classified or divided into:
1. primary liability coverages, and
2. excess liability coverages.
Primary liability coverage provides first basic coverage for the perils insured. Excess liability coverage is designed as catastrophe protection to provide very large limits of coverage as additional insurance amounts for at least some unusual and larger exposures or perils which are not covered by any other insurance. In simpler words, Excess liability coverage adds additional coverage above a specified amount up to a specified limit. Perils are covered first under primary contracts, and then the excess liability coverage applies as extra coverage if needed. Some excess liability coverage policies, such as the umbrella policy, also include additional perils not covered by any other insurance policies. Normally, the price of the excess liability coverage is higher than the cost of increasing the limits of the basic primary policy. The excess liability coverage is needed because the primary insurance company will not write the higher limits.
In recent years when court awards have increased, popularity of excess insurance has increased dramatically also. Although some types of excess insurance have been available for more than 30 years, the need was not there. The liability insurance agent has to learn many different type of policy contracts.
The liability insurance industry is very active in adapting to the needs of the concept of excess insurance. In fact, the best known excess liability coverages have evolved in the last few years. The coordination of excess liability coverage with the primary liability coverage is an increasing problem.
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The excess insurance contract provides the same coverages as the prime contract and only adds an extra limit of insurance. |
Excess liability coverage is written for special situations requiring much higher limits of coverage than are normal for a particular kind of liability insurance coverage. Examples of situations that require higher limits of coverage are truck liability, products liability for manufacturers and aircraft liability. The underlying prime insurance contract determines the type of coverage and the excess contract provides the same coverage and only adds an extra limit of insurance.
Excess aggregate insurance is designed for self-insurers, providing liability coverage up to an aggregate for all losses over a stated amount for the policy year. The insured must pay all liability claims, including loss adjustment expenses, until the specified amount is reached. At this point the excess aggregate insurer pays the remaining claims up to the policy limit. The policy applies the principle of insuring catastrophic loss only rather than first-dollar coverage for all claims. Through the use of excess aggregate insurance, self-insurers are protected against annual losses of catastrophic proportions. Self-insurance is seldom used for the liability exposure. The availability of excess aggregate insurance coverage increases the appeal of such risk management treatment.
Excess liability insurance is taken here to mean insurance of high limits which are used to supplement basic liability policies or a substantial risk-retention program. Liability contracts of $1 million to $10 million or more with a $1,000 to $10,000 deductible or more would be a normal policy. As court awards keep getting higher and higher, so does the excess insurance policy limits. Surplus line insurance is often associated with excess liability insurance since many such policies are designed for excess coverages. The difference, as it is defined in the state insurance codes, usually refers to a difficulty in placement of the insurance in normal markets. It is not extra in the sense of not being needed, as the item may imply. In addition to excess insurance, surplus insurance lines are:
1. substandard exposures (examples of this would be bowling alleys or supermarkets),
2. unique or unusual perils (examples of this would be twin insurance, financial institution mortgage protection), or
3. very broad coverages (examples of this would be "all-risk" on buildings, valued use and occupancy and builders' risk coverages).
Some coverages sold in surplus line insurance markets supplement basic policies by extending the coverage to include many more perils. Surplus line insurance is not technically considered excess insurance because it does not increase policy limits. As with physical damage insurance, difference in conditions (DIC) insurance has created strong interest in the merits of all-risks coverage. Basically, this form converts named-perils insurance into all-risks insurance. It covers perils such as flood, water damage, collapse, and earthquake as well as the unusual and unknown losses. Difference in conditions (DIC) insurance can be endorsed on other contracts. Large corporations doing business on a worldwide basis use different insurance forms. The DIC form may be an important one for these businesses operating internationally. Its advantage is in providing similar coverage everywhere by insuring the differences which often exist in the usual contracts issued for properties insured in foreign countries.
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DIC insurance converts named-perils insurance into an all-risks insurance contract. |
Difference in conditions (DIC) insurance coverage is often written in large contracts covering property valued at $5 million to $10 million or more. Separate limits may apply for the flood or earthquake perils.
Umbrella Liability Policy
The umbrella liability policy may be one of the most popular forms of excess liability insurance for business and organizations during the past several years. The umbrella liability policy is designed to fill in the gaps in liability protection associated with basic coverages or self-insured retentions. Lloyd's introduced this coverage in the United States in 1947. To be eligible for coverage, the insured must buy the following policies: comprehensive general liability insurance with limits of at least $10,000/$300,000; $100,000 property damage liability insurance; automobile liability insurance; bailee liability insurance and at least $100,000 of employers' liability insurance. There are many variations of the umbrella liability policy that may make it nonstandard and even those that follow a standard pattern have many important differences. The development of the umbrella liability policy has gone from extremely broad all-risks liability policies introduced in the 1950s to more restricted yet still very broad policies offered by more insurers.
The umbrella liability policy is excess in the following respects:
1. it provides extra limits with a combined blanket single limit over other existing liability coverages. Usually the required basic auto policy (BAP) limits are $500,000, for example, or for a general liability contract they can be $100,000/$300,000/$100,000, or an employers' liability policy for $100,000;
2. it is extra, or broader coverage for other liability exposures not covered by the underlying liability policies, above self-retention limits of about $25,000. The maximum limit can be written very high, such as $50 million or more. The retention deductible for smaller businesses is sometimes lowered from $25,000 to $10,000 or even less in some circumstances; and
3. it provides automatic replacement for existing coverages exhausted or reduced by loss.
The umbrella liability policy is an indemnity one, repaying the insured for a wide variety of liability losses. Although the contract forms vary, it can be manipulated to fit each individual case. The policy can indicate the types of liabilities that can be included and the way in which to include the limits of coverage applied. The broad protection of the umbrella liability policy is shown by these additions of many coverages that the business would not usually have in their underlying insurance policy, such as advertisers' legal liability, worldwide operations liability, personal injury liability and many others. These are only insured above the insured's retention limit, or deductible of normally $25,000. The result is that important catastrophe liability protection is achieved for the business. The deductible does not apply to auto, general liability and employers' liability losses which are covered for the additional single limit of normally $1 million or more as soon as they exceed the basic underlying limits. Excess fidelity coverage is also included in some of these liability policies.
Businesses are constantly faced with large losses. These large losses indicate the need for an umbrella liability catastrophe protection policy. Examples of catastrophe protection of the type that an umbrella liability policy provides are dams breaking and causing floods, airplane crashes, pollution damage cause by manufacturers and so on. Typically, the individual must first buy basic personal, auto and aviation liability policies, if applicable, before buying an umbrella contract.
The cost of the umbrella liability policy varies from company to company. Premiums must be based partially on judgment factors which decrease for several years but rise again with increasing losses and appreciations for the loss potential of liability situations. Smaller insureds may pay less than $1,000 for their umbrella liability policies while larger businesses may pay thousands of dollars.
Excess Personal Liability Policies
The excess personal liability policy is designed for individuals. This is in contrast to the business excess policies previously covered. Professional or other individuals with a high income can become targets for large liability claims. The excess personal liability policies provide an important defense and catastrophe liability coverage. Many insurance companies have developed policies to meet the needs of these individuals. Most of the policies have limits from $1 million to $10 million above basic automobile liability coverage and comprehensive personal liability coverages. A deductible is chosen by the insured to apply to losses other than those covered by the basic coverage.
A variation of the umbrella liability contract, which is used in the marine field, is called the bumbershoot. The purpose of this is to provide excess limits coverage above the primary marine protection and indemnity coverage. The problems of admiralty liability law and maritime workers' compensation are unique in this field. Careful coordination with or inclusion within the umbrella liability policy is necessary.
The excess personal liability policy usually applies to the entire family and includes the residence, personal injury, automobile, employers, aircraft, sports, snowmobile and watercraft liability. An excess major medical rider can be included of $50,000 also. There are exclusions to these policies that must be known. The usual exclusions include business pursuits or professional malpractice, both of which can be added by endorsement. This coverage can be written as a separate policy but the easiest way is to add it to their homeowner's policy. Excess personal liability insurance is a sound recommendation for great numbers of homeowners’ insurance buyers.
End of Chapter 2