Ø As with other types of insurance, the subject of liability insurance is the applicant. In contrast with other types of insurance, the object of liability insurance is not a thing, it is third-party insurance.
· The term third-party is well established and properly understood as a person or organization not party to the insurance contract but whose legal complaint against the insured brings the contract into play.
Ø The potential involvement of the courts makes liability insurance in some ways more difficult to u/w than other types of insurance, for two reasons:
· An applicant can be sued for any harm for which another person or organization wishes to recover damages from the applicant.
- It is not possible to anticipate every circumstance in which a t/p might sue the applicant.
· Once a lawsuit has gone to trial, it is not possible to be certain whether the applicant will be found legally liable for the t/p’s loss or injury. Nor is it possible, if the applicant is found liable, to be sure of the damages that the court will require the applicant to pay.
Ø Before a t/p’s injury or loss can become a loss under a liability policy,
· The t/p must consider the injury or loss serious enough to pursue a grievance;
· The grievance must be difficult enough to resolve that the parties to the lawsuit are unable to settle it out of court;
· The resulting trial must end in favour of the t/p.
- There may be more possibilities of loss under a liability policy; there may not be a higher probability of such loss.
Levels of Government
Ø Federal – military affairs, foreign relations, the national currency, and the postal service.
Ø Provincial – property rights, education, health care, and the regulation of the insurance industry.
Ø Municipal – police, fire, water and other services within the municipal boundaries.
Two systems of civil law in Canada
· In Quebec, the Civil Code of Quebec covers every area of law, from birth certificates to insurance contracts. The civil court’s role is to settle disputes according to the Civil Code – not to make law but rather to interpret the existing law.
· In other provinces, the system of common law applies. This is a mixture of case law, the law of precedent, and statute law. When case law and statute law conflict, statute law supersedes case law.
Legal Liability
- There are three ways that civil law may impose liability.
Negligence
Ø The most common way that the law imposes liability is by finding that someone has committed a tort, being a wrongful act, and in doing so, has caused damage or injury to another. The wrongful act may be
· An intentional act
· A negligent act, or
· A failure to act
Nuisance
Definition – nuisance is a substantial and unreasonable interference with a person’s right to enjoy and use his or her own property.
Private nuisance – is interference with a person’s use and enjoyment of living area.
Public nuisance – is interference that involves the rights of many people.
Definition - Negligence (the most important way the civil law imposes liability)
- is the omission to do something to which a reasonable person, guided upon those considerations which ordinarily regulate the conduct of human affairs, would do, or doing something which a prudent and reasonable person would not do. (See the definition of a reasonable person on page 8)
The ABC Rule
Ø To establish a cause of legal action for negligence, three things must be established to the satisfaction of a court:
· A duty of care exists.
· The duty was breached.
· There is a casual relationship shown between the breach and the damage.
Underwriting Liability Insurance
Ø The question an u/w really faces is not whether the applicant could be sued and found legally liable for someone else’s harm, but whether that development is likely.
Ø U/w’s speculate intelligently about exposures, a liability u/w must follow the same sorts of developments in law and social trends that influence judges in their decisions.
Extending coverage to Third Parties
Ø Once t/p’s are added as additional named insureds to a liability policy, they cease to be third parties and instead become first parties to the contract. The u/w must be sensitive to the possibility that the activities of the former t/p could lead to lawsuits against them that could in turn impose defense costs on the insurer along with the costs of any judgments rendered against the parties.
Ø Most insurers will only add t/p’s as additional insureds and not as additional named insureds.
Ø Some t/p’s may insist on being named. Where the t/p in question seems unlikely by its activities to create a liability loss for the insurer, the insurer may well treat the request to add the t/p as a formality and accommodate the risk by agreeing to the request. See the example on page 10.
Underwriting the Commercial Risk
Ø Two of the more widely underwritten types of liability exposure are premises liability and products liability.
· Premises liability – arises out of the risk’s use of the physical premises – roughly, a building, the land on which it stands, or both – as an owner, landlord, or tenant.
· Premises liability is rooted in the duty of care – the u/w’s analysis should include an examination of the occupancy and the duty of care owed to others by the applicant as occupier of the premises.
· Definition – an occupier of property or premises is the person who has the immediate supervision and control of the premises and the power to admit and exclude the entry of others. Others include strangers and neighbors.
· Definition – a trespasser is a person who wrongfully enters onto someone else’s land with neither the right nor the permission to be there.
Ø An occupier owes the lowest duty of care to a trespasser. Still the occupier must treat the trespasser with common humanity. The Supreme Court of Canada established a list of factors that determine whether an occupier’s duty of care to trespassers has been breached:
- The gravity and likelihood of probable injury
- The character of the intrusion or trespass
- The nature of the premises trespassed upon
- The knowledge the occupier had or ought to have had of the likelihood of a trespasser’s presence
- The cost to the occupier of preventing the harm to the trespasser
· Definition – a licensee is a person who enters upon land with the consent of the occupier.
Ø An occupier owes a greater duty of care to a licensee than to a trespasser. An occupier has a duty to protect a licensee from known concealed traps or dangers.
· Definition – a contractual entrant is a person who enters onto premises under a contract with the occupier; for example, a hotel guest or a theatre-goer.
Ø If the contract does not specify the occupier’s obligations regarding the entrant’s safety, then the contract is said to have an implied (unwritten) term to the effect that the premises are as safe for the purpose as reasonable care and skill on the part of anyone can make them.
· Definition – an invitee is a person who enters onto the premises with permission when the occupier has some financial or other material interest in the matter.
Ø The occupier owes the greatest duty of care to an invitee. The occupier’s duty is to exercise reasonable care to prevent damage to such a person from unusual danger of which the occupier knows or ought to have known.
Ø Some occupancies are especially susceptible to a high frequency of premises liability claims because of their high volume of pedestrian traffic. Such as retail areas, office or industrial plazas, apartments, condos, educational buildings, entertainment and sports locations.
Ø Good maintenance and housekeeping are crucial. If a risk is not a good fire risk, it will not be a good premises liability risk. Poor maintenance and housekeeping are major contributors to “slip and trip” or “slip and fall” losses. The following questions are required to be obtained through a broker or inspection to help the u/w assess the premises liability exposures for a given risk:
- What is the general condition of the building and grounds?
- How well maintained are the parking lots, stairs, walkways, and floors?
- What is the condition of interior and exterior lighting? Is it adequate?
- What is the condition of exit lights, emergency exits, and doors?
- Are non-slip surfaces used in areas of high pedestrian volume?
- What are the cleanup procedures? Are cleanup records or logs appropriate, and if so, are they available?
- How well is the property drained? Is the drainage adequate to avoid water ponding and icing?
- Are warning signs posted in hazardous areas?
- If the applicant is a tenant, find out about the applicant’s responsibilities for the property under its lease with the landlord.
Ø Does the applicant have a maintenance contract?
Ø If the applicant has a maintenance contract, does it include a hold-harmless or indemnity agreement?
· Definition – hold-harmless clauses and indemnity agreements are used together to transfer liability from where it would normally lie to someone else and to direct who will pay for defense costs in a legal action or for expenses to satisfy a judgment.
· U/w should examine a copy of the maintenance contract to find out if it includes a hold-harmless clause. See example on page 14. The u/w may want to obtain info on the contractor itself; the nature of the business, safety measures, bonding and the risk obtain a certificate of insurance from the contractor.
Ø Does the lease impose obligations on the applicant concerning property maintenance?
· See example on page 14
· Stipulations in any other contracts that may increase the applicant’s exposure such as; with suppliers, drivers, distributors, cleaners, and sales personnel. Has the applicant assumed liability under these contracts of behalf of those parties?
Ø Analyzing premises liability should include the following steps:
· Know the exposure, occupancy and applicant’s activities.
· Understand the legal requirements where the risk is located.
· Review the risk’s loss history.
· Review the loss control reports.
· Follow up on recommendations from loss control.
· Find out if the applicant keeps records of incidents or accidents, maintenance logs, and records of routine inspections. How long are records kept since losses may not be reported for months or years.
· Find out what contracts the applicant is party to and ask if applicant obtains certificates of insurance from its contractors.
· Understand who any additional named insureds on the application are & their relationships are to the applicant.
· Find out if the applicant is named as an additional insured on other policies, such as a contractor’s policy.
Products Liability
Products liability exposures arise from the possibility of injury to a t/p from the use of a risk’s product.
· Products liability exposure is heightened for consumable products. The consequences for a consumer of an inferior or perhaps unsafe product are more serious when the product is ingested. The exposure is also heightened because quality control is so much more difficult with a consumable product.
· The u/w must seek complete info on the production process and especially the quality control process.
General details appropriate to any exposure include – name and address of risk, # of years in business and its payroll and receipts and other measures of it financial well-being.
Analyzing Products Liability
· Who manufactures the products the applicant sells? Applicable if applicant sells products manufactured by another company.
· What products does the applicant manufacture? What is the final use of the products?
· Does the applicant modify or alter products received from other manufacturers before selling them?
· What is the distribution of the applicant’s products – local, national, or international?
· Do any of the applicant’s products contain parts or materials manufactured by another company?
· Are the products dangerous?
· Can the consumer or end-user alter the products?
· Do the products carry a warranty or an express guarantee of performance or other aspects of the products?
· Has the product been discontinued or recalled? If so, why?
· Are instruction manuals provided to consumers?
· What quality control process has the risk implemented?
· Does the applicant have a hold harmless agreement with any t/p?
· Does the applicant already have liability insurance?
· Has the applicant had to make a claim on existing insurance?
In addition to the questions, the u/w will want to arrange an inspection of the premises to ensure that all necessary steps for quality assurance are taken throughout the process. The inspection can also be an opportunity to review the process by which waste materials or rejected products are disposed of, because the disposal could create an environmental liability exposure. The u/w should also determine whether the product labeling or manual includes any instructions on safe disposal.
Underwriting the Personal Risk
Ø To assess liability exposures posed by an applicant for personal insurance, an u/w will want to ask questions about the owner’s lifestyle, occupation and hobbies. See example on page 18.
Ø Has the applicant had any previous liability losses?
Ø Does the applicant have a pet or pets? What kind? See example on page 18.
Ø Does the dwelling have a swimming pool? A deck? A swimming pool represents one of the greatest possibilities for injury to a t/p for which a dwelling owner might be held liable and one of the greatest exposures to loss under a liability policy.
Ø Does the dwelling house more than one family? If so, does the owner live in the dwelling too? How many families occupy the dwelling?
Ø Is the dwelling left unoccupied or vacant for any length of time? See example on page 19.
Ø Does the applicant have children at university or college?
Ø Is the applicant a high-profile individual? See example on page 19.
Ø Does the applicant do volunteer work? See example on page 20.
· Host liquor liability and contributory negligence – the u/w considering the possible liability arising for the host of a social gathering must bear in mind the principle of contributory negligence and ask how much an applicant would have to do as host to satisfy a court that he or she could not reasonably be held liable for the consequences of a guest’s intoxication.
· Definition – contributory negligence is a partial defense against an allegation of negligence. It will allow the amount of damages awarded against the defendant in a civil suit to be reduced by the percentage of blame assigned to the plaintiff.
Ø Does the applicant run a home-based business, or does the applicant play host to others who do? See example on page 21.
Ø Does the applicant take preventative measures against the various liability exposures his or her activities might present?
Personal Umbrella Policy
Depending on the exposures that the u/w has identified, it may be advisable to recommend that an applicant buy a personal umbrella policy. It offers three main benefits in addition to those available on the primary policy:
- Limits of insurance in excess of those in the primary policy.
- Drop-down coverage to cover certain exposures that the primary policy does not.
- Territorial limits wider than those in the primary policy.
Ø Personal umbrella usually requires an underlying primary policy with limits of at least a certain amount for example 1 million. The personal umbrella policy will pay up to a stated amount for damages awarded against the insured that exceed the limit of the underlying policy. See example on page 22.
Ø Umbrella may expand the insured’s liability coverage by dropping down to provide coverage that would not otherwise be available to the insured under an ordinary personal liability policy. Broader coverage includes:
· Broader premises liability coverage.
· Excess auto liability coverage.
· Coverage for liability arising out of use of watercraft and non-owned aircraft.
· Coverage of the policyholder’s employer’s liability.
Ø The premium tends to be low because the coverage is a contingent cover or second level coverage. The policy pays only if another policy does not cover the exposure or does not provide enough coverage. The broader coverage it provides makes it important for the u/w to ask more questions that are more detailed and imaginative. See example on page 23.
Ø An insurer will not generally provide a stand-alone personal umbrella policy, if the primary coverage is underwritten by another insurance company.
Employers Liability Coverage
Most provinces have some form of workman’s compensation insurance; an employer still faces an employer’s liability exposure for employees in trades and classes not subject to the workman’s compensation acts.
- Many insurers will add the coverage to a CGL policy by endorsement.
· A commercial risk may also need employers liability coverage where an employee is eligible for workman’s compensation insurance:
- If an employee is working outside the jurisdiction for a certain period of time or longer
- If the employer has assumed certain liabilities under contract.
- If workman’s compensation benefits are denied to an injured worker because the injury was not incurred on the job. Employee may sue the employer if unable to obtain the benefits.
New Sources of Liability Exposure – Technology
- One aspect of broader social change is technological change. See example on page 24.
- E-commerce is a new area of liability exposure, largely untested in the courts and therefore difficult to quantify with any confidence.
Why is premises liability exposure for a commercial risk such as a bakery higher than for a personal risk such a homeowner?
Ø Because the bakery’s customers are invitees and are therefore entitled to a higher standard of care than if they were trespassers or licensees.
Please review the Underwriting Liability Insurance: A Summary on pages 25 & 26.
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