Types of Liability Insurance

1. Automobile liability insurance

2. Employers liability and workers compensation

3. General liability

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 Liability Insurance in General

1. Undertakes to pay the obligation imposed on a

negligent insured

2. Called “third party” coverage since it

compensates someone who is not a party to the
contract

3. In addition to promise to pay, usually agrees to

defend insured

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 Legal Liability and Liability Insurance

• Liability insurance is designed to provide

protection for the individual or business firm
against the financial loss which might result from
legal liability.
• In its simplest form, the liability insurance policy
undertakes to pay all sums which the insured
becomes legally obligated to pay, up to the limit
of the policy.

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 Defense Costs

• In addition to the promise to pay sums the

insured becomes legally obligated to pay, most
liability policies include a promise to defend the
insured in any lawsuit involving the type of
liability insured under the contract.
• Thus, automobile liability insurance will pay for
defense in connection with lawsuits involving
auto claims, and a premises liability policy will
pay defense costs connected with suits alleging
liability in connection with the premises.

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 Defense Costs

• The insurance company is obligated to pay the

defense costs even if the grounds of the suit are
false or fraudulent.
• The basic principle is that the company must pay
defense costs if it would be obligated to pay the
damages should the insured be found liable.

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 Insurers’ Right to Settle

• As a practical matter, few liability claims reach

trial.
• Insurers normally attempt to reach an out of court
settlement with the injured party to avoid
litigation.

• Most liability policies reserve to the insurer the

right to negotiate and settle any claim it deems
expedient.

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 Distinction Between Liability and Coverage

When presented with a claim, an insurer may refuse

to consider payment. There are two possible bases
for denial by the insurer.
• The loss is not covered under the policy. Here,
the insured must assume his or her own defense
and, if held liable, must pay the claim.
• The insurer does not feel that the insured is liable
for the loss. The insurer must defend the insured
and if the insured is found liable, pay for the loss
up to the policy limits.

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 Commercial General Liability Coverage

• General liability coverage for organizations is

provided under the Commercial General Liability
(CGL) Policy.
• The CGL forms replaced the Comprehensive
General Liability Policy (also known as the CGL).
• The CGL designed to insure those general
liability exposures that are common to most
organizations: premises and operations,
products and completed operations, independent
contractors, and contractual liability.

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 Commercial General Liability Coverage

• The 1986 CGL has two versions: an "occurrence

form" and a "claims-made form."
• Historically, most general liability policies were
written on an "occurrence basis," which means
that they covered injuries and damage that
occurred during the policy period, regardless of
when a claim was made or suit was brought.
• Under a claims-made form, coverage applies to
claims made during the policy, regardless of
when the injury occurred.
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 Rationale for Claims-Made Form

• Occurrence-form liability policies, which cover

losses arising out of occurrences during the
policy period, are satisfactory when the injury is
of a type that is recognized when it occurs.
• Some injuries--called latent injuries--are not
discovered until long after they occur.
• The phenomenon of latent injury is best
illustrated by asbestosis, an occupational lung
disease incurred by workers in a number of
industries.
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 Latent Injuries

• Latent injuries have required insurers to pay

losses under occurrence policies long expired,
because the injury or damage was not discovered
until long after it had occurred..
• Persons who suffer asbestosis may not discover
the injury until long after it occurs. Employees
who began working with asbestos in the 1950s
did not discover they had contracted the disease
until the 1970s or 1980s.

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 Latent Injuries

• The insurers who provided the products liability

coverage for asbestos manufacturers in the
1950s on an "occurrence" basis found
themselves paying for losses in the 1980s on
policies that had long since expired.
• ISO and its member companies believed that a
new approach to liability insurance was needed
to counter the legal theories adopted by the
courts in long-term exposure cases.

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 The Claims-Made Form

• The solution was the introduction of a new

claims-made form for the general liability field,
under which coverage applies, not based on the
time at which the injury or damage occurs, but on
the time that the claim is filed with the insurer.
• Despite the lower cost of the claims-made form,
few insureds have chosen to purchase it. In
addition, insurers have insisted on using the
claims-made form only in those situations in
which the latent injury exposure is significant.

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 Coverages Under the CGL

Coverage of the CGL is provided under three

insuring agreements:
Coverage A: Bodily Injury and Property Damage
Coverage B Personal and Advertising Injury
Coverage C: Medical Payments

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 Coverage A of the CGL

• Coverage A, Bodily Injury and Property Damage

Liability covers liability arising out of:
premises and operations
products and completed operations
• Coverage is also included in the Coverage A for
contingent liability
contractual liability
fire legal liability.

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 Insuring Agreements - Coverage A

We will pay those sums that the insured becomes

legally obligated to pay as damages because of
"bodily injury" or "property damage" to which this
insurance applies. The "bodily injury" or "property
damage" must be caused by an "occurrence." The
"occurrence" must take place in the "coverage
territory." We will have the right and duty to defend
any "suit" seeking those damages.

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 CGL Exclusions

• There are 15 exclusions in the CGL, designated a.

through o.
• Coverage for some of the excluded exposures is
available under other forms of coverage, such as
the auto policy or workers compensation policy.
• Some exclusions eliminate exposures that
require an additional premium, and provision is
made for a “buy-back” of the coverage.
• Finally, some of the excluded exposures are
simply considered uninsurable by insurers.

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 CGL Exclusions

a. Expected or intended injury

b. Contractual assumptions except insured
contracts
c. Liquor liability
d. Workers Compensation
e. Employers liability
f. Pollution
g. Aircraft, autos, watercraft
h. Mobile equipment while being towed
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 CGL Exclusions (Continued)

i. War
j. Damage to property in the insured’s care,
custody and control
k. Damage to insured’s product
l. Damage to insured’s work
m. Damage to impaired property
n. Product recall
o. Employment-related practices
(by endorsement)

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 Definition of Personal Injury

Coverage is provided for:

1. False arrest, detention, or imprisonment
2. Malicious prosecution
3. Wrongful entry into or eviction of a person from
a room, dwelling, or premise
4. Oral or written publication of material that
slanders or libels a person or organization
5. Oral or written publication of material that
violates a person's right of privacy
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 Coverage C: Medical Payments Coverage

• The medical payments coverage pays reasonable

medical expenses incurred within three years of
an accident to persons injured on the premises,
regardless of liability.
• The Medical Payments coverage excludes injury
to any person who is an “insured” under the
policy
• For tenants in residences, coverage applies only
with respect to nonoccupied areas.

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 Fire Legal Liability

• Fire legal liability is covered under a separate

agreement, subject to a $50,000 limit, which may
be increased for an additional premium.
• Fire Legal Liability covers damage to real
property that is rented to the insured for damage
caused by fire.
• The care, custody, and control exclusion of the
policy does not apply to this coverage.

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 Contractual Liability Coverage

• Contractual liability coverage is provided without

a separate insuring agreement by virtue of an
exception to an exclusion.
• The policy excludes liability assumed under
contract, and then adds an exception for “insured
contracts,” which are defined in the policy.
• The coverage for liability assumed under contract
is subject to the other exclusions of the form.

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 Policy Limits

• A combined single limit “per-occurrence” limit

applies to bodily injury and property damage.
• A separate aggregate limit applies to the
products/completed operations hazard, with a
separate aggregate limit applicable to all other
coverages combined.
• Separate sublimits apply "per-person" to
personal and advertising injury liability, "per
person" to medical payments, and "per fire" to
fire damage legal liability.
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 Occurrence Form Compared with Claims-
Made Version

• The major difference between the occurrence and

claims-made versions of the CGL is the coverage
trigger of coverage, but this difference dictates
other differences as well.
• The claims-made trigger is the date when a claim
is "reported and recorded" by the insured or the
company, for injury or damage that occurred after
the policy's retroactive date.

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 Retroactive Date

• A retroactive date in a claims-made liability policy

is a coverage restriction that limits coverage to
claims arising out of events that occur after the
specified retroactive date.
• Usually, the retroactive date will be the date on
which a claims-made form first replaces an
occurrence form.
• This is a natural approach to eliminating
duplication of coverage between a claims-made
form and an occurrence form.
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 Potential Gap in Coverage

• If a renewal policy is written with a new (different)

retroactive date than the policy it replaces, a gap
in coverage is created.
• The expired claims-made policy will not cover
claims filed after it expires, and the new policy
will not cover claims arising out of occurrences
prior to its retroactive date (inception).

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 Extended Reporting Date Endorsement

• The traditional solution to this gap in claims-

made policies has been for the insured to
purchase an extended reporting date
endorsement (commonly called "tail" coverage)
for the expiring policy.
• An "extended reporting period" provision
stipulates that any claim reported within the
designated extended reporting period will be
deemed to have been reported during the policy
and will be covered.

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 Extended Reporting Period Provisions

• The ISO claims-made form includes an automatic

5-year extended reporting period for claims
arising out of occurrences reported to the insurer
during the policy period or within 60 days of the
policy’s expiration.
• The insured may elect, within 60 days of the
policy’s expiration, to purchase an Supplemental
Extended Reporting Period Endorsement for an
additional premium. The endorsement extends
the reporting period indefinitely.

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 Miscellaneous Liability Coverages

1. Liquor Liability Coverage

2. Pollution Liability Coverage
3. Pension Fiduciary Liability
4. Directors and Officers Errors and Omissions
Insurance
5. Employment-Related Practices Liability

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 Liquor Liability Coverage

• The CGL excludes liability arising out of the

business of manufacture, sale, or serving of
alcoholic beverages.
• Some insurers exclude liquor liability not not only
for those in the liquor business, but for anyone
who serves alcoholic beverages for a charge.
• This could include a variety of fund-raising and
social activities sponsored by nonprofit
organizations.

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 Liquor Liability Coverage

• Liquor liability may be covered by endorsement

to the CGL, or it may be covered under a Dram
Shop or Liquor Liability Policy.
• Occurrence and claims-made Liquor Liability
Coverage forms were introduced as a part of the
portfolio general liability program.
• Both cover liability arising out of the selling,
serving, or furnishing of alcoholic beverages but
differ in the coverage trigger.

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 Pollution Liability Insurance Coverage

• An endorsement is available under which

coverage for polllution liability can be added to
the CGL, but most insurers have been unwilling
to extend the policy.
• In addition to the pollution liability endorsement,
ISO introduced two simplified pollution liability
forms as a part of the portfolio revision.

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 Pollution Liability Insurance Coverage

• The two pollution liability forms are designated

Pollution Liability Coverage Form - Designated
Sites and Pollution Liability Limited Coverage
Form - Designated Sites.

• The principal difference between the two forms is

that the limited form does not provide coverage
for "mandated off-site cleanup costs," whereas
coverage for such costs is specifically insured in
the standard form.

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 Pension Fiduciary Liability

• ERISA imposed new responsibilities on

employers and fiduciaries of employee benefit
plans, making them liable to beneficiaries for
negligence in the supervision of such a plan.
• Pension fiduciary liability insurance protects
against this exposure.
• Coverage may be written to include employee
benefit E&O coverage, which protects against
liability arising from errors in advising employees
and from other types of mistakes related to a
fringe benefit program.
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 Directors and Officers E & O Insurance

• Directors and Officers (D&O) Errors and

Omissions (E&O) insurance is available to protect
corporate officers and directors from suits
alleging mismanagement.
• The coverage is subject to a deductible and the
insured is usually required to bear 5 percent of
any loss in excess of the deductible.
• Losses based on alleged personal gain by an
insured and losses resulting from failure to
purchase proper insurance are excluded.

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Other D&O Errors and Omissions Coverage

Variations of D&O coverage are available to protect

elected and appointed public officials. These
include a
Board of Education Liability Policy and a
Public Official Liability Policy.
Like the Officers and Directors coverage, above,
there is no standard form for these coverages, and
they are usually sold by specialty insurers.

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 Employment Practices Liability Coverage

• A limited number of insurers offer employment

practices liability policies, which cover sexual
harassment, discrimination, and wrongful
termination.
• Coverage is written on a claims made basis with
a retroactive date and a limited discovery period.
• In most cases, defense costs are included in the
policy limit, rather than “outside” the policy limit
as in most other liability contracts.

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 Employment Practices Liability Coverage

• Fines and criminal penalties are universally

excluded. Deductibles range upward from a low
of $1,000 to $25,000.
• In addition to the deductible, policies also include
a co-payment provision.
• The insured must usually share a percentage of
defense and settlement costs, normally ranging
from 5 percent to 25 percent, with most being
either 5 percent or 10 percent.

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 Insurance for Bailees

• A bailment consists of the delivery of property of

one person, the "bailor," to another, the "bailee,"
for some specific purpose.
• The property may be in the care of the bailee to
be worked on, or in storage, or for some other
purpose.
• If property in the hands of a bailee is damaged or
destroyed, the bailee may be liable to the owner.

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 Bailee Liability

• Bailment for hire, which represents the bailment

with which most businesses will be involved is a
form of bailment for mutual benefit.
• Because it is bailment for hire, the degree of care
required is somewhat greater than gratuitous
bailment for mutual benefit.
• Business bailee may extent their liability by
contract or by advertisement.

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 Bailee Liability

• Normally, it is legal for the bailee to limit its

liability. However, the courts frown on attempts
of a bailee to relieve itself of liability completely.
• Courts rarely support the validity of exculpatory
clauses or provisions of parking lots, garages,
checkrooms, and warehouses to excuse
themselves from liability

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 Insurance Coverage for Bailees

1. Like common carriers, bailees may need

insurance to cover the legal liability for damage
to property in their custody.
2. Bailees also desire coverage for damage to
customers goods when they are not liable, for
the purpose of preserving goodwill.
3. Bailee coverage forms are available to cover
both the liability of the bailee and the interest of
the owner of the property.

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 Insurance Coverage for Bailees

• Under some bailee forms, payment is made

regardless of the liability of the bailee, as long as
the cause of the loss is a peril under the policy.
• This approach results from customer’s demand
that their property be returned to them in good
condition, regardless of the bailee’s liability.
• While some bailee coverages provide for payment
only when the insured is legally liable, these are
the exceptions rather than the rule.

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 Bailee's Customer Policy

• The Bailee's Customer Policy is the basic policy

for bailees' customer insurance. It is completed
by the attachment of a special form designed for
the particular class of business.
• Coverage may be provided under these forms for
such businesses as laundries, dyers and dry
cleaners, processors, and service-type firms.
• There are special forms for appliance repair
stores, radio and television repair stores, and
other similar establishments.
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 Bailee’s Customer Policy

• Covers all kinds of lawful goods and articles that

are the property of customers in the custody of
the insured regardless of the bailee’s liability.
• The normal perils insured include fire, lightning,
windstorm, riot, earthquake, sprinkler leakage,
burglary, robbery, and confusion of goods
caused by any of the perils insured against.
• In addition, the usual perils of transportation are
covered and coverage applies to the property
while in transit or at the insured's premises.

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 Excess and Umbrella Liability Coverage

• Excess liability policies and umbrella liability

policies provide coverage “in excess” of a
program of underlying insurance--that is, after
the limits of the underlying coverage is
exhausted.
• Coverage is written for limits ranging upward
from $1 million.

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 Excess and Umbrella Liability Coverage

• Excess and umbrella liability policies provide

coverage “in excess” of a program of underlying
insurance—that is,after the limits of the
underlying insurance is exhausted.

• Although the terms “excess liability policy” and

“umbrella liability policy” are sometimes used
interchangeably, there is a fundamental and
extremely important difference.

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 Excess and Umbrella Liability Coverage

In general, excess liability policies and umbrella

policies fall into one of three categories.

1. Following-Form Excess Liability Policies

2. Excess Umbrella Liability Policy

3. Combination Umbrella and Following-Form

Excess

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 The “True” Umbrella

When purchased in conjunction with the liability

policies normally purchased by the business firm,
the umbrella serves three functions:
1. Excess Coverage
2. More comprehensive coverage
3. Drop-down coverage

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 Commercial Umbrella Policy

$500K $500K $500K

$5,000 $5,000 $5,000 $5,000

Auto GL Employers
Liability

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 The “True” Umbrella

In general, the insuring agreements are broad and

comprehensive in nature. It is common to provide
coverage under three sections:
1. Personal injury liability
2. Property damage liability
3. Advertising liability

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 Underlying Insurance Requirements

• The insurer requires CGL and auto liability

coverage with bodily injury and property damage
limits ranging from upward from $250,000.
• Employers' liability coverage is required, usually
in the amount of $100,000, (although some
insurers have begun to require a $500,000 limit).
• The policy conditions require maintenance of the
underlying coverage, and payment under the
umbrella is determined as if the underlying
coverage were in force, whether or not it is.
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 Umbrella Policy Exclusions

1. Benefits under workers compensation or

unemployment compensation laws.
2. Claims for replacement of defective products.
3. Owned aircraft and some chartered aircraft.
4. Employee versus employee claims.
5. Property owned by the insured.
6. Some property in care, custody, and contol
7. Pollution
8. Punitive damages (in some contracts)
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 Combining Retention With Transfer

• Although there are few organizations that are

sufficiently large to fully retain the legal liability
exposure, it is possible to combine transfer with
retention in several ways.
• The first is through the use of deductibles.
Although most people think of deductibles in
connection with property insurance, general
liability coverage may also be written with a
deductible.

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 Combining Retention With Transfer

• The ISO Commercial Lines Manual lists credits

for deductibles from $250 up to $25,000.
• The credits for higher deductibles must be
obtained from the insurer.
• When coverage includes a deductible, the insurer
provides defense coverage and the deductible is
applied only to the amount of damages.
• The insured reimburses the insurer for the
payment within the deductible.

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 Combining Retention With Transfer

• Although retrospective rating is most frequently

used in the field of workers compensation, it may
also be used in for general liability and
automobile programs.
• Large firms sometimes combine workers
compensation, automobile coverages, and
general liability coverage into a single
retrospectively rated program.

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