Chapter 8: Liability Insurance

Chapter 8: Liability Insurance

Objectives • Describe in general terms the coverage provided by a liability policy and how the policy operates; • Summarize the different categories of coverage provided by a CGL policy; • Describe the specialty liability coverages available and the loss exposure they cover.

Introduction • One of the most important insurance products. • Covers exposures that arise from business pursuits and business premises. • Essential to keep up-to-date with current affairs. • Many liability policies available with unique features.

Liability Insurance Compared to Other Types of Insurance • Protects against legal liability imposed because of an injury or damage to a third party. • Medical and funeral expenses, repairs bills, loss of income, pain and suffering, etc. • NOT intended to cover insured’s under the policy. • Payment based on legal liability (must be legally binding) – not moral obligation • Includes a “no-fault” coverage for certain medical expenses.

Liability Insurance Compared to Other Types of Insurance • Two vital questions:

Liability Insurance Compared to Other Types of Insurance • Benefits of coverage to insureds includes: • Investigation and assessment of claims • Analysis of legal liability • A defence of the insured against third party claims

Liability Insurance Compared to Other Types of Insurance • Liability policies are written to trigger coverage on: • An occurrence basis – during the term the policy is in force • A claims-made basis – when a claim is made against the insured • Retroactive date • Another formula

Legal Liability • Negligence is the usual test for legal liability (damage or injury was caused by negligence). • Many statutes impose obligations that can make the insured legally liable in various circumstances. • E.g. - Occupiers’ Liability Act – imposes special duties that may create legal liability on the part of an insured.

Contractual Liability • Anyone can be liable to others by agreement (contract) • Quite often contracts will contain special clauses imposing liability that does not exist under ordinary law. • This liability is referred to as contractual liability. • All contractual commitments of the insured MUST be reviewed to determine if coverage is adequate (applies to property and liability).

Contractual Liability • Contracts covered under the CGL policy wording include: • A lease of premises; • An easement or licence agreement in connection with vehicle or pedestrian private railroad crossing at grade; • Indemnification of a municipality as required by ordinance, except in connection with work for a municipality; • An contract when tort liability of another is assumed.

Who is an Insured? • CGL is very flexible in its description of who is covered. • Used to provide coverage for commercial exposures, the business may operate under the clients name. • If an individual is named as the insured, their spouse is automatically included in the coverage for the business. • Partnership or Joint venture • Company named

Who is an Insured? • Employees are considered insureds when their actions fall within the scope of their employment. • Circumstances not covered are: • One employee causing injury or damage to another employee in the course of employment; • Persons eligible for workers’ compensation benefits; • An employee providing professional health-care services.

Limits of Insurance • Defense costs are usually paid in addition to the limit in a CGL policy. • Higher limits are available at additional cost. • Insured should choose the limit of coverage desired. • How much insurance to buy influenced by: • How insured will be affected by a loss; • How probable it is that a loss will occur; • A review of awards and an estimate of the amounts of loss that have occurred; • An analysis of the clients assets that must be protected: • Review financial statements; • How claims will affect the principle owners of the company.

Limits of Insurance • Umbrella policy is a method to increase the limit of liability insurance available and also provided wider coverage. • May be a sizable deductible. • If available, quote for it and explain the cost and benefits to your insured.

Claims Handling and Defence Costs • CGL policy the expense of handling the claim is absorbed by the policy, as well as lawyers fees to maintain a defense or negotiate settlement. • Insurance company handles the claim and insureds’ responsibility is to report details promptly and cooperate. • Benefit to insured, as lawyers are expensive and average insured is quite inexperienced. • Note: some liability policies defence costs are part of the limit of insurance and thus erode the available limit to third parties.

General Liability • Written on named peril or all-risks basis. • CGL covers all legal liability for bodily injury or property damage except what is excluded (all-risk). Personal injury generally written on named perils basis. • Common exposure meant to be covered by CGL is occupiers’ liability (in addition to tort). • Managing occupiers’ liability exposures: • Lease agreements must be verified for hold harmless agreements. • Insured should have a maintenance program in place • A program to deal with accident situations should be in place. Insured is only covered for business activities disclosed!

CGL Policy Exclusions • Each policy exclusion MUST be reviewed. • Insured must know about gaps, sometimes a gap can be restored by endorsement or by issuing another policy designed to cover the exposure. • Sometimes coverage is not available.

CGL Policy Exclusions • Commonplace exclusions: • Injury to employees: obligations to Provincial Workers’ Compensation laws are not covered. Most policies provide contingent employers’ liability cover. • Automobile, watercraft and aircraft: other insurance available. Some restricted coverage granted. • Extended coverage for non-owned watercraft under a certain length and not used for hire. • Care, custody or control: policy does not cover personal property no matter who it belongs to; if the insured is using it or holding it for someone else.

CGL Policy Exclusions • Commonplace exclusions (continued): • Products: damage caused by the insured’s products is covered. • Being worked upon: See example Pg. 8 • Pollution: very broad exclusion. Coverage almost always available for liability arising out of certain hostile fires. • Environmental policy may be required if insured has pollution exposures. • Exclusions may not be standard. • Warn the insured about uninsured risks and suggest an action plan.

CGL Policy Exclusions

Personal Injury • CGL generally provide a separate insuring agreement for personal injury in addition to bodily injury and property damage. • Named perils coverage that typically covers liability arising out of: • Wrongful entry into or eviction of a person from a room, dwelling, or premises that the person occupies; • Oral or written publication of material that slanders or libels a person or organization or disparages a persons or organizations goods, products or services; • Oral or written publication of material that violates a persons’ right to privacy.

Tenant’s Legal Liability • Property occupied or rented by the insured is not covered under the main coverage of a liability policy (Separate insuring agreement under CGL for Tenant’s Legal Liability – TLL) • Typically TLL insuring agreement provides coverage for damage caused by: • F • E • S • Leakage from fire protective equipment. • If all-risks is available – should be recommended and gaps discussed • Separate limit of insurance for this section of liability coverage should reflect value of the property leased.

Non-Owned Automobile • Employer is responsible for acts of employees in the course of employment (negligent acts or omissions). • This principle extends to employees driving on employer’s business even if driving their own automobiles. • Coverage for this exposure can be provided under non-owned automobile (NOA) • Does not apply to the insured’s vehicles, whether leased or owned. This requires a separate automobile policy.

Environmental Impairment Liability (EIL) • Used to cover a broad range of pollution exposures and gradual pollution (cover pollution exposure not covered by CGL). • Generally extends beyond the physical damage of bodily injury and property damage to include interference with environmental rights or amenities protected by law and off-site clean-up costs. • Specifically covers claims arising from emissions, discharges, dispersals, disposals, seepage, releases or escapes of liquids, gases, solids, or thermal irritants into or upon the land, atmosphere or any watercourse or body of water. • Coverage generally provided for claims from smells, noises, vibrations, light, electricity, radiation and changes in temperature.

Environmental Impairment Liability (EIL) • Excluded sources of liability you might find are: • Events that occur before the policy inception date if the insured could reasonably have foreseen a claim occurring; • Routine clean-ups within a waste facility; • War; • Non-compliance with a statute; • Premises owned, occupied or rented to the insured; • Liability imposed under the Nuclear Liability Act

Environmental Impairment Liability (EIL) • Benefits of purchasing a separate environmental impairment liability policy: • A separate annual aggregate limit of coverage which does not interfere with CGL policy limits; • A likelihood that renewal of the CGL policy will not be compromised by an environmental impairment claim or serious pollution exposure; • Directors and officers of the company are insured.

Environmental Impairment Liability (EIL) • Situations and entities which need EIL may be as follows: • Premises with storage tanks; • Companies that ship waste off-site; • Insured liable to insure contractor is responsible and well-qualified to safely and lawfully carry out waste disposal. • Companies located in areas where natural surrounds are an important part of the economic resources of the community • See Pg. 12 for more examples • Policy limits include bodily injury, property damage, clean-up costs and defense expenses. Deductibles apply to defense expenses. • Generally written on claims-made basis on specific locations.

Homework • You are an environmental broker and have a client who has asked about Environmental Impairment Liability (EIL). A number of companies provide EIL coverage but the client just wants general information from one company. Go onto the internet and find one of these companies. • Provide the website address for information you are using and, • Briefly describe what coverages they are offering, along with any other information that you think might be pertinent to this client.

Errors and Omissions • Mistakes made in the exercise of a profession (excluded from general liability policies). • Policies covering special skills, professional skills and health related services are generally known as: • Errors and omissions insurance; • Malpractice insurance; • Professional liability insurance. • Certain professions such as doctors, engineers and lawyers often arrange for insurance through their provincial professional association. • Learn about your insured’s business to confirm if coverage is provided from a special separate source.

Directors’ and Officers’ Liability • Corporate and institutional directors and officers can be sued personally for the decisions they make and because they hold the positions they do. • Failing to supervise company affairs adequately. • Individuals serving on boards are personally liable for a wide range of statutory obligations, including unpaid wages, vacation and severance pay and unpaid taxes. • Also responsible for breaches of environmental and health and safety legislation. • Fiduciary duties to their shareholders

Directors’ and Officers’ Liability • Activities that can lead to claims: • Mergers, acquisitions or divestiture activity; • Mismanagement; • Bankruptcy or Insolvency; • Employment practices exposure; • Making investments in other countries; • Boardroom disputes;

Directors’ and Officers’ Liability • Exposure will differ from one organization to another. • Governance policy can reduce risk to the director • Establish guidelines to follow in the event of a claim. • Various federal and provincial statutes impose standards of conduct and other obligations upon directors. • Directors’ and officers’ (D&O) coverage usually provides coverage to these individuals if they are personally named in a lawsuit. • No standard D&O policy – insuring agreements, conditions and exclusions vary considerably.

Directors’ and Officers’ Liability • Indemnification clauses: most corporations write these into their bylaws, permitting the corporation to pay or reimburse directors and officers for all expenses incurred in litigation arising out of their duties. • D&O policies only provide for the personal liability incurred – Corporate Reimbursement is a separate section in the policy that must be arranged to reimburse the appropriate party for the disbursement from indemnification. • Two payment options under D&O: • To directors and officers for personal liability; • To corporations when they reimburse directors and officers for liability incurred in (a).

Wrap-Up General Liability • Designed of construction risks • Covers all contractors, sub-contractors, and the owner while involved in the construction project. • Duplication and extra expense of conducting an investigation and mounting a defence separately for each defendant would be saved.

Excess Liability Policies • Provides extra limits of insurance over the underlying policies that are in place. Commonly follows the insuring provisions of the underlying policy. • Advantage: less concern over gaps in coverage. • Coverage must be analysed for any differences: • Loss reporting features; • Whether losses be paid “on behalf of” the insured or the policy is an “indemnification” policy; • Any additional exclusions that do not appear in the underlying policy.

Excess Liability Policies • Keep in mind the following while looking at limits of insurance: • Defense and supplementary costs; • Aggregate limits’ • The insured’s options if the underlying policy limits are eroded or exhausted by claims; • The products liability aggregate limit – if there is one. • Determine whether coverage will be invalidated if underlying insurance is not maintained.

Umbrella Policies • Similar to excess but designed to cover excess coverage over any underlying policies AND to cover other perils not insured by underlying policies. • Should cover other losses not covered by underlying insurance, subject to retention. • All related entities should be included • Applications for this coverage should always include a detailed schedule of the underlying policies. • Self-insured retention is typically substantial ($10,000) • Determine if policy will “drop down” to provide coverage when underlying aggregate limits are exhausted. • Should have same effective date as underlying policy for this.

Umbrella Policies • Umbrella is affected if it is a major claim or if an area of broadened coverage is available. • Bodily injury is generally expanded to include mental injury, mental anguish, humiliation or shock. • No standard umbrella policies – is it claims-made or occurrence? • Defense coverage can be provided under the umbrella • Sexual harassment claims generally excluded in CGL; if the umbrella excludes this exposure a separate rider may be added. • Loss control measures for this exposure include forming a policy on the standards for acceptable behaviour, developing a procedure to deal with allegations of unacceptable behaviour; etc… • See Pg. 18

Umbrella and Excess

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Chapter 8: Liability Insurance