Study 5 – Underwriting the Risk: Liability
1. How is liability insurance different from other types of insurance? (p. 3)
· Applications for liability insurance require an underwriter to assess both the subject and the object of insurance.
· It is not first-party insurance; rather, it is third-party insurance.
2. What does the term “third party” refer to? (p. 3)
Third party is a person or organization not party to the insurance contract but whose legal complaint against the insured brings the contract into play.
3. Why does the potential involvement of the courts make liability insurance in some ways more difficult to underwrite than other types of insurance? (p. 3-4)
The applicant is legally liable for another person’s loss or injury if found to be so in a court of law. A court of law would decide such a matter when the applicant has been sued by another person or organization and the dispute has gone to trial.
The potential involvement of the courts make liability insurance in some ways more difficult to underwrite than other types of insurance for two reasons:
1) An applicant can be sued for any harm for which another person or organization wishes to recover damages from the applicant.
2) Once a lawsuit has gone to trial, it is not possible to be certain whether the applicant will be found legally liable for the third party’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.
4. What must happen before a third party’s injury or loss can become a loss under a liability policy? (p. 4-5)
Before a third party’s injury or loss can become a loss under a liability policy, the following 3 conditions must be met:
1. The third party must consider the injury or loss serious enough to pursue a grievance;
2. The grievance must be difficult enough to resolve that the parties to the lawsuit are unable to settle it out of court;
3. The resulting trial must end in favour of the third party.
5. What are the three levels of government in Canada
Federal: Military affairs, foreign relations, the national currency, the postal service, etc.
Provincial: Property rights, education, health care, the regulation of insurance companies, etc.
Municipal: Police, fire, water and other services that municipalities are authorized by provincial governments to provide or perform within their boundaries.
6. What are the two types of civil law in Canada
Criminal law: Law that governs an act against society that is prohibited by the Criminal Code of Canada and certain other federal statutes. The criminal courts determine guilt and punishment.
Civil law: Legal liability is the subject of the system of civil law and civil courts determine fault and compensation.
7. What are the three ways that civil law may impose a liability? (p. 6)
1. Negligence
2. Nuisance
3. Breach of Contract
8. What is the definition of “nuisance”? What is the different between private and public nuisance? (p. 7)
Nuisance is the 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.
9. What is the purpose of the ABC rule? List the rule’s three parts. (p. 8)
To establish a cause of legal action for negligence, three things must be established to the satisfaction of a court:
1. A duty of care exists.
2. The duty was breached.
3. There is a causal relationship shown between the breach and the damage.
10. What are the implications for a liability policy when third parties are added as additional named insured’s? (p. 9-10)
Once third parties are added as additional named insured’s to a liability policy, they effectively cease to be third parties and instead become first parties to the contract. The underwriter must be sensitive to the possibility that the activities of the former third parties 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.
The policy wording usually ensures that coverage for third parties extends only to liability they might incur from their relationship to the original insured. Still, many insurers will not add third parties to liability policies as additional named insured’s but may add them as additional insured’s.
11. What factors determine whether an occupier’s duty of care to trespassers has been breached? (p. 10-11)
Premises liability arises out of the risk’s use of physical premises, usually a building, the land on which it stands or both, as an owner, landlord or tenant.
To assess a risk’s premises liability exposure, the underwriter’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.
The “others” to whom an occupier owes a duty of care include strangers who do not step onto the land or enter the building, along with owners and occupiers of adjoining properties.
12. What is the difference between a trespasser and licensee? (p. 11)
Trespasser: is a person who wrongfully enters someone else’s land with neither the right nor permission to be there. Trespassers are owed the lowest duty of care but the occupier must treat the trespasser with common humanity.
Licensee: is a person who enters upon land with the consent of the occupier. 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.
13. What is the difference between a contractual entrant and an invitee? (p. 12)
Contractual entrance: is a person who enters onto premises under a contract with the occupier; for example, a hotel guest or a theatre-goer. The occupier’s duty to a contractual entrance is as specified in the contract.
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 of the part of anyone can make them.
Invitee: is a person who enters onto the premises with permission when the occupier has some financial or other material interest in the matter. Invitees are owed the greatest duty of care by an occupier. For example, a customer or a client.
14. What are some questions that will help an underwriter assess the premises liability exposure for a given risk? (p. 13-14)
Generally, if a risk it not a good fire risk, it will not be a good premises liability risk. Poor maintenance and housekeeping are major contributors to “slip and fall” losses.
Answers to the questions of the following sort obtained from the broker or from an inspection of the premises will help the underwriter assess the premises liability exposure 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 exists, 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?
Additionally, the underwriter should find out the presence and proximity of neighbours and such responsibilities might be discovered by asking questions like the following:
· Does the applicant have a maintenance contract?
15. What are hold-harmless clauses and indemnity agreements? (p. 14)
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.
16. What steps should an underwriter’s analysis of premises liability exposure generally include? (p. 15)
There is a great deal for an underwriter to consider in underwriting the premises liability exposure. In general, the underwriter’s analysis should include the following steps:
1. Know the exposure, the occupancy, and the applicant’s activities.
2. Understand the legal requirements in the jurisdiction where the risk is located.
3. Review the risk’s loss history.
4. Review the loss control reports.
5. Follow up on any recommendations outstanding from those loss control reports.
6. Find out whether the applicant keeps records of incidents or accidents, maintenance logs, and records of routine inspections.
7. Find out what contracts (i.e. maintenance agreements or lease agreements) the applicant is party to and ask if the applicant obtains certificates of insurance from its contractors.
8. Understand who any additional named insured’s on the application are and what their relationships are to the applicant.
9. Find out if the applicant is named as an additional insured on other policies, such as a contractor’s policy.
17. Why is products liability exposure heightened when a company’s products are consumable? (p. 16)
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 must more difficult with a consumable product. Therefore, the underwriter must seek complete information on the production process and especially the quality-control process.
18. What details concerning product liability should be included in an underwriter’s analysis of risk? (p. 16)
Whether the product is consumable or not, the underwriter’s analysis of a risk’s products liability exposure should include underwriting details appropriate to any exposure such as:
· The name and address of the risk;
· The number of years it has been in business; and
· Its payroll and receipts and other measures of its financial well-being.
The underwriter’s analysis should also include questions that more especially concern products liability exposure:
1. Who manufactures the products that the applicant sells? (This question would apply if the applicant sells products manufactured by another company)
2. What products does the applicant manufacture? What is the final use of the products?
3. Does the applicant modify or alter products (that is, parts, materials, or finished products) received from other manufacturers before selling them?
4. What is the distribution of the applicant’s products (local, national or international)? In particular, is the product distributed in the United States
19. What types of personal information about an applicant might be useful for an underwriter assessing personal liability exposure? (p. 18)
A liability underwriter will want to ask questions about the owner’s lifestyle, occupation and hobbies.
Other questions the underwriter might ask include the following:
· Has the applicant had any previous liability losses? If so, the underwriter will want details.
· Does the applicant have a pet or pets? What Kind?
20. What is contributory negligence? (p. 20)
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.
For example, a dwelling owner may hold gatherings in the home for the purpose of selling kitchen wear, etc. Such gatherings may expose the dwelling owner to liability for injury to guests who slip and fall while on the premises.
21. What is a personal umbrella policy? What is the purpose of a personal umbrella policy, and what are its three main benefits? (p. 21-22)
A personal umbrella policy offers three main benefits in addition to those available under ordinary liability insurance:
1. Limits of insurance in excess of those in the primary policy;
2. Drop-down coverage to cover certain exposures that the primary policy does not;
3. Territorial limits wider than those in the primary policy.
22. Why does the premium for personal umbrella insurance tend to be fairly low? (p. 22)
The premium for personal umbrella insurance tends to be fairly low because the exposures that it covers are “second-level” and are contingent on other events. The umbrella policy pays only if another policy either does not cover the exposure or does not provide enough coverage.
23. Why might a commercial risk need employer’s liability coverage even in some circumstances where an employee is eligible for workers compensation insurance? (p. 23)
A commercial risk may need employer’s liability coverage even in some circumstances where an employee is eligible for workers’ compensation insurance such as the following cases:
1. If an employee is working outside the jurisdiction for a certain period of time or longer.
2. If the employer has assumed certain liabilities under contract.
3. If workers compensation insurance benefits are denied to an injured worker because the injury was not incurred on the job.
24. How does technology affect liability exposure? (p. 25)
Technology affects liability exposure as it is a new source of liability exposure arising from changes in the judiciary or in the broader society. For example, E-commerce is a new area of liability exposure, largely untested in the courts and therefore difficult to quantify with any confidence.
25. Why is premises liability exposure for a commercial risk such as bakery higher than for a personal risk such as a dwelling-owner? (p. 25-26)
· Invitees heighten premises liability exposure.
· Bakery is usually a tenant, thus subject to leasing and tenants contracts.
· Quality control more difficult for consumable products.
· Inspection needed to assess quality control and environmental liability exposure.
· There is often an employee’s liability exposure.
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