Chapter 2: Insurance Products - Types (F203 Appx. 2) Flashcards
Liability insurance
Provides INDEMNITY where the insured,
… owing to some form of tort,
… is legally liable to pay compensation to a third party.
Tort
A civil wrong or injury,
… not arising out of any contract,
for which action for damages may be sought.
Liability insurance claims are usually made on 2 bases:
- breach of contract
- negligence.
8 Main types of liability insurance
- Employers’ liability / workers’ compensation
- Motor third party liability
- Marine and aviation liability
- Public liability
- Product liability
- Professional indemnity and errors and omissions (E&O) liability
- Directors’ and Officers’ (D&O) liability
- environmental liability and pollution liability
Benefits under any liability insurance
An amount to indemnify the policyholder fully against a financial loss.
However, subject to any statutory requirements, this benefit may be restricted by:
- a maximum indemnity per claim (the sum insured) or an aggregate maximum per year
- a maximum indemnity per event (this may involve more than one claim)
- an excess
Any legal expenses relating to such liability are usually also covered.
An illegal act of negligence will often invalidate the cover.
Employers’ Liability
Indemnifies the insured against legal liability to compensate an employee or his or her estate for bodily injury, disease or death suffered, owing to negligence of the employer, in the course of employment.
Loss of - or damage to employees’ property is usually also covered.
When might employers be liable
If they are negligent in providing their employees with safe working conditions.
If failing to
- provide a proper working place with proper equipment in which the employee can work
- properly maintain the working place as well as the tools and equipment
- create and enforce proper working procedures and methods
The benefit of employers’ liability insurance
Can be in the form of regular payments to compensate for disabilities that reduce the employee’s ability to work, lump sum payments to compensate for permanent injuries to the employee and benefits under the legal framework.
Legal costs will also be covered.
Other costs such as care costs can also be included.
Compulsory cover
In many countries, cover is compulsory and may sometimes be provided by State funds to which employers contribute (eg The compensation for Occupational Injuries and Diseases Act, 1993 in South Africa)
Motor third party liability
The insurance indemnifies the owner of a motor vehicle against compensation payable to third parties for personal injury or damage to their property.
Motor third party liability:
Possible “heads of damages”
- loss of income (often split between loss of past income and loss of future income, with each considered separately)
- medical and nursing costs (including hospital costs)
- compensation for pain and suffering
Motor third party liability
Compulsory cover
In most countries, such cover is compulsory, although precise rules vary - for example the amount of cover required.
Motor third party liability:
Compulsory cover in South Africa
In SA, motor liability insurance is not compulsory, unless the car has been bought on credit, in which case comprehensive insurance is compulsory (a condition set by the lending bank).
Marine and aviation liability insurance
The insured is indemnified against the legal liability to compensate a third party for bodily injury, death or damage to property arising out of operation of the vessel or aircraft.
Public liability insurance
The insured is indemnified against legal liability for the death of or bodily injury to a third party or for damage to property belonging to a third party, other than those liabilities covered by other liability insurance.
Public liability insurance:
2 Main types of cover
- the risk at insured’s own premises
- the risk when work is carried out by the insured away from their own premises
Product liability insurance
Indemnifies the insured against legal liability for the death of or bodily injury to a 3rd party, or for damage to property belonging to a 3rd party, that results from a product fault.
The policy usually also covers legal costs.
Some policies will include the cost of recalling faulty products that have not actually caused damage.
Professional indemnity insurance
Indemnifies the insured against legal liability for losses resulting from negligence in the provision of a service, for example unsatisfactory medical treatment or incorrect advice from an actuary or solicitor.
Directors’ and Officers’ Liability insurance
Indemnifies the insured against the legal liability to compensate third parties owing to any wrongful act of the insured in his or her capacity as a director or officer of a company.
Directors’ and Officers’ Liability insurance:
Compulsory cover
Holding professional indemnity insurance is often a legal or regulatory condition of being allowed to practise a profession or may be imposed as a condition by a professional body.
Environmental liability insurance
The insured is indemnified against the legal liability to compensate third parties as a result of bodily injury, death and damage to property as a result of unintentional pollution for which the insured is deemed responsible.
The costs of cleaning up the pollution and regulatory fines may also be covered.
Gradual and sudden environmental pollution will generally both be covered.
Employers’ liability:
3 groups of insured perils
- accidents caused by the negligence of the employer or by other employees
- exposure to harmful substances
- exposure to harmful working conditions
Motor third party liability:
2 categories of perils
- loss or damage to the property of third parties caused by the insured vehicle
- bodily injury and death of third parties caused by the insured vehicle.
Marine and aviation liability:
4 categories of perils
- loss of or damage to passengers’ property, including luggage
- bodily injury and death of passengers either while on board the vessel or aircraft or when boarding or leaving the aircraft.
- bodily injury caused by the vessel or aircraft
- damage to property caused by the vessel or aircraft
Product liability:
Perils (4)
Depend on the nature of the product being produced, but include:
- faulty design
- faulty manufacture
- faulty packaging
- incorrect or misleading instructions
Professional indemnity:
Perils
The perils depend on the profession of the insured.
Directors’ and Officers’ liability:
Perils
- allowing a company to continue operating in circumstances when it should have been declared insolvent
- any act resulting in the insured being declared unfit for his or her role
- allowing false financial statements to be published
Environmental liability:
Perils
The insured perils can be regarded as any incident causing gradual or sudden environmental pollution.
Employers’ Liability:
Basis for cover
Most classes of business are written on the basis of when the loss was incurred, (cover relates to the date of the accident rather than the date of reporting of the accident)
Employers’ liability:
Problems with the basis of “when the loss was incurred”
- Where an industrial disease results from prolonged exposure, it is hard to define the “accident date”.
- Because many diseases take a very long time to develop fully, there have been extensive reporting delays with employers’ liability.
Motor third party liability:
Basis for cover
loss-occurring basis
Marine and aviation liability:
Basis for cover
loss-occurring basis
Public liability:
Basis for cover
Depends on the exact cover provided, although its likely to be on a losses-occurring basis.
Public liability insurance may be combined with other insurances, eg residential buildings and contents products may include public liaiblity cover.
Product liability:
Basis for cover
Usually written on a claims-made basis
Environmental liability:
Basis for cover
Policies are likely to be written on a claims-made basis
Measures of exposure to which premiums are related :
Employers’ liability
Person-hours worked could be the best exposure when assessing claim frequency.
However, claim settlements are often related to loss of earnings so, in practice the main measure of exposure for employers’ liability is payroll or total wage and salary costs.
Measures of exposure to which premiums are related:
Motor third party liability
The sum-insured vehicle-year.
I.e., an agreed monetary premium is charged for the insurance of a single car worth R1 a year.
Measures of exposure to which premiums are related:
Marine and aviation liability (5)
- passenger kilometers (number of passengers times km travelled)
- passenger voyages
- in-service seats
- in-service vessels / aircraft
Turnover is still the most commonly used measure (although not accurate)
Measures of exposure to which premiums are related:
Public liability
Most commonly used measure of exposure is turnover.
An alternative is payroll.
Measures of exposure to which premiums are related:
Product liability
The most commonly used measure of exposure is turnover.
Measures of exposure to which premiums are related:
Professional indemnity
The most commonly used measure of exposure is turnover.
Measures of exposure to which premiums are related:
Environmental liability
The measure of exposure will depend heavily on the nature of the industry carried out by the insured.
2 Causes of settlement delays on liability insurance business
- delays caused by establishing liability
- time to establish the extent of injuries and to assess the speed of recovery
Possible causes of accumulations of risk in liability insurance (2)
- court award inflation
- an insurer who provides cover for several employers in the same industry is exposed to the possibility that a large number of claims will emerge from a common cause (eg asbestosis)
court award inflation
If there is a court award in favour of a claimant, it may trigger a large number of similar claims from individuals with the same complaint against their employer
Risk factors and rating factors:
Employers’ liability and public liability (2)
- type of industry / occupation(s) of the insured
- extent to which the employer implements safety measures
underwriting factors:
Employers’ liability and public liability insurance (12)
- type of industry or occupation
- exposure and claims experience
- location of the workforce
- frequency of visitors to the site
- the materials handled
- the processs involved
- safety precaustions in place, eg sprinklers in a factory or office
- turnover
- size of deductible*
- payroll
- level of staff training and safety standards
- provision of first aid facilities
Rating factors:
Marine and aviation liability (6)
- loss history
- type of craft or vessel
- commercial category
- satellites and missiles also attract separate rating structure
- use of craft or vessel
- geographic region
3 commercial categories of marine/aviation
- commercial
- private
- military
Risk factors: Product liability (6)
- Nature of the products produced by the insured
- the distribution channel of the product
- how much US-exposure the product has (in general, US has more claims likely to be made)
- its usage
- the general trade of policyholder
- any potentially dangerous components within the product, and how quickly they deteriorate
Risk factors:
Professional indemnity
Nature of the profession and company.
Risk factors: Environmental liability (4)
- the processes carried out by the insured
- the likely effects of any accident
- the likely cost of clean-up
- a general assessment of the risk management practices of the insured.
Property damage insurance
Indemnifies the policyholder against loss of or damage to the policyholders’ own material property
10 Types of property subject to such damage
- residential buildings
- commercial and industrial buildings
- moveable property (contents)
- land vehicles
- marine craft
- aircraft
- goods in transit
- construction
- engineering plant and machinery
- crops
4 types of land vehicles (subject to damage)
- private motor
- commercial vehicle
- motorcycle
- motor fleet
Benefits on:
Household buildings property insurance
The principle of indemnity:
Benefit is the amount required to fully reinstate the property, rather than the market value of the property
The benefit is subject to any excess or deductible.
Ancillary costs may also be covered (but are not standard)
Often include insurance for liabilities arising from the insured property