Chapter 3: Insurance Products - Types 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
- Definition:
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. - Benefit:
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. - Insured Perils:
- accidents caused by the negligence of the employer or by other employees
- exposure to harmful substances
- exposure to harmful working conditions - 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)
- 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. - Measure of exposure:
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.
- Risk and Rating factors:
- type of industry / occupation(s) of the insured
- extent to which the employer implements safety measures - Underwriting factors:
- 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
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
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
- Definition:
The insurance indemnifies the owner of a motor vehicle against compensation payable to third parties for personal injury or damage to their property. - Benefit:
Heads of damage:
- 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
In most countries, such cover is compulsory, although precise rules vary - for example the amount of cover required. - 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. - Basis of cover:
loss-occurring basis - Measures of exposure:
The sum-insured vehicle-year. I.e., an agreed monetary premium is charged for the insurance of a single car worth R1 a year.
Marine and aviation liability insurance
- Definition:
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. - 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 - Basis:
loss-occurring basis - Measures of exposure:
- 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) - Rating factors:
- loss history
- type of craft or vessel
- commercial category
- satellites and missiles also attract separate rating structure
- use of craft or vessel
- geographic region
How might accumulations of risk occur with marine insurance
- Geographical concentration would make an insurer exposed to the possibility of lots of claims arising from one incident (eg storm)
- If a ship spills hazardous material in a populated coastal area, there may be many liability claims
Public liability insurance
- Definition:
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. - Peril/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 - Basis:
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 liability cover. - Measure of exposure: Most commonly used measure of exposure is turnover. An alternative is payroll.
- Risk factors:
- type of industry / occupation(s) of the insured
- extent to which the employer implements safety measures - Underwriting factors:
- 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
Product liability insurance
- Definition:
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. - Perils:
Depend on the nature of the product being produced, but include:
- faulty design
- faulty manufacture
- faulty packaging
- incorrect or misleading instructions - Basis: Usually written on a claims-made basis
- Measures of exposure: The most commonly used measure of exposure is turnover.
- Risk factors:
- 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
Professional indemnity insurance
- Definition: 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.
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. - The perils depend on the profession of the insured.
- Measures of exposure: The most commonly used measure of exposure is turnover.
- Risk factors: Nature of the profession and company.
Directors’ and Officers’ Liability insurance
- Definition:
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. - 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 insurance
- Definition:
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. - Perils: Gradual and sudden environmental pollution will generally both be covered.
- Measures of exposure: The measure of exposure will depend heavily on the nature of the industry carried out by the insured.
- Risk factors:
- 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.
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
3 commercial categories of marine/aviation
- commercial
- private
- military
Property damage insurance
Indemnifies the policyholder against loss of or damage to the policyholders’ own material property