Chapter 3 Liability Basics

Question 1

Tort

Answer 1

tort is a wrongful act, other than a breach of contract, that violates a duty or the rights of another and for which compensation may be sought from the responsible party. Torts may result from either criminal or civil activity.

Torts are either intentional, or unintentional.

An intentional tort is a deliberate act that harms another and for which the injured party is permitted by law to sue the wrongdoer.

An unintentional tort, also known as negligence, is an act, or failure to act that is committed without the same level of care a reasonable individual would have exhibited given the same knowledge and set of circumstances. Liability insurance provides coverage for most unintentional torts and excludes intentional torts.

Question 2

Vicarious Liability

Answer 2

The liability assigned to one party for the conduct of another, based solely on a relationship between the two. Examples include employer/employee relationships and parent/child relationships.

Question 3

Negligence

Answer 3

Failure to use ordinary care. For example, running a red light.

Question 4

Gross Negligence

Answer 4

Failure to exhibit any sort of care through recklessness or deliberate indifference to the well-being of others. For example, driving while under the influence of alcohol.

Question 5

Attractive Nuisance

Answer 5

An artificial condition on land that attracts children, such as a swimming pool, and requires the owner to exhibit a special duty of care. Legally, children are considered invitees to the premises if it contains an attractive nuisance even when they are not expressly invited.

Question 6

Loss of Consortium

Answer 6

Compensation to a husband or wife for the loss of companionship of a spouse.

Question 7

What is liability?

Answer 7

Liability insurance only provides coverage when the insured is legally liable for causing injuries or damage. Legal liability is the responsibility under law or contract for an act or failure to act.

Question 8

A(n) ____________ is a civil wrong committed by one person against another.

Answer 8

Tort

Question 9

Compensatory Damages/ Special and General

Answer 9

Awarded to the injured party for the actual loss sustained. Damages are Special or General.
Special damages are an award to an injured party for actual and known expenses such as bills, loss of earnings, and the costs of repairing or replacing damaged property. Special damages are paid for tangible loss or damage.

General Damages are an award to an injured party for pain, suffering, mental anguish, disfigurement, and similar types of losses. General damages are paid for losses that cannot be calculated objectively and assigned a specific dollar value.

Question 10

Punitive Damages

Answer 10

An award to an injured party, in addition to compensatory damages, to punish and discourage a wrongdoer from repeating negligent acts or omissions. Most liability policies do not provide coverage for punitive damages.

Question 11

Bodily Injury

Answer 11

Legal liability arising from physical injury, including sickness, disease, and death caused by the acts or omissions of an insured. Bodily injury liability expenses include medical bills, lost wages, mental anguish, pain and suffering, etc.

Question 12

Property Damage Liability

Answer 12

Legal liability arising from physical damage to tangible property, including loss of use of that property, caused by the acts of an insured. Property damage liability expenses include the actual cost of repair or replacement of the damaged property as well as the inability to use damaged property (loss of use).

Question 13

Medical Payments Coverage

Answer 13

Coverage for the bodily injury of third parties sustained on an insured location or as a result of the insured’s activities. Coverage is provided for the payment of necessary medical, surgical, x-ray, dental, ambulance, hospital, professional nursing, and funeral expenses. Payments are made regardless of the insured’s negligence. This coverage is provided to discourage liability claims and lawsuits and, when payments are made, are not an admission of liability.

Question 14

Which of the following damages is awarded to the injured party for the actual medical expenses incurred?

Answer 14

Special
Special damages are paid for tangible losses and general damages are paid for damages that cannot be objectively calculated, such as pain and suffering.

Question 15

Personal Injury Liability

Answer 15

Legal liability arising from specific offenses committed by an insured that results in injury other than bodily injury or property damage. Examples of personal injury include libel, slander, false arrest, invasion of privacy, and copyright infringement. Personal injury is generally understood to affect one’s reputation or emotional well-being and is not bodily harm or property damage.

Question 16

Accident

Answer 16

A sudden, unforeseen, unintended, and unplanned event from which loss or damage results.

Question 17

Occurrence

Answer 17

An accident includes continuous or repeated exposure to the same general harmful conditions.

Question 18

Notice of Loss

Answer 18

Insured must notify the insurer in writing as soon as possible in the event of any loss or occurrence. The written notice should include the named insured, policy number, and details about the time, place, circumstances of the occurrence, and names and addresses of any claimants and witnesses.

Question 19

Proof of Loss

Answer 19

A formal statement made by the insured and provided to the insurer that provides necessary details for the insurer to determine its liability under a policy.

Question 20

Certificate of Insurance

Answer 20

A document that shows evidence that specific types of insurance were purchased by the insured, at certain limits, and that they were in place on the date the certificate of insurance was issued. A certificate of insurance is not proof of insurance, as a binder is.

Question 21

Payment of necessary medical expenses without regard to negligence is covered by which of the following insurance coverages?

Answer 21

Medical payments
will also pay for surgical, x-ray, dental, ambulance, hospital, nursing, and funeral expenses incurred by a third-party on the insured’s premises.

Question 22

Which of the following documents informs an insurer that a loss has occurred?

Answer 22

Notice of loss
The Notice of Loss is the initial notification to the insurer that a loss has happened. Proof of Loss is a formal statement providing the details necessary for the insurer to determine liability.

Question 23

Match the term to its definition

Answer 23

Property damage liability
Legal liability arising from physical damage to tangible property, including loss of use of that property, caused by the acts of an insured

Medical payments coverage
Pays for necessary medical, surgical, hospital, and funeral expenses incurred by a third party on the insured’s premises regardless of fault

Bodily injury liability
Legal liability arising from physical injury, including sickness, disease, and death caused by the acts or omissions of an insured

Personal injury liability
Legal liability arising from the wrongful conduct of the insured resulting in injuries to one’s mental or emotional state or reputation

Question 24

Negligence

Answer 24

Negligence, in a broad sense, is the failure to use ordinary care. Specifically, it is a wrongful act that is neither criminal nor a breach of contract that violates a duty or the rights of another — and for which the injured party may demand compensation. It is the failure to use the same degree of care a reasonable and prudent person would use when given the same knowledge and set of circumstances.

Question 25

Elements – In order for an act or failure to act to be negligent, it must contain 4 elements:

Answer 25

Duty is Owed – Requires the injured party to prove the alleged wrongdoer owed a duty to the injured party or to the public.

Violation of Duty – Requires the injured party to prove the alleged wrongdoer not only owed a duty but also violated that duty. Basically, the alleged wrongdoer didn’t exhibit reasonable care.

Violation of Duty is Proximate Cause – Requires the injured party to prove the alleged wrongdoer’s negligent actions or inactions were the proximate cause of actual injuries or damages.

Foreseeable Consequence – Requires the injured party to prove the actual injuries or damages were a reasonably foreseeable consequence at the time the negligent action or inaction occurred.

Question 26

Each of the following is an element of negligence, except:

Answer 26

There is an intervening cause

Question 27

Defenses

Answer 27

when a claimant accuses an insured of negligence, the insured may use one of several defenses:

Question 28

Common Law

Answer 28

Law practiced as the result of judicial or court decisions (i.e., case law and precedents).

Contributory Negligence – Prevents recovery for damages caused by a negligent party if the claimant was negligent to any extent. For example, if the claimant is 5% negligent and the wrongdoer is 95% negligent, the claimant is not permitted to collect damages.

Assumption of Risk – Prevents recovery if the claimant knowingly assumed the risk.

Intervening Cause – Prevents or limits recovery from the wrongdoer when a second, distinctly separate negligent act occurs after the original negligent act, but before damage occurs, and interferes with the chain of events that brings about the loss. The intervening cause must be unexpected and unforeseen.

Question 29

Statutory Law – Written law enacted by legislatures.

Answer 29

Comparative Negligence – Damages are reduced in proportion to the degree of the claimant’s negligence. For example, if the claimant is 5% negligent and the wrongdoer is 95% negligent, the claimant may only recover 95% of damages.
Statute of Limitations – The length of time during which legal proceedings may be initiated. This time period is established by federal or state law and usually begins on the day an event occurs.

Question 30

Which of the following is a common law defense used by the insured when the injured party is partially responsible for his own injuries?

Answer 30

Contributory negligence
If the insured can prove that the claimant was negligent to any degree in causing the accident, contributory negligence will prevent recovery of damages by the claimant.

Question 31

Strict and Absolute Liability

Answer 31

strict and Absolute liability is a legal principle that imposes legal liability based on conditions, activities, or products that exhibit very high hazards; the degree of care exercised by the insured isn’t considered when making a determination of liability.

Absolute liability is most often associated with dangerous animal ownership, abnormally dangerous activities, and employers liability for injuries sustained by their employees. Dangerous animals include lions, bears, and certain dog breeds such as pit bulls and rottweillers. Absolute liability applies to the storage of explosives, highly flammable material and weapons or firearms.

Question 32

Strict Liability Applies to Products

Answer 32

If a claimant can prove that a product caused the injury, the manufacturer will be held liable whether or not the product was defective.

Liability may be asserted even in the absence of negligence. For example, the manufacturer of a dangerous product is always legally liable if the product causes injury or damage.

Question 33

No-Fault Liability

Answer 33

When a no-fault liability system or law is in place, the injured party collects insurance benefits from his or her own insurance as if it were first-party coverage, thus eliminating the process of determining negligence or legal liability. No-fault laws vary by state and typically apply to auto insurance.

Most no-fault laws restrict the rights of the injured party to sue unless the injuries are severe (e.g., paralysis or death) and meet certain conditions. These conditions are called a threshold and can either be a monetary limit (e.g., $5,000) or described verbally (e.g., death, facial injuries, or broken bones).

Some no-fault laws allow the insured to choose whether their policy operates under a no-fault or tort basis. Other states allow policyholders to “add-on” no-fault benefits to their auto policies that are otherwise subject to tort liability.
Some states refer to their no-fault laws and coverage as personal injury protection (PIP).

Question 34

A party injured in an auto accident is not allowed to sue the negligent party who caused the accident under which of the following laws?

Answer 34

No fault
Under no-fault, the tort system is abolished and a party who is negligent and causes injury to another does not have to pay for those injuries.

Question 35

Common Policy Provisions

Answer 35

Insureds
Named Insured – The person or organization designated on the Declarations page of the policy as being protected by an insurance contract.

Insured – A person or organization protected by an insurance contract.

First Named Insured – The name of the person or organization that appears first on the Declarations page of a policy as “named insured.”

Additional Insured(s) – A person or organization not ordinarily protected by a policy but which, through the addition of an endorsement to the policy, is granted status as an insured. Under a liability policy, an additional insured is often a party to an indemnification or hold harmless agreement.

Question 36

Other Insurance

Answer 36

is a provision that specifies the process to be followed when more than one policy covers the same loss.

Primary – If the policy is primary, it makes payment before all other policies in place make payment for a loss.

Excess – If the policy is excess, it makes payment only after all other insurance in place exhausts its limits or denies coverage.

Pro Rata Liability – Specifies the process to be followed when more than one policy covers the same loss. Each policy pays no more than its share of the loss and the method of sharing varies by contract. Some policies require sharing of losses by the ratio of applicable limits of insurance each insurer writes with respect to the total of all limits available for the loss (pro rata). Other policies require the insurers to share the loss by contributing equal shares until each insurer has paid its limit of insurance (contribution by equal shares).

Question 37

Other Insurance
Other Insurance is a provision that specifies the process to be followed when more than one policy covers the same loss.
EXAMPLE

Answer 37

Example

Policy A insures a dwelling for $250,000 and Policy B insures the same dwelling for $500,000. If both policies covered the same loss, Policy A would pay one-third of the loss because $250,000 represents 1/3 of all the insurance available to cover the loss ($250,000 equals 1/3 of $750,000, which is the sum of $250,000 on Policy A and $500,000 on Policy B).

Question 38

Which of the following is designed to prevent the insured from collecting more than the actual extent of a loss?

Answer 38

Pro rata liability
clause that in the event more than one insurance policy covers a loss, each will pay its share of loss in proportion to the total insurance on the risk.

Question 39

Limits of Liability

Answer 39

each policy includes a provision that specifies the most it will pay in the event of loss. Certain limits of liability apply to any one loss; other limits apply to the total of all losses that occur within the policy period. In addition, the manner in which limits of liability are designated vary by coverage and policy type. The limit of liability, or limits of insurance, are shown on the policy declarations page and are the most paid by the policy regardless of the number of insureds, claims made, lawsuits filed, or parties making claims or filing lawsuits.

Per Occurrence Limit – The most the policy will pay for all losses arising out of any one occurrence, regardless of other policy limits.
Example: The limit of liability for personal liability on a homeowners policy is a per occurrence limit.
Per Person Limit – The most the policy will pay for loss to any one person injured in any one loss, regardless of other policy limits.
Example: The limit of liability for medical payments coverage on an auto policy is a per person limit.

Question 40

Aggregate Limits –

Answer 40

The most the policy will pay for all losses submitted during the policy period, regardless of other policy limits.

Each loss payment made under a per occurrence limit or per person limit reduces the aggregate limit of liability.
For example, if a commercial general liability policy has a medical payments coverage per person limit of $5,000, a liability per occurrence limit of $1 million and a $2 million general aggregate limit, payment of a $3,000 medical payments claim would use up $3,000 of the general aggregate limit, leaving $1,997,000 available for the payment of future claims submitted during the balance of the policy term.

Question 41

Split Limit

Answer 41

The most the policy will pay for loss of different types that occur as a result of any one loss, regardless of other limits. For example, the limits of liability on an auto policy for bodily injury might be represented as 100/300/100 ($100,000 is the per person limit for bodily injury liability, $300,000 is the per occurrence limit for bodily injury, and $100,000 is the per occurrence limit for property damage liability).

Question 42

Combined Single Limit –

Answer 42

The most the policy will pay for all losses of all types resulting from any one occurrence, regardless of other limits. For example, the per occurrence limits on homeowners and general liability policies provide coverage for the sum of all bodily injury liability and property damage liability claims that arise from one occurrence.

Question 43

The _______ is the most the policy will pay for the sum of all the losses occurring within a policy period.

Answer 43

Aggregate
Under an aggregate limit, the payment for an accident during a policy period reduces the amount of insurance available for all future accidents that occur for the remainder of the policy period.

Question 44

The _______ Limit of liability applies to bodily injury, property damages, or both.

Answer 44

Combined Single

Question 45

Match the limit of liability provision with the correct description

Answer 45

Combined Single Limit
The most the policy will pay for all losses total (any type of damage) resulting from any one occurrence, regardless of other limits

Aggregate Limit
The most the policy will pay for all losses submitted during the policy period, regardless of other policy limits

Split Limits
The most the policy will pay for each type of damage that occurs as a result of a single loss, regardless of other limits

Per Occurrence Limit
The most the policy will pay for all losses arising out of any one occurrence, regardless of other policy limits

Per Person Limit
The most the policy will pay for a loss to any one person injured in a single loss, regardless of other policy limits

Question 46

Policy Conditions

Answer 46

Assignment – The owner of a liability policy cannot transfer policy ownership without the insurer’s written consent. For example, a business owner cannot sell his business and then transfer ownership of the business’ general liability insurance policy to the new owner without the written consent of the insurance company.

Subrogation – After an insurer pays a loss, it is granted the insured’s rights to seek recovery from the party responsible for the loss. For example, if Bob is legally responsible for injuring Sue in a car accident, Sue’s insurance company may seek reimbursement from Bob for the claim payments it made to Sue.

Liberalization – When coverage under a particular form of insurance issued by an insurer is broadened without an additional premium charge, it automatically applies to all policies currently in effect. For example, Carrier A adds coverage enhancements to its Special Form homeowners policy, without an additional charge. Those changes automatically apply to all policies currently in effect.

Question 47

A certificate of insurance includes which of the following?

Answer 47

The effective date, name of the insurer, the named insured, and limits of liability

Question 48

Which of the following statements best describes the Other Insurance condition on a standard property insurance policy, when two separate property policies provide coverage for the same loss?

Answer 48

each policy pays its pro rata share of the loss

Question 49

Which of the following terms includes pain and suffering, disfigurement, and mental anguish?

Answer 49

General damages

Question 50

Which statement regarding liability coverage and limits is false?

Answer 50

The per occurrence limit is the maximum amount recoverable during the policy period

Question 51

Plaintiff K was injured after losing control of their skis on a slope with well-marked signs indicating the degree of difficulty. What legal defense is available to the ski resort to avoid liability for the injury?

Answer 51

When a person participates in an activity where a certain type of injury is known to be probable, that person’s rights of recovery are barred or diminished under the doctrine of assumption of risk.

Question 52

Policy A provides liability coverage to Fred’s Grocery up to $500,000. Policy B provides coverage for the same risks up to $1.5 million. Both policies pay on a pro rata basis. If Fred’s Grocery is determined to have a legal liability of $400,000 to a claimant who was injured on the property, how much will Policy A pay?

Answer 52

Pro rata liability requires that each policy pays no more than its share of the loss. The total insured amount carried by Fred’s Grocery is $2 million ($500,000 + $1.5 million). Policy A’s share of that amount is 25% ($500,000 ÷ $2 million). Therefore, its share of any loss would be 25% of the loss amount. 25% of $400,000 is $100,000.

Question 53

If the amount of liability insurance coverage is divided between bodily injury and property damage claims, the policy limits are which of the following?

Answer 53

Split limits

Question 54

The formal statement an insured provides to an insurer, including all the details an insurer needs to assess its liability following a loss, is known as a:

Answer 54

Proof of loss

Question 55

Negligence is what kind of tort?

Answer 55

An unintentional tort

Question 56

B has two policies on a property. Policy A is for $20,000; Policy B is for $40,000. If Policy A has a pro rata provision, how much will it pay for a covered loss of $15,000?

Answer 56

The total amount of coverage is $60,000. Policy A provides 1/3 of that total, so Policy A’s pro rata contribution would be one-third, or $5,000. Policy B provides $40,000, or 2/3 of the total coverage, so Policy B pays two-thirds.

Question 57

All of the following are true of liability policies, except:

Answer 57

They will cover damage to the insured’s own property

Question 58

Which of the following is an example of general damages?

Answer 58

Pain

Question 59

Bodily injury is best described as:

Answer 59

Physical injury or death arising from the negligent acts of an insured

Question 60

Which of the following might be considered a negligent act?

Answer 60

Unintentionally renting a leaky boat to vacationers

Question 61

Bodily Injury may include which of the following?

Answer 61

Loss of earnings

Question 62

Which of the following defenses against negligence reduces damages in proportion to the degree of negligence?

Answer 62

Comparative Negligence

Question 63

A manufacturer is held liable if a product caused an injury whether the product was or was not defective. This describes what type of liability?

Answer 63

Strict

Question 64

A chain of events may be broken by which of the following, thus freeing the defendant from liability?

Answer 64

Intervening cause

Question 65

Which of the following is a legal liability imposed without demonstrated negligence?

Answer 65

Absolute Liability
Because of the high degree of hazard associated with some risks, no degree of care is sufficient to fulfill the responsible party’s duty to the public. In such cases, the responsible party is legally liable even when no negligent act is committed. The principle conferring this liability is known as absolute or strict liability.

Question 66

The most a policy will pay for a loss arising out of any one accident regardless of overall policy limits, is known as the:

Answer 66

Per occurrence limit

Question 67

Which of the following prevents recovery for injuries caused by a negligent party if the claimant was also negligent?

Answer 67

Contributory negligence

Question 68

Which statement regarding liability coverage and limits is false?

Answer 68

The per occurrence limit is the maximum amount recoverable during the policy period

Question 69

All of the following are true of torts, except:

Answer 69

They must be committed intentionally

Question 70

Which of the following relationships involves vicarious liability?

Answer 70

Employer and employee

Question 71

Personal injury liability includes which of the following?

Answer 71

Libel and slander
Personal injury liability is the legal liability for injury other than bodily injury or property damage. Examples of personal injury include libel, slander, false arrest, invasion of privacy, and copyright infringement.

Question 72

The provision that establishes the method by which coverage will be applied if other insurance applies to the loss, is sometimes called:

Answer 72

The pro rata liability provision
This provision is found in the policy in the Other Insurance condition. It is sometimes known as the pro rata liability provision because it provides for claim settlement to be proportioned to the amount of other insurance.

Question 73

Policy A provides liability coverage to Fred’s Grocery up to $500,000. Policy B provides coverage for the same risks up to $1.5 million. Both policies pay on a pro rata basis. If Fred’s Grocery is determined to have a legal liability of $400,000 to a claimant who was injured on the property, how much will Policy A pay?

Answer 73

$100,000
Pro rata liability requires that each policy pays no more than its share of the loss. The total insured amount carried by Fred’s Grocery is $2 million ($500,000 + $1.5 million). Policy A’s share of that amount is 25% ($500,000 ÷ $2 million). Therefore, its share of any loss would be 25% of the loss amount. 25% of $400,000 is $100,000.

Question 74

Plaintiff K was injured after losing control of their skis on a slope with well-marked signs indicating the degree of difficulty. What legal defense is available to the ski resort to avoid liability for the injury?

Answer 74

Assumption of risk
When a person participates in an activity where a certain type of injury is known to be probable, that person’s rights of recovery are barred or diminished under the doctrine of assumption of risk.

Question 75

Which is the best description of punitive damages?

Answer 75

Punitive damages are assessed as a punishment for extremely objectionable conduct by a negligent party

Question 76

All of the following are common law defenses against negligence, except:

Answer 76

Statute of Limitations