Study 5: Underwriting the Risk: Liability - Summary Flashcards
Liability insurance is primarily intended to protect the insured from legal liability for bodily injury or property damage unintentionally caused to other people. The insurer will pay the claim if several elements are present:
- The defendant (insured) owed the plaintiff (third party) a duty of care.
- The defendant broke that duty of care by his or her actions.
- The defendant’s actions caused injury to the plaintiff.
Two reasons why liability insurance can be more difficult to write than other types of insurance
- An applicant can be sued for any harm for which another person or organization wants to recover damages.
- Once a lawsuit has gone to trial, it is uncertain 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.
Premiums for liability insurance tend to be lower than other types, because a loss suffered by a third party does not automatically become a loss under the policy. Before it can become a loss under the policy:
- the third party must consider the injury or loss serious enough to pursue a grievance;
- the grievance must be difficult enough to resolve that the parties to the lawsuit are unable to settle it out of court; and
- the resulting trial must end in favour of the third party.
Adding other parties to a liability policy
- Third parties can be added to a liability policy as additional named insureds, which effectively makes them first parties to the contract
- Underwriters should be sensitive to the fact that the actions of such parties could lead to lawsuits which the insurer would have to respond to
- Can be tricky when insuring large corporations who may insist on adding additional insureds - winning the business may be dependent on the willingness to add these parties
Underwriting liability insurance
- Underwriter must consider whether it is likely that an applicant could be sued and found legally liable
- Difficult to determine since liability is determined by the court
- Underwriter must follow developments in law and social trends that influence judges in their decisions. Requires more speculation than underwriting property.
Jurisdictions of the Canadian legal system
- Federal—Military affairs, foreign relations, the national currency, the postal service, financial regulation of banks and insurance companies, among others
- Provincial and territorial—Property rights, education, health care, and the regulation of the insurance industry, among others
- Municipal—Police, fire, water, and other services that municipalities are authorized by provincial and territorial governments to provide or perform within their boundaries
Systems of civil law
- Civil Code of Quebec: covers every area of law, from birth certificates to insurance contracts, mortgages to wills. Courts do not make law, but interpret the code.
- Common law: practiced in all provinces outside Quebec. Mixture of case law (law of precedent) and statute law (laws passed in written form by the government). Statute law supersedes case law.
How civil law imposes liability
Tort and breach of contract. For insurance purposes, the most common torts are negligence and nuisance.
The most common way the law imposes liability
Finding someone has committed a tort (i.e. a wrongful act) and in so doing has caused damage or injury to another. The wrongful act may be
- an intentional act,
- a negligent act, or
- a failure to act.
A person is negligent when…
…he or she omits to do something a reasonable person would do or does something that a reasonable person would not do. Of the two common torts, negligence is the most important.
The duty of care is assessed by the standard of the reasonable person
- A mythical creature of the law whose conduct is the standard by which the courts measure the conduct of all other persons and judge it proper or improper in particular circumstances.
- This person is not an extraordinary or unusual creature, not superhuman, not required to display the highest skill of which anyone is capable, not a genius who can perform unusual feats, and not in possession of unusual powers of foresight.
- He or she is a person of normal intelligence who makes prudence a guide to conduct.
- The reasonable person does nothing a prudent person would not do and does not omit to do anything that a prudent person would do.
Three things that must be shown in court to establish a cause of legal action for negligence
- A duty of care exists.
- The duty was breached.
- There is a causal relationship between the breach and the damage.
Breach of contract
- Occurs when one of the parties to a contract fails to fulfill one of its obligations under the contract
- Liability insurance has only limited application to breach of contract
Two commonly underwritten types of liability for commercial risks
- Premises liability
- Products liability
Premises liability
- Arises out of the risk’s use of physical premises, such as a building, the land on which it sits, or both
- To assess liability exposure, an underwriter should look at the occupancy and the duty of care owed to others by the occupier of the premises
