Liability insurance

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Liability insurance is a part of the general insurance system of risk financing. Originally, individuals or companies that faced a common peril, formed a group and created a self-help fund out of which to pay compensation should any member incur loss. The modern system relies on dedicated carriers to offer protection against specified perils in consideration of a premium. Liability insurance is designed to offer specific protection against third party claims, i.e., payment is not typically made to the insured, but rather to someone suffering loss who is not a party to the insurance contract. In general, damage caused intentionally and contractual liability are not covered under liability insurance policies. When a claim is made, the insurance carrier has the right to defend the insured. The legal costs of a defense are not always affected by any policy limits, which is useful because they can be significant where long trials are held to determine either fault or the amount of damages.

Overview of liability insurance

In many countries, liability insurance is a compulsory form of insurance for those at risk of being sued by third parties for negligence. The most usual classes of mandatory policy cover the drivers of vehicles, those who offer professional services to the public, those who manufacture products that may be harmful, constructors and those who offer employment. The reason for such laws is that the classes of insured are deliberately engaging in activities that put others at risk of injury or loss. Public policy therefore requires that such individuals should carry insurance so that, if their activities do cause loss or damage to another, money will be available to pay compensation. In addition, there are a further range of perils that people insure against and, consequently, the number and range of liability policies has increased in line with the rise of contingency fee litigation offered by lawyers (sometimes on a class action basis). Such policies fall into three main classes:

Public liability

Industry and commerce are based on a range of processes and activities that have the potential to affect third parties (members of the public, visitors, trespassers, sub-contractors, etc. who may be physically injured or whose property may be damaged or both). It varies from state to state as to whether either or both employer's liability insurance and public liability insurance have been made compulsory by law. Regardless of compulsion, however, most organizations include public liability insurance in their insurance portfolio even though the conditions, exclusions, and warranties included within the standard policies can be a burden. A company owning an industrial facility, for instance, may buy pollution insurance to cover lawsuits resulting from environmental accidents.

Many small businesses do not secure general or professional liability insurance due to the high cost of premiums. However, in the event of a claim, out-of-pocket costs for a legal defense or settlement can far exceed premium costs In some cases, the costs of a claim could be enough to shut down a small business.

Businesses must consider all potential risk exposures when deciding whether liability insurance is needed, and, if so, how much coverage is appropriate and cost-effective. Those with the greatest public liability risk exposure are occupiers of premises where large numbers of third parties frequent at leisure including shopping centers, pubs, clubs, theaters, sporting venues, markets, hotels and resorts. The risk increases dramatically when consumption of alcohol and sporting events are included. Certain industries such as security and cleaning are considered high risk by underwriters. In some cases underwriters even refuse to insure the liability of these industries or choose to apply a large deductible in order to minimize the potential compensations. Private individuals also occupy land and engage in potentially dangerous activities. For example, a rotten branch may fall from an old tree and injure a pedestrian, and many ride bicycles and skateboards in public places. The majority of states requires motorists to carry insurance and criminalise those who drive without a valid policy. Many also require insurance companies to provide a default fund to offer compensation to those physically injured in accidents where the driver did not have a valid policy.

In many countries claims are dealt with under common law principles established through a long history of case law and, if litigated, are made by way of civil actions in the relevant jurisdiction.

Product

Product liability insurance is not a compulsory class of insurance in all countries, but legislation such as the UK. Consumer Protection Act 1987 and the EC Directive on Product Liability (25/7/85) require those manufacturing or supplying goods to carry some form of product liability insurance, usually as part of a combined liability policy. The scale of potential liability is illustrated by cases such as those involving Mercedes-Benz for unstable vehicles and Perrier for benzene contamination, but the full list covers pharmaceuticals and medical devices, asbestos, tobacco, recreational equipment, mechanical and electrical products, chemicals and pesticides, agricultural products and equipment, food contamination, and all other major product classes.

Employers

New policies have been developed to cover any liability that might be imposed on an employer if an employee is injured in the course of his or her employment. In many states, the insurers are prohibited from including conditions within their policies that seek to impose any unreasonable conditions precedent to liability, or require the insured either to take reasonable precautions or to comply with current legislation and regulations. In those countries where such insurance is not compulsory, smaller organizations are often driven into bankruptcy when faced by claims not covered by insurance.

Many of the public and product liability risks are often covered together under a general liability policy. These risks may include bodily injury or property damage caused by direct or indirect actions of the insured.

Evidentiary rules regarding liability insurance

In the United States, most states make only the carrying of auto insurance mandatory. Where the carrying of a policy is not mandatory and a third party makes a claim for injuries suffered, evidence that a party has liability insurance is generally inadmissible in a lawsuit on public policy grounds, because the courts do not want to discourage parties from carrying such insurance. There are two exceptions to this rule:

1. If the owner of the insurance policy disputes ownership or control of the property, evidence of liability insurance can be introduced to show that it is likely that the owner of the policy probably does own or control the property.
2. If a witness has an interest in the policy that gives the witness a motive or bias with respect to specific testimony, the existence of the policy can be introduced to show this motive or bias. Federal rules of civil procedure rule 26 was amended in 1993 to require that any insurance policy that may pay or may reimburse be made available for photocopying by the opposing litigants, although the policies are not normally information given to the jury. Federal Rules of Appellate Procedure rule 46 says that an appeal can be dismissed or affirmed if counsel does not update their notice of appearance to acknowledge insurance. The Cornell University Legal Institute web site includes congressional notes.

Liability insurance and the technology industry

Because technology companies represent a relatively new industry that deals largely with intangible yet highly valuable data, some definitions of legal liability may still be evolving in this field. Technology firms must carefully read and fully understand their policy limits to ensure coverage of all potential risks inherent in their work.

Typically, professional liability insurance protects technology firms from litigation resulting from charges of professional negligence or failure to perform professional duties. Covered incidents may include errors and omissions that result in the loss of client data, software or system failure, claims of non-performance, or negligent overselling of services. For example, some client companies have won large settlements after technology subcontractors’ actions resulted in the loss of irreplaceable data. Professional liability insurance would generally cover such settlements and legal defense, within policy limits.

Additionally, client contracts often require technology subcontractors working on-site to provide proof of general liability and professional liability insurance.

Notes

See also

• Cumis counsel
• [1] How to Reduce Fraud Podcast

References