BUSE4024A Advanced Liability Insurance 2023 PDF

UNIVERSITY OF THE WITWATERSRAND SCHOOL OF BUSINESS SCIENCES BCOM. HONOURS INSURANCE AND RISK MANAGEMENT BUSE4024A Advanced Liability Insurance and Risk Management 2023 Lecturer: Ms Penny Spentzouris Lecture 5 SPECIFIC LIABILITY INSURANCE CONTRACTS-GENERAL INSURANCE (PUBLIC) LIABILITY Public liab...

UNIVERSITY OF THE WITWATERSRAND SCHOOL OF BUSINESS SCIENCES BCOM. HONOURS INSURANCE AND RISK MANAGEMENT BUSE4024A Advanced Liability Insurance and Risk Management 2023 Lecturer: Ms Penny Spentzouris Lecture 5 SPECIFIC LIABILITY INSURANCE CONTRACTS-GENERAL INSURANCE (PUBLIC) LIABILITY Public liability policies provide the broadest form of liability cover and for this reason are also known as general liability policies in the UK or comprehensive general liability insurances (CGL) in the US. Various risks insured under separate contracts are usually excluded e.g. motor 3rd party liability, employers’ liability and professional indemnity. Until the middle of the 19th century, public liability insurance was considered to be against public policy in that it undermined the deterrence objective of liability rules. In England, the enactment of the Employers’ Liability Act 1880 helped accelerate the growth of public liability insurance. The earliest form of public liability insurance in the UK was insurance of carriage drivers and the pioneer in this field was the London and Provincial Carriage Insurance Company Ltd which began issuing these policies in 1875. Early PL policies covered damage to the carriage itself, death of the horse and 3rd party risks. The first PL insurances for general trade risks were written soon after the enactment of the Employers’ Liability Act 1880. This Act directly led to the development of employers’ liability insurance but at the same time, it created a demand for wider liability cover since accidents at the workplace could cause injury to people other than employees. Trades such as construction were some of the first to seek this wider form of liability cover due to the dangers that their activities posed to the public. Legal Basis of Public Liability Claims A public liability claim generally arises from an accident connected with defects in the insured’s business premises, or accidents connected with his business activities. Injury or damage may arise from the activities of individual employees for which the employer will be vicariously liable. The legal foundation for most PL claims is negligence. PL claims based on breach of statutory duty are less common except in the area of occupational health and industrial safety. The Operative Clause of a PL policy may run along the following lines: The Company will indemnify the Insured against legal liability to pay damages and claimant’s costs and expenses in respect of accidental: (a) Bodily injury to any person (b) Loss or damage to material property 1 Occurring within the Geographical limits during the Period of Insurance in connection with the Business. Legal liability to pay damages For a PL policy to respond there must be legal liability on the part of the insured to compensate the injured party. Such legal liability usually follows a court ruling or an arbitration award or it can arise from an out of court settlement reached after it has become clear that the insured’s liability to the injured party is virtually incontestable. Allied to this is the requirement often found in liability and other insurances that the insured must take steps to mitigate loss and failure so to do may result in indemnity being withheld by the insurer. However, enforcement of the duty to mitigate loss can be a very tricky proposition under a liability policy. In the English case of Corbin v Payne [1990] a contractor facing a nuisance action by a neighbor in respect of noise and vibrations made payments to the neighbor in order to prevent from seeking an injunction against the continuance of the contractor’s activities. The contractor sought to recover these payments under his liability policy arguing that they were incurred in an effort to mitigate loss. It was held that the payments did not fall within the contractor’s liability policy as they had not been in respect of legal liability. In Yorkshire Water Services Ltd v Sun Alliance & London Insurance Plc [1997] 2 Lloyds Rep. 21 the insured took steps to prevent pollution in respect of which it would have been legally liable and sought indemnification of the costs incurred in the process from its insurer. The Court of Appeal had to consider whether the Sue and Labour clause found in marine and aviation insurance could be implied into a non-marine policy. If such implication were possible it would also be arguable that the insurer was under a corresponding duty to indemnify the insured for reasonable costs incurred in mitigation of the loss. NB sue and labour clauses in marine and aviation insurance generally provide that the insured has a duty to take reasonable measures to prevent or mitigate loss and any expenditure incurred in pursuance of this duty is recoverable from the insurer. The Court of Appeal’s view in this case was that a lot depended on the wording of the relevant cover. With specific reference to this case, the court concluded that the policy sought to cover only legal liability and not costs of legal liability. What appears to emerge from this judgment is that the insured is not under any obligation to avoid or mitigate liability and in the same way the insurer is under no implied obligation to indemnify the insured where the insured unilaterally chooses to incur expenditure in mitigating a loss. Because of this position if a liability policy contains a clause requiring the insured to take reasonable steps to avoid loss such a clause will be construed merely as requiring the insured to avoid acting recklessly. Merely showing that the insured acted negligently will not be enough to justify the insurer avoiding liability-Fraser v Furman (Production) Ltd [1967] 1 WLR 898. ‘in respect of accidental (a) bodily injury to any person (b) loss or damage to material property The wrongful act of the insured must cause some physical damage to life, limb or property. Further the compensation awarded to the claimant may partly reflect financial loss suffered by the claimant as a consequence of the damage e.g. loss of earnings in the case of a claimant who has been injured or loss of profit in the case of a business whose premises have been damaged. In this connection the use of the words ‘in respect of’ in the operative clause is significant as it is intended to signify that liability for consequential losses of this type is covered by the policy. What is an accident for purposes of liability? 2 Featuring in the operative clause is the word ‘accidental’ and the purpose here is to make it clear that the insurer will only indemnify the insured where he is liable for loss or damage which is unintended and unexpected in conformity with the basic purpose of insurance. If the word is excluded from the operative clause then the insurer must remember to include among the exclusions liability for deliberate acts and omissions. A question often arises whether a liability insurer would be liable where the consequences of the insured’s act are reasonably expected or are such as could have been foreseen. The classic but controversial British case of Gray v Barr, Prudential Assurance Co. [1971] 2 QB 554 is illustrative. In this case, the insured shot and killed his wife’s lover. He had deliberately taken a loaded gun with the intention of frightening his rival. A scuffle between the two men started on the stairs and the gun went off killing the victim. The dead man’s wife sued the insured who forwarded the claim to his insurers claiming that they were liable to indemnify him under a personal liability section of his household policy. The court held that the loss was not caused by an accident as required by the policy because the death was a foreseeable consequence of Barr’s intentional act of taking a loaded gun into Gray’s house. In the Australian case of Robinson v Evans [1969] VR 885 a crop of brussel sprouts was damaged in two separate incidents where fluoride had been released from the insured’s brickworks. The insurers whose policy covered liability ‘damage caused by accidental means’ were held not to be liable in respect of the first incident because the insured’s managing director knew of the danger and the damage was thus held not to have been unexpected. However, insurers were held liable for the second incident that occurred after the height of the brickworks chimney had been raised to address the problem. In this case, the damage was unintended and unexpected since it occurred after it was thought to have been prevented. The distinction between accidental and non-accidental losses also becomes relevant in cases where damage accumulates from a continuous and gradually operating cause. This is often the case in pollution cases. Pollutants may be released gradually over a long period of time until they reach dangerous levels and in such cases the questions arises whether such damage is accidental or not. Such damage may still be accidental especially if it was initially unforeseen. On the other hand it can be argued that such occurrences are not accidental since there is no specific incident or event which can be properly be identified as an accident. ‘Occurring during the Period of Insurance’ PL policies commonly the occurrence wording. This means that the injury, loss or damage suffered by the 3rd party must occur in the period of insurance. The cover provided by PL insurance is therefore partly retrospective (run-in) in the sense that the insurer may be become liable to indemnify the insured for losses occurring in the period of insurance but arising from events or acts committed before the insurer came on risk and when perhaps another insurer carried the risk. The insurer is not liable for damage occurring after the policy has elapsed but they are liable for losses which become manifest after the period of insurance has expired provided that damage occurred in the period of insurance. The occurrence wording is very vulnerable to the long-tail phenomenon which characterizes some liability losses. Some policies may incorporate a definition of what constitutes an occurrence. The occurrence wording becomes problematic when the resultant loss is a latent one e.g. a latent illness such as asbestosis or property damage which is cumulative and gradual such as that caused by pollution. In such cases the occurrence wording often lacks precision in the determination of the precise date of the occurrence. Depending on the wording of the contract, 3 an ‘occurrence’ could be the date of the actual damage/injury (which could span a long period); or the whole period of exposure to agents causing the damage/injury (which again may span over a long time frame); or the time when the symptoms become manifest; or even the date of actual diagnosis. Not surprisingly, there is a large body of case law on what constitutes an occurrence. US courts for instance have adopted interpretations which have seen all insurers who participated on the risk at some stage becoming liable because of the increase in number of disputes among insurers whose policy wordings may incorporate different triggers but all of them arguing that their wording excludes the loss. ‘Within the Geographical limits’ Usually PL policies stipulate the geographical territory to which the policy relates. This simply means the losses must occur within the stipulated territory for the policy to respond. Allied to this is the jurisdiction clause which is also found in liability policies. This may provide that claims must be brought against the insured in the country of the insurer issuing the policy. The jurisdiction clause avoids the problem of having to defend claims in some overseas jurisdiction. An alternative to the jurisdiction clause is for the policy to exclude liability for damages won in an action in any country outside the insurer’s home country. The exclusion may apply to specific territories e.g. the US and Canada. POLICY EXCLUSIONS PL policies are subject to a wide range of exclusions. Since they provide general liability cover it is necessary to exclude both uninsurable risks and those which are covered under more specific policies. Some of the common exclusions under PL policies are: Liability for injury to employees in the course of their employment This risk falls under employers’ liability insurance. The PL policy will define the word ‘employee’ to avoid any overlap. Liability arising out of the ownership, possession or use of mechanically propelled vehicles This risk is covered under motor 3rd party liability insurance. Other exclusions included in PL policies are: • • • • • Liability arising from the ownership; Liability for any advice, design, specification or treatment provided for a fee; Liability from any product supplied; liability for pollution and contamination; Liability for defective workmanship; and contractual liability. Liability arising in contract. The meaning of this exclusion was considered in Omega Proteins Ltd v Aspen Insurance UK Ltd [2010]. In this case, the court pointed out that for this exclusion to apply it is necessary to consider what liability would have attached in the absence of a contract. If liability would still have attached in tort or delict in the absence of the contract between the parties on the transaction in question, the PL policy will respond to the claim. This exclusion seeks to keep liability under PL policies in line with the general purpose of liability insurance which is to indemnify the insured for liability arising in delict or tort only. 4 Public liability risk assessment What are some of the relevant factors when assessing the level of public liability risk on any given location? It should be noted that in this context we are interested in those aspects of the insured’s business which may result in him/her being legally liable to a 3rd party. For most businesses, risk assessment focuses on two broad types of risk for public liability purposes namely: (a) The premises risk i.e. what is the potential for an accident happening at the insured’s premises? This could result from defects in or dangers present at the premises. (b) The work-away risk arising from work carried out by the insured elsewhere e.g. contractors going to lay underground cables in another part of the city. When assessing the premises risk the following considerations may have to be weighed among others: • • • • • • • The age and condition of the buildings or plant in question; The degree of danger presented by the activities conducted at those premises; The degree of public access and the extent to which 3rd parties generally are likely to be present; The presence of other tenants or occupiers in the premises; The nature and proximity of surrounding property to the insured’s premises; The insured’s annual turnover. Turnover gives a good indication of the degree of activity at the insured’s business. Since accidents are likely to arise from the insured’s activities turnover becomes a good indicator of the potential exposure. Usually the turnover is used as a rating base; and The legal and social environment. However, because of the long tail nature of some liability claims, injuries, claims information and the general legal environment may change over time. A PL contract written today is not priced on grounds of the current cost of claims but on an estimate of the claims costs when claims under that contract will on average be paid out i.e. run-off period. As a consequence PL premiums are based on the expected growth of average claims costs over the average duration of the claim and then discounted for the expected investment income on claims provisions over that period. Under-pricing and over-pricing occurs when these variables that go into premium computation prove to be seriously inaccurate. Insurers find themselves in a very difficult position when it comes to setting PL and other liability business premiums because they must set the premium now before they know the bulk of the associated costs hence the potential for underpricing is very high. Who Needs Public Liability Insurance? Any firm whose business involves some form of interaction with members of the public faces exposure to the sort of risk that public liability insurance covers. Consider a local authority in the form of the City of Johannesburg. It offers a range of services to the public that can cause it to be sued if those services are negligently provided leading to injury e.g. failing to maintain facilities used by children in a public park run by the authority. People operating in the hospitality industry also need public liability insurance. A patron can be injured on the premises of a hotel due to the fact that some facilities thereat are not adequately maintained. A university 5 may also require public liability insurance. The range of potential buyers of public liability insurance is thus very extensive. 6