Chapter 26, Rejda (13th ed.) Commercial Liability Insurance

Chapter 26, Rejda (13th ed.) Commercial Liability Insurance
General Liability Loss Exposures Commercial General Liability (CGL) Policy Employment-related Practices Liability (EPL) Insurance Workers compensation insurance Commercial Auto Insurance Aircraft Insurance Commercial Umbrella Policy Businessowners policy (BOP) Professional Liability Insurance Directors and Officers (D&O) Liability Insurance

Categories of the Law Sources of Law: Branches of Law: Common law
Statutes Branches of Law: Criminal Civil Contract Tort: A tort is a legal wrong for which the court allows a remedy in the form of money damages (損害賠償).

Types of Legal Liability
The person who is injured (plaintiff) by the action of another (tortfeasor) can sue for damages. Plaintiff (原告) vs. Defendant（被告） P vs. D

Damages (損害賠償) Compensatory Damages Punitive Damages Special damages
lost wages medical expenses General damages pain and suffering compensation loss of consortium Punitive Damages punishment egregious conduct

McDonald’s Hot Coffee Case A Common Understanding
Liability Exposures McDonald’s Hot Coffee Case A Common Understanding A woman purchased hot coffee at the drive-through window of a McDonald’s Restaurant. She spilled the coffee on herself while driving and was burned. She sued McDonald’s for compensation for her injuries (about $11,000) and was awarded nearly $3 million.

Liability Exposures: McDonald’s Hot Coffee Case
A Complete Account of the Facts See the handout.

Liability Exposures Exposures Peril? Hazard?
Expenditure of TIME and MONEY Investigate, Negotiate, Defense, Payment Peril? Hazard?

Property vs. Liability Losses
Parties Involved Measurement of Exposure Changing Environment Tail

Insurance Tails:

Joint and Several Liability
What does it mean? Multiple parties are liable One cannot pay, then the others are responsible A Hong Kong case In August 1994, an 80-year-old woman died and 12 other people were injured when a canopy above New Best Restaurant, on the first floor of the Aberdeen building, collapsed due to structural flaws. The collapse resulted in defendants (flat and shop owners) being required to pay damages of HK$33 million in compensation to the victims . The Albert House Incorporated Owners (添喜大廈業主立案法團) met their 15% of the damages but the other four defendants went bankrupt. At the end of the day, the incorporated owners had to share the balance.

General Liability Loss Exposures
General liability refers to legal liability arising out of business operations other than auto or aviation accidents and employee injuries Some important exposures include: Premises and operations liability, arising out of the ownership and maintenance of the premises where the firm does business Products liability, arising out of the manufacturing and sale of products Completed operations liability, arising out of faulty work performed away from the premises after the work or operation is completed Contractual liability, arising out of the assumption of legal liability through a written or oral contract Contingent liability, arising out of work done by independent contractors

Commercial General Liability Policy
The commercial general liability policy (CGL) is widely used by firms to cover their general liability loss exposures The policy comes in two forms: an occurrence form and a claims-made form An occurrence policy covers liability claims arising out of occurrences that take place during the policy period, regardless of when the claim is made A claims-made policy covers only claims that are first reported during the policy period or extended reporting period, provided that the event occurred after the retroactive date, if any, stated in the policy The CGL policy can be written alone or included in a commercial package policy

Section I of the CGL contains three major parts of coverage and supplementary payments Coverage A: Bodily Injury and Property Damage Liability The insurer agrees to pay on behalf of the insured all sums up to the policy limits that the insured is legally obligated to pay because of bodily injury or property damage The bodily injury or property damage must be caused by an occurrence, I.e., an accident, including continuous or repeated exposure to substantially the same general harmful conditions Coverage does not apply when a loss is known or is apparent before the policy’s inception date Coverage includes defense costs, and the insurer has the right to investigate a claim or suit and settle it at its discretion

Coverage A contains a lengthy list of exclusions, including: Expected or intended injuries or damages Contractual liability, with some exceptions Liquor liability Workers compensation and employers liability Pollution, with some exceptions Aircraft, auto, and watercraft, with some exceptions Mobile equipment War Damage to property owned, rented, or occupied by the insured Property damage to the insured’s product or work Damage to impaired property that is not physically damaged Recall of products Personal and advertising injury Electronic data

CGL Exclusions: QE Quality Electric (QE) is an electrical contractor that is insured under a CGL policy. Explain whether each of the following losses would by covered under its CGL. A QE employee, while driving a piece of mobile equipment to a job site, negligently damaged a traffic light. The city made claim against QE for the cost of repairs. QE brought a fuel tank, containing 200 gallons of gas, to the job site. The tank, which was corroded, ruptured and spilled its contents. QE was liable for cleanup costs. An employee of QE was injured on the job and collected workers compensation benefits. The employee’s spouse then made claim against for loss of consortium.

CGL Exclusions: S&S Seafood & Spirits (S&S) is a bar and grill insured under a CGL policy. Explain whether each of the following losses would by covered under its CGL. S&S provides its customers with valet parking in a lot on S&S’s premises. While one of S&S’s employees was parking a customer’s car, he negligently struck and injured a pedestrian. Claims were made against S&S by the following persons. The pedestrian, for bodily injury (P.602) The customer, for damage to her car (P.602) The employee, for injuries he sustained in the accident An S&S’s bartender served liquor to a person who was obviously intoxicated. After the patron left S&S, he attempted to drive home and injured another driver, who sued S&S.

Coverage A includes coverage for fire legal liability Covers fire damage to premises rented to the named insured or temporarily occupied by the named insured with the permission of the owner A separate limit of coverage applies Other damage to property rented by the insured is NOT covered

Coverage B: Personal and Advertising Liability The insurer agrees to pay those sums that the insured is legally liable to pay as damages because of personal and advertising injury The policy covers legal liability resulting from: false arrest malicious prosecution wrongful eviction or entry slander violation of privacy copyright infringement

Coverage C: Medical Payments The insurer will cover the medical expenses of persons who are injured in an accident on the premises or on ways next to the premises, or as a result of the insured’s operations Expenses must be incurred within one year of the accident Payments are made without regard to legal liability Supplementary Payments: Coverages A and B In addition to the policy limits, coverage includes: All expenses incurred by the insurer Up to $250 for the cost of a bail bond Up to $250/day for actual loss of earnings by the insured Prejudgment interest

Section II of the CGL indicates the individuals and organizations that are considered “insureds” If designated in the declarations, insureds include: Owner and spouse if a sole proprietorship Partners, members, and their spouses if a partnership or joint venture Members and managers if a limited liability company (LLC) Officers, directors, and stockholders if a corporation A trust and trustees, but only with respect to their duties as trustees Insureds also include persons not named in the policy: Volunteer workers acting for the organization Employees acting within the scope of employment Any person or organization acting as a real estate manager A legal representative if the named insured should die Any newly acquired or formed organization, other than a partnership, joint venture or LLC

Section III of the CGL contains the coverage limits The general aggregate limit is the maximum amount that the insurer will pay for the sum of the following: Damages under Coverage A (except for amounts paid for products-completed operations hazard), damages under Coverage B, and medical payments under Coverage C The policy contains a separate products-completed operations hazard aggregate limit A personal and advertising injury limit is the maximum paid under Coverage B An each-occurrence limit is the maximum amount the insurer will pay for the sum of damages under Coverage A and medical expenses under Coverage C arising out of any one occurrence The damage to rented premises limit is the maximum amount paid for damages under Coverage A due to a single fire The medical expense limit is the maximum amount paid under Coverage C because of a bodily injury sustained by any one person

Exhibit 26.1 Illustration of the CGL Limits of Insurance

Example of CGL 6 Limits Sharon operates a sporting goods store in a rented location at a shopping mall. She is insured under a CGL policy with the following limits: General aggregate limit $1,000,000 Products-completed operations aggregate limit $1,000,000 Personal and advertising limit $250,000 (Coverage B) Each-occurrence limit $300,000 (Coverage A and C) Fire damage limit (any one fire) $100,000 Medical expense limit (any one person) $5,000

CGL Example: Sharon’s Sports Store
The propane tank that Sharon kept in the store exploded. Indicate the dollar amount, if any, that Sharon’s CGL insurer will pay for each of the following losses: Three customers were injured by flying debris with medical expenses of $6,000, $7,500, and $5,000, respectively. A fire resulted from the explosion. Property damages are $50,000. The store had to suspend operations for three months. Sharon’s lost profits are estimated to total $20,000. She had continuing expenses of $10,000 during the period of suspension.

Section IV of the CGL states the various conditions that apply to the coverage form For example, this section contains provisions for dealing with bankruptcy, and the duties in the event of an occurrence Section V of the CGL contains the definitions of various terms used in the policy Some terms defined in the policy include “advertisement”, “hostile fire”, and “volunteer worker”

The ISO claims-made policy is similar to the occurrence policy with the major exceptions of: Payment of claims is on a claims-made basis The policy covers only those claims that are first reported during the policy period The event must occur after any stated retroactive date It contains an extended reporting period provision The purpose is to provide coverage under an expired claims-made policy for claims first reported after the policy expires The basic extended reporting period, with two separate reporting “tails” is automatically provided in certain circumstances (e.g., cancellation of coverage) The first tail is a five-year period after the policy expires Covers events that occur during the policy period, and are reported to the insurer, but a claim may not yet be made The second tail is a 60-day period after the expiration date Covers events that occur during the policy period that the insured may not be aware of

Employment-related Practices Liability (EPL) Insurance
Under the EPL insurance coverage, the insurer agrees to pay damages resulting from an “injury” arising out of: Demotion or failure to promote Wrongful termination Negligent hiring or supervision Retaliatory action against employees Coercing an employee to commit an unlawful act Work related harassment Employment-related libel Other work-related verbal, physical, mental, or emotional abuse, such as gender discrimination

Employment-related Practices (EPL) Liability Insurance
The form includes a co-payment provision that requires the insured to pay part of the damages and legal defense costs up to some maximum limit The form provides for a legal defense Included as part of the policy limit A claim cannot be settled without the insured’s consent Exclusions include criminal acts, contractual liability, workers compensation, and violation of laws applicable to employers, such as the Age Discrimination in Employment Act Interest in this coverage is increasing due to an increase in suits against employers for sexual harassment

Workers Compensation Insurance
Workers compensation insurance provides medical care, cash benefits, survivor benefits, and rehabilitation services to workers who are injured or die from job-related accidents or disease Benefits are paid on the principle of liability without fault The workers compensation and employment liability policy contains three parts: Part One: Workers compensation insurance Part Two: Employers liability insurance Part Three: Other-states insurance

Under Part One, the insurer agrees to pay all workers compensation benefits and other benefits that the employer must legally provide to covered employees who have a job-related injury or an occupational disease There are no policy limits. The insurer pays all benefits required by state law The employer must reimburse the insurer for any payments that exceed regular benefits in certain cases, e.g., willful misconduct by the employer

Under Part Two, the insurer agrees to pay those sums that the insured is legally liable to pay as damages for worker injuries that are not compensable under Part One This coverage is needed in some states where workers compensation is not required for smaller employers Employees who are injured must sue for damages Also, an employee may sue for injury caused by an accident at the job site, but the injury is not considered work related The coverage contains many exclusions including intentional bodily injury by the employer

Part Three provides other-states insurance The employer is covered for workers compensation claims arising in states not listed on the information page (declarations page) Part One covers claims arising in any states listed on the information page Part Three coverage applies only if one or more states are listed on the information page Workers compensation insurance provides economic security to workers who are disabled by a job-related accident or disease Weekly cash benefits are paid during the period of disability; medical care is unlimited and rehabilitation and survivor services are available

Commercial Auto Insurance
The ISO business auto coverage form is used to insure commercial auto exposures There are ten numerical classifications or “symbols” for covered autos, e.g., 1 for any auto; 2 for owned autos only; 7 for specifically described autos, etc. Coverage of newly acquired autos depends on the symbols selected The form includes liability and physical damage coverage It includes limited liability for pollution losses Options for physical damage coverage include comprehensive, specified cause-of-loss, and collision Coverage for towing and labor costs can be added

Commercial Auto Insurance
The garage coverage form is a specialized form for auto dealers The insurer will pay all sums that an insured must legally pay as damages because of bodily injury or property damage caused by an accident in the course of garage operations Garage operations includes garage business locations, autos covered under the form, and all operations necessary or incidental to a garage business Damage to property of others in the insured’s care, custody, or control are excluded Adding garagekeepers coverage can eliminate this exclusion There is no coverage for property damage to any of the insured’s products if the product is defective at the time it is sold Physical damage insurance on covered autos can be included

Example of Business Auto Insurance
Best Appliance Store has a business auto policy with symbol 1 for liability coverage and symbol 7 for collision and comprehensive. State each of the following losses would be covered under Best’s policy. (a) Helen, an employee of Best’s drove her own car to pick up a needed repair part for Best’s. In the process, Helen negligently injured another driver, who made claim against (1) Helen and (2) Best’s. (b) While using a hand truck to move a washing machine from a delivery truck to a customer’s flat, an employee of Best’s damaged a wall in the flat building.

Example of Business Auto Insurance
Best Appliance Store has a business auto policy with symbol 1 for liability coverage and symbol 7 for collision and comprehensive. State each of the following losses would be covered under Best’s policy. (c) Alvin, a service rep employed by Best’s, was transporting a customer’s refrigerator on a truck to Best’s warehouse for repairs. Because Alvin neglected to tie down the refrigerator, it fell off the truck while in transit and was destroyed. (d) Best’s acquired an additional delivery van and did not notify the insurer until the van was destroyed by fire, six months after the van was acquired.

Aircraft Insurance Most states apply the common-law rules of negligence to aviation accidents Some states have absolute or strict liability laws that hold the owners or operators of aircraft absolutely liable for aviation accidents Absolute liability is imposed on commercial airlines for aviation accidents that occur during international flights Aviation insurance is highly specialized coverage and is underwritten by a small number of insurer organizations Associated Aviation Underwriters (AAU) provides coverage for private business and pleasure aircraft Includes coverage for physical damage to the aircraft and liability coverage for property damage and bodily injury arising out of the ownership of the insured aircraft

Commercial Umbrella Policy
A commercial umbrella policy can protect a business against catastrophic liability judgments The ISO commercial umbrella policy pays the ultimate net loss in excess of the retained limit for bodily injury, property damage, and personal and advertising injury to which the insurance applies The ultimate net loss is the total sum the insured is legally obligated to pay as damages The retained limit refers to (1) the available limits of underlying insurance listed in the declarations, or (2) the self-insurance retention, whichever applies If a loss is covered by an underlying insurance contract, the umbrella policy pays only after the underlying limits are exhausted If the loss is not covered by any underlying coverage, the insured must satisfy a self-insured retention (SIR)

Insureds are required to carry certain minimum amounts of liability coverage before the umbrella insurer will pay any claims The form contains a lengthy list of exclusions for bodily injury and property damage liability, including: Expected or intentional injury Liquor liability Pollution Liability arising out of professional services The form also contains a list of exclusions for personal injury and advertising liability, including: Criminal acts Failure of the product to perform as advertised Employment-related practices, such as harassment

Coverage above limits on other primary policies covering multiple exposures. Example: (Fred Inc. has the following set of policies:) An auto liability policy providing $1 million excess coverage above a $100,000 SIR per occurrence. (Insurer A) A products liability policy providing $10 million excess coverage above a $1 million SIR per occurrence. (Insurer B) An umbrella policy providing $20 million of coverage per occurrence, excess of liability limits on the other two primary policies. (Insurer C)

Suppose Fred Inc. incurs a $10.1 million auto liability loss and a $15 million products liability loss during coverage period. How would those four firms apportion the losses? Amount Insurer of loss Fred Inc. A B C Auto liability loss Products liability loss Total loss

Professional Liability Insurance
Physicians Liability Insurance Errors and Omissions Insurance (E&O) Accountants Professional Liability Insurance (or under E&O Form) Directors and Officers Insurance (D&O)

Physicians Liability Insurance
1. Broad coverage 2. Liability not restricted to accidental acts of the physician 3. Protection against claims arising out of negligent acts of employees 4. Maximum limit per medical incident and an aggregate limit for each coverage 5. Not a substitute for general liability insurance 6. Current forms permit the insurer to settle without the insured's consent. 7. Extended reporting period can be added.

Professional liability insurance is available for certain business professionals to provide protection against a lawsuit involving a substantial error or omission The physicians, surgeons, and dentists liability coverage form covers these professionals for acts of malpractice or omission resulting in harm or injury to patients Liability is not restricted to accidental acts of the physician or surgeon. The policy also covers the physician for liability arising out of negligent acts of an employee Current forms permit the insurer to settle a claim without the physician’s or surgeon’s consent An extended reporting period endorsement can be added to cover future claims arising out of incidents that occurred during the policy period

Errors and omissions insurance provides protection against loss incurred by a client because of negligent acts, errors, or omissions by the insured This coverage is purchased by professionals who provide advice to clients, such as: insurance agents and brokers travel agents real estate agents stockbrokers attorneys consultants engineers, and architects The policies are generally issued on a claims-made basis, covering only claims made in the current policy period Claims that result from dishonest, fraudulent, criminal or malicious acts by the insured are specifically excluded

Directors and Officers (D&O) Insurance
A directors and officers (D&O) liability policy provides financial protection for the directors and officers and the corporation if the directors and officers are sued for mismanagement of the company’s affairs Typically, the policy agrees to pay damages on behalf of directors, officers, and employees because of a wrongful act D&O policies are written on a claims-made basis Common exclusions include bodily injury and property damage, libel and slander, personal profit, deliberate dishonesty by the insured, and illegal discrimination

D&O Lawsuits… 《新财经》2005年3月 “中国概念股”海外集体诉讼 (class action)
新浪（Nasdaq: SINA）：中航油（CAOLF.PK）： UT斯达康（Nasdaq: UTSI）：中国人寿（NYSE: LFC）：网易（Nasdaq: NTES）：中华网（Nasdaq: CHINA）：

Who is Under Fire? Federman & Sherwood Announces That a Securities Class Action Lawsuit Was Filed Against China Life Insurance Company Limited, Wednesday April 14, 6:35 pm ET OKLAHOMA CITY, April 14 /PRNewswire/ -- On March 16, 2004, the class action lawsuit was filed in the Southern District of New York against China Life Insurance Company Limited (NYSE: LFC - News). The complaint alleges violations of federal securities laws, including allegations of dramatically overstating revenues and concealing China Life Insurance Company Limited's true prospects. The lawsuit further alleges that defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5, thereby issuing a series of material misrepresentations to the market. The class period is from December 22, 2003 through February 3, 2004. Lawsuits dismissed & plaintiffs drop the lawsuit … Jan. 8, 2009

Enron … 兩保險商入稟要求解除安然 D&O 保險合約 (2002/02/22)
《紐約時報》報道，美國皇家保險公司和聖保羅水星保險公司分別入稟曼哈頓破產法庭，兩家保險公司指，它們是根據嚴重失實的資料與安然訂立承保合約，故要求法院判它們毋須按照保單，為安然董事及高層遭控告而給予賠償。安然董事或需承擔法律費用律師指，如它們獲判毋須履行保單條款賠償，另外九家承保安然董事及高層責任的保險公司或會跟隨。安然及其董事和高級人員，可能要自行承擔股東索償及有關的律師費。香港恆隆(0010)董事長陳啟宗較早前已辭任安然董事一職，但仍須面對股東訴訟。報道指，安然的董事及高級職員責任保額為3.5億美元(27.3億港元)。然而，紐約律師行H.E.W & M主管保險行業案件的喬伊斯認為，保險公司不容易說服法官判它們得直。它們須證明，安然購買保險時提交的資料含有重大誤導。 Enron case settled in 2005: 10 directors paid $13m; D&O Insurer paid $155m.

Liability Policies @ CUHK
Public Liability Insurance HK$20,000,000 per occurrence / unlimited in aggregate Medical Malpractice Liability Insurance HK$40M per occurrence / HK$80M in aggregate Directors & Officers Liability HK$20M any on loss and in the aggregate Employees’ Compensation (HK$200M); Professional Indemnity; Motor Vehicle Third Party Liability, Marine Liability, Boiler Explosion Liability; Excess Liability (HK$363M)

Businessowners Policy
The ISO businessowners policy (BOP) includes liability coverage that is similar to the CGL form The coverage includes: Business liability Medical expenses Legal defense Although the BOP excludes professional liability, some professional liability endorsements are available for: retail drugstores barbers and beauticians funeral directors optical and hearing aid establishments printers veterinarians

Example: Angela’s BOP Angela owns and operates a small retail food store in Shatin shopping center. The store is insured for liability coverage under a BOP policy. Indicate whether the following situations are covered under Angela’s BOP. A clerk accidentally injures a customer with a shopping cart. Both Angela and the clerk are sued. A customer slips on a wet floor and breaks a leg. Angela has a customer arrested for shoplifting. The customer is innocent and sues for damages. A woman returns a spoiled package of gourmet cheese and demands her money back. Angela has a Christmas party for her employees after the store closes. One employee gets drunk and injures another driver while driving home. The injured sues both Angela and the employee.

Chapter 26, Rejda (13th ed.) Commercial Liability Insurance

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Chapter 26, Rejda (13th ed.) Commercial Liability Insurance

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