Introduction to Liability Insurance

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Homeowners Liability Insurance

Included in Section ll of all Homeowners Policies providing protection under three coverage parts:

Coverage E(Personal Liability).

Coverage F (Medical Payments to Others),

and Coverage G (Damage to Property of Others).

It is important to note that coverage is only for losses that occurred on the insured location.

Completing this lesson will allow you to:

Define negligence and recognize its role in a liability case
Distinguish between three types of Liability Policy Limits
Defend a policyholder if a false claim is made against them
Explain the three degrees of legal liability

Liability Insurance: Liability insurance is insurance that provides protection against claims resulting from injuries and damage to people and/or property.

– Liability insurance always indemnifies a third party, never the insured!

– Legal liability can be determined outside of court.

-Only covers people or organizations that are listed as “insured” in the policy.

EXAMPLE

Auto Insurance Policy:

Named Insurance: owner of the car
Insured: someone who uses the car with the owner’s permission

Degrees of Liability

Tort Law suggests 3 types of liability:

Full liability: the insured party is 100% at fault for damages to a third party.
Partial liability: the insured is only partially at fault, or shares fault, with a third party. The third party had some part in their own damages.
No liability: the insured party has 0% or no liability in the damages to the third party.

Liability Policy Limits

Policy Limit: The maximum amount a policy will pay for covered losses.

Three types of liability policy limits:

Single limits
Split limits
Aggregate limits

Single Limit Liability Insurance

Establishes one maximum payout for liability damages caused by the policyholder(s)
The limit applies for each occurrence

EXAMPLE

A Homeowners Policy:

Bodily Injury Liability: $150,000
Property Damage: $50,000

Split Limit Liability Insurance

Establishes three different limits on how much the policy will pay out

Limit 1: maximum payout for bodily injury for each person injured
Limit 2: maximum payout for bodily injuries to multiple persons
Limit 3: maximum payout for property damage

EXAMPLE

If Limit 1 is $40,000, Limit 2 is $80,000, and Limit 3 is $40,000, the split limits will be 40/80/40

Aggregate Limit Liability Insurance

Typically found in commercial liability policies
Establishes two liability limits:
- Limit 1: maximum payout for damages or injury per occurrence
- Limit 2: maximum amount the policy will pay per term

EXAMPLE 1

If limit 1 is $500,000 per occurrence and Limit 2 is $1,000,000 per term, the aggregate limits will be 500,000/1,000,000

EXAMPLE 2

Construction, Inc.’s liability policy

Aggregate limits: 300,000/900,000
Accident causes: $450,000 covered damages
Insurer pays $300,000 (occurrence limit of policy)
Construction, Inc. must pay: $150,000
New limits for remainder of term: 300,000/600,000

Personal Umbrella Insurance

Umbrella insurance is meant to help protect you from large and potentially devastating liability claims or judgments. Personal umbrella coverage comes into play when your underlying liability limits (such as from homeowners, personal auto, or watercraft insurance policy) have been reached. Most personal umbrella policies not only high limits but also broader coverage than underlying personal insurance policies. A condition of umbrella coverage is that the insured must retain certain limits of underlying policies with specified limits. If the loss is covered by one of these underlying policies, the umbrella insurer will only pay after the underlying limits are exhausted.

The personal umbrella policy also typically provides drop-down coverage, which is broader than the underlying policies. When the underlying insurance does not cover a certain loss and the loss is not excluded by the umbrella coverage, the umbrella coverage will “drop down” to cover the entire loss, minus a self-insured retention (SIR). Usually, the retention (which is similar to a deductible) is $250 but can be as high as $10,000. The SIR applies only when the loss is not covered by an existing, underlying policy.

The personal umbrella policy includes coverage for legal defense costs that are not payable by the underlying insurance policies. Defense costs include payment of attorney fees, the premium on appeal bonds, the release of attachment bonds, court costs, interest on the unpaid judgment, other legal costs, and loss of earnings up to a certain amount (such as $250) per day to attend court hearings. Some states require the insurer to offer the insured the option to extend the personal umbrella to uninsured and underinsured motorists protection. This protection is offered as an endorsement, and state laws usually require that the insured submit a written letter to the insurer rejecting the coverage.

Exclusions

Umbrella Insurance protects you against most, but not all lawsuits. There are certain kinds that many policies specifically exclude. Since personal umbrella policies provide broad coverage, the following crucial exclusions are usually included:

Business property and pursuits- Liability arising out of a business activity or business property, other than claims involving an insured’s use of a private passenger automobile.
Intentional injury- An act committed or directed by a covered person with intent to cause personal injury or property damage.
Professional liability- Rendering or failure to render professional services.
Aircraft- All liability arising out of the ownership, maintenance, use, loading, or unloading of an aircraft.
Watercraft- Coverage for large watercraft is excluded except for the insured’s liability for smaller that are normally covered by the underlying homeowner’s policy or for watercraft covered by underlying insurance.
Recreational vehicles- Liability arising out of the ownership, maintenance, or use of recreational vehicles, such as golf carts and snowmobiles, unless there is an underlying insurance.
Transmission of any communicable diseases- Liability that results from the insured’s transmission of a communicable disease.
Directors and Officers- Liability coverage for acts of directors or officers of a corporation except for officers and directors of a not-for-profit organization.
Damage to the insured’s property- Damage to property an insured owns.
Workers compensation- Any obligation for which the insured is legally liable under a workers compensation, disability benefits, or similar law.
Nuclear energy- Applies to insured who are or should be insured under nuclear energy policies.

Umbrella Insurance only protects you from being sued for damage to other people. If you’re the one who gets hurt and needs an expensive operation, it is up to your health insurance to pay for it- and anything the health insurance doesn’t cover still comes out of your pocket. In that case, an umbrella insurance policy can’t help you.

Conditions

These are among the most important conditions in the personal umbrella policy:

The insured must maintain the underlying insurance coverages and limits shown in the declarations. If underlying coverage is not maintained, the policy will pay no more than would have been covered if the underlying insurance was in effect.
The insured must give the insurer written notice of loss as soon as practicable.
The umbrella policy is excess over any other insurance, whether collectible or not.
The policy territory is worldwide.

Purpose of Personal Umbrella Coverage

Umbrella Insurance is not required. It is commonly purchased by people who:

Own property and desire higher limits.
Have significant savings or other assets.
Are worried about liability claims against them when they travel outside the U.S.
Own items that are inherently dangerous such as pools, trampolines, and certain pets.
Engage in activities that increase your chances of being sued, such as:
- Being a landlord.
- Coaching kid’s sports.
- Serving on the board of a nonprofit.
- Volunteering.
- Regularly posting reviews of products and businesses.
- Participating in sports where you could easily injure others(skiing, surfing, hunting, etc.)

What Umbrella Insurance Does Not Cover

Umbrella Insurance protects you against most, but not all lawsuits. There are certain kinds that many policies specifically exclude. For example, many umbrella policies do not cover:

Workers compensation claims against employers
Malpractice lawsuits
Damage caused by a business, or by any business-related activity
The damage that you cause intentionally to any person or property