Nature of Policy
Liability insurance indemnifies the insured person against legal liability to third parties. The liability is for personal injury, death, damage to or loss of property and financial and economic loss. The law of tort / civil wrongs defines circumstances in which a person may become liable to compensate another. Negligence is the most pervasive tort.
A liability insurance policy is a contract of indemnity. This means that the insured’s rights under the policy arise if becomes liable to a third-party. In the absence thereof, he has suffered no loss. The extent of the loss determines the insurer’s maximum liability under the policy.
Insurance policies provide two broad types of cover. The policy may provide cover in respect of the occurrence of insured risk during the period of the policy. In contrast, a claims made policy, commonly found in professional negligence policies, provide cover in respect of claims made and circumstances reported to the insurer during the period of cover.
The terms of the policy will determine the extent to which the insured liability is covered. Where the insured is made liable for types of damages outside the terms of the policy, the policy may not apply to this particular loss.
In strict terms, the right to enforce the policy arises when the liability of the insured has been established to the third-party. This earlier stricter position was modified in equity so that loss is deemed suffered under the policy, once liability and its extent are ascertained whether in proceedings or by a settlement.
Modern policies may seek to provide that no payment will be made under the policy until the liability is established. However, the courts are likely to interpret such wording so that it gives effect to the reasonable expectations of the insured.
It is not usually possible to insure against an intentional or unlawful act of the insured. Insurance primarily covers liability for unintended acts and accidents, where there is a sufficient degree fault, typically negligence, to make the insured liable in the civil courts for his actions or omission.
The wrongful acts of the insured will not usually prevent innocent third parties from obtaining the benefit of the insurance. This is effectively based on public policy, for the benefit of persons who suffer civil wrongs. The liability of the insured at law is based in general legal principles. In legal proceedings, it is not permissible to disclose the availability or non-availability of insurance to the court, or to the jury, if there is a jury.
Liability policies cover liability to pay damages for compensation; together with costs and expenses incurred and reclaimed by the third party claimant. Policies may exclude punitive or exemplary damages. They are rarely awarded. They may be awarded where the defendant/insured has acted in a way which the courts strongly disapproves of, and seeks to punish.
Exemplary damages may be awarded in the case of oppressive or arbitrary behaviour by governmental authorities. They may be awarded where the defendant’s conduct has been calculated to make a profit which may exceed compensation payable.
Aggravated damages are compensatory damages, increased due to oppression or the manner in which the wrongful act has been committed. Conduct after the event, such as a refusal to apologise, may be taken into account.
Additional damages may be awarded by way of punitive damages or exemplary damages. This may be due to the egregious behaviour of the defendant and would usually be outside the scope of cover.
Conduct of Claim
The insurer will usually d deal with the claim in the event of it arising. Liability policies usually provide that the insured may take over the conduct of the claim. The insured must cooperate as a condition of the indemnity.
Claims must generally be notified within a particular time. The insured must not take steps to compromise the claim without the consent of the insurer.
The insurer may be entitled to defend and settle the claim in its absolute discretion. It is not obliged to act at the insured’s direction. In some policies, there may be provision obliging an insurer to defend where a Senior Counsel gives a positive opinion on the merits.
Where a person is indemnified under an insurance policy, the relevant services, in particular, legal services, are deemed to be provided to the insured for VAT purposes. This may allow deduction by them in respect of the VAT element, provided they are recoverable under general VAT principles.
Limit of Cover
Save where unlimited liability is required by law, insurance policies will usually provide a maximum limit of liability. This does not usually apply to costs.
The limit may be referable to an accident or when a series of events referable to a single cause. Alternatively, it may be an aggregate limit applicable in any period of insurance. When the insurer pays the maximum amount, it is not obliged to make any further payments under the policy.
Where liability is insured under a number of policies, they usually provide that the insurer can claim contribution from other insurers, proportionately or rateably.
Obligations of Insured
Liability policies commonly require that the insured must take reasonable precautions to prevent the insured risk from occurring. This may require maintenance of plant, equipment, premises. It may require that positive steps be taken. It may require that continuing state of affairs to apply. However, breach of the policy is usually interpreted to apply, only where the insured has been reckless or intentionally.
The courts interpret such clauses to allow avoidance of liability by the insurer, only where there has been deliberate, willful or reckless behaviour on the part of the insured. The purpose is to mitigate the risk of moral hazard.
Insurance premium policies may oblige the insured to keep records of all relevant information and allow the insurer to inspect them. They may require a statement or declaration so that the premium may be calculated. Most insurance policies contain an arbitration condition in the event of a dispute between the insurer and the insured
Arbitration conditions will be invariably incorporated into insurance policies. Questions regarding the avoidance of the policy itself are outside the scope of the insurance contract itself. The insured may have a right of action for breach of contract where the insurer purports, wrongfully to avoid it.
Liability for Costs
Policies usually cover legal costs awarded against the insured. The costs will often be a very significant part of the entire claim. The policy may cover costs incurred by the insured in relation to the defence of the claim with the insurer’s consent. There will usually a limit on the amount insured. This may be expressed to apply to the principal liability and/or cost either together, or separately. This is a matter of interpretation of the policy.
There have been cases, which suggest that where an insurer defends a matter and thereby exposes the insured to liability above the policy limits, it may be liable for those costs under the policy, notwithstanding that they exceed the policy limit. This will depend on the interpretation of the policy.
The courts will not wish to visit costs incurred primarily by the insurer in defending the matter, which turn out to have been futile, and which could have been avoided by an earlier settlement. The insurer must balance its interest and take account of the interest of the insured. There may be conflicts of interest for the insurer.
Insurance policies may cover the insured in relation to cost incurred in summary prosecutions arising out of the insured risks. The policy may cover the costs of coroner’s and other statutory inquiries. The reason is that the failure of representation might otherwise prejudice the insured. Fines and other penal impositions may not be insured, for reasons of public policies. However, relevant legal costs may apply. In some cases, the cost of prosecution awarded against the insured may be covered.
Claims Made or Period of Cover Basis
Most liability policies apply to events occurring within the period of cover. However, a “claims made” basis of policy applies in respect of certain categories of liability insurance, including, in particular, professional negligence policies.
In this latter case, the insurer who insures at the time that the claim is made must meet the liability, notwithstanding that negligent act occurred during the currency of an earlier policy. Such policies apply to a claim made to the insured, or to a relevant event or circumstance, which may give rise to a claim, notified by the insured during the policy period.
The default position is that there should be contribution in respect of the overlapping cover. Contribution may be applicable, notwithstanding that one policy is wider in scope or that is a different type of insurance cover, which happens to cover the same risk in the circumstances.
The apportionment will generally be rateable, with reference to the liability which the insurer would have paid, had there been no other policy in place.
Contribution may arise under the Civil Liability Act. Proceedings must be brought for contribution against another party, who is liable to contribute. A person who he is alleged to be liable to contribute may be brought into an action by a third-party claim. See generally the sections on contribution under the Civil Liability Act.
Subrogation clauses allow the insurer who has paid out on the policy to exercise the rights of the insured, in its name, against third parties who are liable it the insured in relation to the insured risk. The insurer will usually require that it take control of the action. Subrogation requires that the insured is himself indemnified, in taking the claim.
The default principle is that the insured must not interfere with the insurer’s rights of subrogation. He may jeopardise, cover or subject himself to liability if he does so, for example, by a settlement or by making prejudicial admissions.
Subrogation does not involve an assignment of the right to sue. It a right to sue in the name of the insured. This position implies that if the insured no longer exists, the action may not be taken.
McMahon Legal, Legal Guide Limited and Paul McMahon have no liability arising from reliance on anything contained in this article nor on this website.