Introduction to Liability

This topic provides an overview of important insurance concepts which people need to know in order to master liability insurance. We suggest you work through all the questions and answers in the FAQ section as if it were course notes

Question: When is it Custody and Control?
Answer:

How much control does the Insured need to have over an item before the policy considers the item to be in the Insured’s custody and control?

  • Consider the following scenarios:
    • The owner leaves the petrol attendant to wash the window of locked vehicle while buying a magazine at the kiosk.
    • The owner leaves the vehicle with the garage for a week so that they can replace the engine.
  • Policy wordings seldom define the extent of ‘custody and control’. South African law does not provide much by the way of additional clarity either. 
  • It is the position of one legal practitioner that an item can be considered to be in the Insured’s custody or control when the Insured exerts more influence over the item than anyone else does. In other words:
    • While at the Kiosk, the abovementioned vehicle owner still has more influence of the vehicle than what the petrol attendant does. E.g. if the attendant decided to tow the vehicle to another parking bay, the owner would return swiftly and loudly to stop the move. This clearly shows that the vehicle is not in the attendant’s custody or control.
    • While undergoing engine repairs, the mechanic would undoubtedly be able to move the vehicle to a more suitable location in the workshop without interference from the owner. This illustrates that the mechanic has taken the vehicle into his custody.
 
Question: Why are many insurers reluctant to give worldwide cover? (Territorial limits)
Answer:

There are generally four reasons why insurers are reluctant to give worldwide cover:

  • The basis of the law in a foreign country might be very different, exposing the insurer to a greater risk
  • The laws of the foreign country may include regulations limiting or regulating the cover that a non-local insurer may provide
  • The exchange controls could pose a problem when settling claims
  • It might be difficult to provide an adequate claims service in certain countries
 
Question: What are territorial limits, jurisdiction and choice of law?
Answer:
  • Territorial Limits define where in the world the loss can occur. If the territorial limits exclude USA/Canada then a loss arising in the USA would not be covered.
    • The Camargue General Liability policy’s territorial limits exclude losses arising in USA/Canada when the Insured is domiciled there.
  • Jurisdiction defines where a claim may be brought against the Insured. If the Jurisdiction excludes USA/Canada then even though the loss occurred in SA, there would be no cover if the matter was heard in a Canadian court.
    • The CGL policy’s jurisdiction is worldwide except USA/Canada
  • Choice of law defines which court will preside over any disputes between the Insured and the Insurers.
Question: Additional Explanation: Claims-Made and Losses-Occurring Policies?
Answer:

Suppose the Insured committed a wrongful act on 1 Feb 2008 but only became aware of the wrong two years later on 1 Feb 2010 when the legal papers arrived. Would the claim be paid if the cover started on 1 Jan 2010 and ran for the whole of 2010?

Liability insurance is written on either a Losses-Occurring basis or (more commonly) on a Claims-Made basis.

  • If the policy was written on a Losses-Occurring basis then the injury or damage needs to have occurred during the policy period. In the example the damage was done during 2008 so the claim would not be covered.
  • If the policy is written on a Claims-Made basis then the policy needs to be in force at the time the Insured finds out that there is possible claim. Although the Insured became aware of the claim (and reported it to the Insurer) during the Period of Insurance, the event giving rise to the claim could have occurred before the Period of Insurance started.

Will the Claims-Made policy always pay for damage done prior to (but notified of during) the Period of Insurance? Not necessarily, damage done prior to the Retroactive Date (stated in the policy) is not covered. Also, it is important that the Insured was not aware of a possible claim before the inception of the policy. It is important that, prior to the renewal of a Claims-Made policy, the Insured must ensure that the Insurer is made aware of any possible claims.

Question: What is the difference between Claims-Made liability policies and Losses-Occurring policies?
Answer:

Losses-Occurring

Claims-Made

The injury or damage giving rise to the claim must occur during the Period of Insurance

The event causing the claim must occur after the Retroactive Date but before expiry of the policy

The claim1 can be reported at any time during or after the Period of Insurance

The claim1 must be reported during the period of Insurance2

Disadvantages:

  • The claim may only come many years later when the indemnity limit is inadequate
  • The Insurer might stop trading before the claim arises
  • The client might need to keep their policy records indefinitely
  • A gradually operating cause may span the periods of insurance of several differed insurers (each with a different indemnity limit). A dispute may arise as to which insurer ought to pay the loss.
  • The premiums are generally higher because insurers need to provide for claims that may occur many years into the future
  • There is no cover for losses that occur before the period of insurance.

Disadvantages:

  • Today’s mistakes might only manifest themselves as a liability in many years time. By then the insurance market might not be willing to provide the required type of cover

(The most well know example of this is asbestosis.)

NB:

  1. 1.            The Insured must notify the insurers immediately if they become aware that there may be a legal liability to a third party.
  2. 2.            To enjoy cover under a Claims-Made policy, the Insured must first become aware of these circumstances during the Period of Insurance.

 

Question: More about the Retroactive Date and Retroactive Cover
Answer:
  • Retroactive cover provides the Insured with cover for claims arising from events that occurred before the start date of the policy (provided that the Insured did not already suspect there would be a claim).
  • An event giving rise to a claim must occur on or after the Retroactive Date. The policy provides no cover for events which occurred before the Retroactive Date.
  • Sometimes the Retroactive Date coincides with the date the policy started (i.e. the Retroactive Period coincides with the Period of Insurance).
  • There are, however, times when the Retroactive Date is earlier than the policy inception date: the Insured may have cover for liability in respect of events which occurred before the policy started (i.e. before the Period of Insurance) but of which the Insured only became aware during the Period of Insurance.
    For example
  • Retroactive Dates are only found on Claims-Made liability policies. They are not found on Losses-Occurring liability policies.
Question: Camargue policies are issued on a Claims-Made basis (claims made)
Answer:

Since Camargue policies are issued on a claims-made basis it means that:

  • The event causing the claim must occur after the Retroactive Date but before expiry of the policy
  • The Insured must become aware of the possibility of a claim during the period of insurance. The Insured must immediately notify the Insurers if they become aware of a possible claim.
Question: What cover is provided by a general liability policy
Answer:

The cover provided by the policy is found in four sections and a number of extensions

 

Covers the Insured’s liability for:

Sections

Public Liability

Injury or Damage arising in the general course of business. Many claims, if not most, are paid in terms of this section

Pollution Liability

The accidental release of pollutants into the environment

Products Liability and Defective Workmanship

Injury or Damage arising out of the harmful nature of the Insured’s products or out of the Insured’s negligence while working on a product

Negligent Advice

Injury or Damage arising out of free advice given in promotion of the Insured’s products or services

Extensions

Statutory Defence Costs

Legal expenses in defence of a criminal action

Wrongful Arrest

Wrongful arrest, false imprisonment and any related assault caused by the Insured

Defamation

Defamatory statements whether written or verbal

Employers Liability

Employees injured in the workplace

 

Question: What are the parts of a liability policy? (Construction, structure of a policy)
Answer:

The policy wording is made up of the following parts:

  • Preamble – this makes the policy conditional upon the payment of the premium, the truthfulness and completeness of disclosure by the Insured
  • Attestation clause –the underwriter’s signature accepting the risk
  • Operative clause – this clause states what the underwriter’s will pay for
    • This clause is different from the other clauses in that the onus is on the Insured to prove that his claim falls within the Operative Clause. By contrast, the onus is on the underwriter to prove that an exclusion applies.
  • Definitions – the meaning of frequently used terms is defined to avoid repetition
  • Exclusions – states what the policy does not insure
  • Conditions – states what the Insured needs to do in order to enjoy cover
Question: The secret to understanding a liability policy
Answer:

There are usually three kinds of loss which the policy provides for. These are

  • Injury, which also includes death and illness
  • Damage, which includes theft and other loss to tangible property
  • Pure economic loss, which is a loss where there has been no Injury or Damage
    • Example, the Insured is sued for breach of copyright
    • A pure economic loss (PEL) is also referred to as a pure financial loss
  • Like a PEL, a consequential loss is also of a financial nature, but it arises out of Injury or Damage
    • Example, as a result of an Injury the Insured is unable to earn an income. That loss of income is a consequential loss.
  • The terms Insured and Damage are capitalised because they have a special meaning e.g. Injury includes sickness.
  • The word ‘Insured’ is also capitalised because it includes not only the insured company but also the staff when they become personally liable in the course of their employment duties.
Question: How does liability arise?
Answer:

A person or an organisation can become legally liable in three ways.

  • By doing something wrong. The legal term for is delict. For example, a security company shoots an innocent bystander. Some people refer to this a fault based liability.
  • An alternative to fault based liability is strict liability. In terms of strict liability someone can be held liable even when it was not their fault. A common example is found in the employer-employee relationship where the employer is automatically liable for the actions of the employee. Example, the Insured’s gardener starts a fire which spreads to the neighbour’s property. The Insured will be held liable for the actions of their employee.
  • Strict liability is an example of the country’s law imposing a liability on a person.
  • Liability can also arise out of a contract. For example, the Insured undertakes to pay any liability that the security company incurs while protecting the Insured’s property
  • To summarise, there are three ways in which liability can arise:
    • Delict
    • Law
    • Contract
Question: Who is a third party?
Answer:
  • The party causing the damage or injury is usually referred to as the first party.
  • The person to whom the damage or injury is done is the third party.
  • For insurance purposes, some people might not be considered to be third parties
    • People close to the Insured – close enough for the Insured to benefit from the policy’s indemnity.
    • e.g. the Insured’s employees or members of the Insured’s household
  • The second party shares in the first party’s misfortune, e.g. the Insurer. 
Question: Who needs liability insurance?
Answer:
  • Everyone is capable of causing harm or loss to others (known as the third party). As a result, the third party would have a legal right to demand compensation for the loss they have sustained.
  • The intention of liability insurance is to step in and pay this compensation on behalf of the Insured.
Question: What is the purpose of liability insurance?
Answer:

In the ordinary course of business a company could cause damage to the property of others, or even injure people. As a result the company may become legally liable for the negligence or wrongful acts of the company’s employees, directors, subcontractors, customers, suppliers and shareholders – to name just a few.

Even though the company should do everything it reasonably can to prevent liability, it is simply not practical for a business to anticipate and prevent every possibility.

If the company is at fault, then it might be sued for Damages. The Camargue General Liability policy has been designed to pay for these Damages – even if the matter is settled out of court. Legal costs incurred in defending the matter as also covered.

The policy provides worldwide cover, however there are restrictions in terms of USA and Canada.