Chapter 3 - Casualty (Liability) Basics

H's liability policy has the following limits: $25,000 per person, $100,000 per occurrence, and $2,000,000 aggregate. This year, five separate claimants file in the amount $25,000 for injuries suffered in a single accident. How much will the policy pay?

$100,000 - Because all five injuries arose from a single accident, the per-occurrence limit will cap the compensation at $100,000.

Policy A provides liability coverage to a Fred's Grocery up to $500,000. Policy B provides coverage for the same risks up to $1.5 million. Both policies pay on a pro rata basis. If Fred's Grocery is determined to have a legal liability of $400,000 to a claimant who was injured on the property, how much will Policy A pay?

$100,000 - Pro rata liability requires that each policy pays no more than its share of the loss. The total insured amount carried by Fred's Grocery is $2 million ($500,000 + $1.5 million). Policy A's share of that amount is 25% ($500,000/$2 million). Therefore its share of any loss would be 25% of the loss amount. 25% of $400,000 is $100,000.

Which of the following is true regarding liability insurance?

A liability policy provides coverage for unintentional torts - A liability policy is intended to provide protection in the event the insured's negligence causes bodily injury or property damage to others for which the insured becomes legally obligated to pay damages. Liability is an unintentional tort. Neither intentional torts nor criminal acts are covered by a liability policy.

Which of the following defines a tort?

A wrongful act - A tort is a wrongful act (excluding breach of contract). Liability assigned to one party for the conduct of another is vicarious liability. An award to an injured party is called damages. An unforeseen event from which damage results is called an accident.

Z is a distributor of natural gas. While connecting gas to B's house, an explosion occurs and the house is destroyed. Z's defense is that B did not turn off the pilot light on her furnace before the hookup as instructed by the company. The court ruled that the activities of connecting gas lines were so dangerous that Z's defense did not relieve its liability. What legal principle is applicable in this case?

Absolute liability - Some activities are so inherently dangerous that they are bound by the principle of Absolute Liability, which states that no degree of care taken by the insured can defend against a charge of negligence.

Which of the following is an example of vicarious liability?

An employer's liability for the acts of an employee - Vicarious liability is the liability assigned to one party for the conduct of another, based solely on a relationship between the two. Examples include employer/employee relationships and parent/child relationships.

Proximate cause refers to:

An unbroken chain of events leading to a loss, that were initiated in a negligent act of wrongdoing - A proximate cause is any action on inaction leading to a loss by a chain of events unbroken by any intervening cause.

Negligence is what kind of tort?

An unintentional tort - Negligence is an unintentional tort arising out of failure to use reasonable care.

M has a liability policy insuring her flower shop. After M sells the shop, the buyer asks if she can transfer her liability policy as part of the sale. Which provision prevents M from making this transfer without the insurer's consent?

Assignment - The assignment provision states a policyholder cannot transfer policy ownership without the insurer's written consent.

Which of the following is not an element of negligence?

Assumption of risk - The elements of negligence are: Duty of care, violation of the duty of care, proximate cause, and damages that are foreseeable. Assumption of risk is a defense against negligence, rather than an element of it.

Plaintiff K was injured after losing control of his skis on a slope with well-marked signs indicating the degree of difficulty. What legal defense is available to the ski resort to avoid liability for the injury?

Assumption of risk - When a person participates in an activity where a certain type of injury is known to be probable, that person's rights of recovery are barred or diminished under the doctrine of Assumption of Risk.

Which of the following statements about liability insurance is false?

Bodily injury includes personal injury, sickness and disease - Bodily injury does not include personal injury.

Which of the following indicates a disrupted chain of events that frees the defendant from liability?

Intervening cause - Intervening cause breaks a natural and continuous sequence of events that are necessary to establish negligence.

Which of the following is true about an aggregate limit?

It applies to losses from all occurrences within a specified policy period - Aggregate limits apply to loss from all occurrences during the policy period.

Which of the following is an example of Special Damages?

It is compensation to an injured party for actual medical expenses and loss of earnings - Special damages are an award to an injured party for actual and known expenses such as bills, loss of earnings, and the costs of repairing or replacing damaged property. Special damages are paid for tangible loss or damage.

Which description applies to General Damages?

It is compensation to an injured party for pain, suffering, mental anguish, disfigurement and similar types of losses - General Damages are damages that are likely to continue into the future, and where it is difficult to put a final figure on the losses.

Which of the following best describes a liability policy that is written on a primary basis?

It is the policy that pays first with respect to other policies - Sometimes liability insurance is written in layers to provide higher limits of coverage. When this is done, the primary insurance pays the entire claim until its limits are exhausted, then the excess policy pays the balance of the claim.

Policyholder J has a no-fault auto policy. Upon being hit by a driver that ran a stop light, J suffers a broken leg. Whose insurance company will pay for J's injury?

J's insurer - Under no-fault insurance, the injured party collects insurance benefits from his/her own insurance as if it were first-party coverage, eliminating the need to determine negligence or legal liability.

Personal injury liability includes which of the following?

Libel and slander - Personal injury liability is the legal liability for injury other than bodily injury or property damage. Examples of personal injury include libel, slander, false arrest, invasion of privacy, and copyright infringement.

The maximum amount a policy will pay in the event of a loss, regardless of the number of insureds, claims made, lawsuits filed, or parties making claims is the:

Limit of liability - The limit of liability, or limits of insurance, are shown on the policy declarations page and are the most paid by the policy regardless of the number of insureds, claims made, lawsuits filed, or parties making claims or filing lawsuits.

Which of the following statements about medical payments is false?

Medical payments cover personal injury - Medical payments pays for bodily injury without regard as to fault by the insured. Personal injury expenses are not covered.

The person specifically designated in the policy as the person with whom the contract of insurance has been made, is considered to be the:

Named Insured - The Named Insured is the entity with whom the insurance contract is made. When there is more than one entity designated as named insured in the policy, then contractual obligations are transacted with the first one designated, known as the first named insured.

Q runs a stop sign causing an oncoming vehicle to swerve and hit a tree. Q is guilty of:

Negligence - Negligence is defined as failure to use that degree of care that an ordinary person would.

Which of the following is an example of general damages?

Pain - Special damages are an award to an injured party for actual and known expenses such as bills, loss of earnings, and the costs of repairing or replacing damaged property. General damages are paid to compensate losses that cannot be calculated objectively.

Medical payments coverage includes which of the following?

Payment of necessary medical expenses incurred by an injury on the insured's premises - Medical payments coverage pays for bodily injury caused by an accident on the insured's property or arising form the insured's activities, whether or not the insured is legally liable. Coverage does not extend to insureds, employees, or residents of the premises.

A primary liability policy is one that:

Pays first with respect to other policies - A primary insurance policy pays the entire claim until its limits are exhausted, after which an excess or umbrella policy will pay the balance of the claim.

The most a policy will pay for a loss arising out of any one accident regardless of overall policy limits, is known as the:

Per occurrence limit - The per occurrence limit represents the most the policy will pay for all losses arising out of any one occurrence, regardless of other policy limits.

Bodily injury is best described as:

Physical injury or death arising from the negligent acts of an insured - Bodily injury is any physical injury, including sickness, disease, and death caused by the acts or omissions of an insured. Bodily injury liability expenses can include medical bills, lost wages, mental anguish, and pain and suffering.

___________ damages are ordered by the courts to punish a negligent party.

Punitive - Punitive damages are awarded to punish a negligent party for extremely objectionable conduct.

Most liability policies do not provide coverage for:

Punitive damages - Punitive damages are awarded to punish and discourage a wrongdoer from repeating negligent acts. Most liability policies do not provide coverage for punitive damages.

What is NOT a common law defenses against negligence?

Statute of Limitations - The Statute of Limitations is a statutory defense, not a common law defense.

The time period in which a lawsuit may be filed after the occurrence of a claim is referred to as:

Statute of limitations - Statute of limitations is the length of time from the date of claim that legal proceedings may be initiated. This time period is established by federal or state law

What is the principle of liability that imposes legal liability for injury and damage by products?

Strict liability - Strict liability applies to products causing an injury, whether or not the product was defective.

In Liability Insurance, which of the following is the maximum amount that the coverage will pay for loss to any one person regardless of overall policy limits?

The Per Person Limit - The Per Person Limit is the amount of coverage available for each person that sustains bodily injuries in an occurrence.

All of the following are true of liability policies, except:

They will cover damage to the insured's own property - A liability policy does not cover damage to the insured's property, it covers damage to property of a third party.

Driver D slid into another car causing an accident in which three people in the other car were injured. Two injured parties claimed $15,000 in medical expenses and the third person claimed $25,000. How much will D's insurance company pay if her policy has 25/50 limits for bodily injury?

$50,000 - The policy pays up to $25,000 for each person injured, but no more than $50,000 per occurrence, regardless of the number of persons injured. Therefore, the limit for this accident is $50,000.

The formal statement that verifies details so the insurer can determine liability is called:

A Proof of Loss - A proof of loss setting forth the date and circumstances of the loss (including the amount of the loss) is generally required by the insurer before the insurer will settle the claim.

Which term describes the maximum amount payable for loss from all occurrences within a policy period?

Aggregate limit - The aggregate limit is the most the policy will pay for all losses in the policy period.

Which of the following describes the policy liability limits that may be applied to either bodily injury or property damage, in any combination?

Combined Single Limits - Policies with Combined Single Limits have one limit of insurance per occurrence, which may be applied to either bodily injury or property damage, or a combination of the two, as needed.

When damages are reduced in proportion to the degree of negligence, this is an example of:

Comparative Negligence - Comparative negligence is a defense wherein damages are reduced in proportion to the degree of the claimant's negligence. For example, if the claimant is 5% negligent and the wrongdoer is 95% negligent, the claimant may only recover 95% of damages.

Which of the following defenses against negligence reduces damages in proportion to the degree of negligence?

Comparative Negligence - Comparative negligence provides that the damages recoverable by each party to the suit be reduced in proportion to that party's degree of negligence.

Which of the following reduces an award in proportion to the amount of negligence?

Comparative negligence - Under comparative negligence, the award to the injured party is reduced by the amount of their own negligence.

Which term describes the equal sharing of a loss by two or more insurers until the loss is paid, or until each insurer has exhausted its limits of insurance, whichever comes first.

Contribution by Equal Shares - Under Contribution by Equal Shares, each insurer pays an equal amount to the loss settlement until the loss is paid, or until each insurer has exhausted its limits of insurance, whichever comes first.

What is the name for a type of policy that doesn't pay benefits until the limits of the primary policy has been exhausted?

Excess policy - An excess policy makes payment only after all other insurance in place exhausts its limits or denies coverage.

Which of the following terms includes pain and suffering, disfigurement, and mental anguish?

General damages

Bodily Injury may include which of the following?

Loss of Earnings - Bodily injury includes such items as medical expenses, lost wages, mental anguish, death and disfigurement.

The formal statement an insured provides to an insurer including all the details an insurer needs to assess its liability following a loss is known as a:

Proof of loss - A proof of loss is a formal statement made by the insured and provided to the insurer that provides necessary details for the insurer to determine its liability under a policy.

Which of the following is not essential in determining if an action is due to negligence?

The injured party must prove the wrongdoer committed a criminal act - Negligence is the commission of a civil or private wrong, not a criminal wrong.