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4.2 Types of Liability and Liability Exposures

Casualty insurance protects an insured who becomes legally responsible for causing injury or damage to another party. Legal responsibility may require the insured to provide compensation or another form of remedy to the injured party. Legal liability may be classified as either criminal liability or civil liability. Criminal liability results from conduct that violates criminal law and may lead to penalties such as fines or imprisonment. Criminal liability is not insurable. Civil liability arises when one party brings legal action against another to obtain monetary damages or another civil remedy. For example, a court may order specific performance, which requires a party to carry out an obligation rather than pay damages. Many forms of civil liability are insurable, subject to the terms, conditions, and exclusions of the policy.

Legal liability is not limited to situations involving negligence. In some circumstances, an insured may be legally responsible for injury or damage even when fault or negligence has not been established. Casualty insurance may provide protection for these liability exposures, subject to the policy's terms, conditions, and exclusions.

Strict and Absolute Liability​

Some activities, conditions, and products are considered so hazardous that a person may be held legally responsible for resulting injuries or damage even after exercising reasonable care. This principle is known as strict liability, sometimes referred to as absolute liability. Under strict liability, responsibility is imposed because of the inherently dangerous nature of the activity, condition, or product, and the injured party is not required to prove negligence.

Although the terms strict liability and absolute liability are sometimes used interchangeably, they are commonly applied in different legal contexts.

  • Strict liability generally refers to the responsibility of a manufacturer or seller for injuries or damage caused by a defective product, regardless of whether the business acted negligently. The injured party must typically establish that the product was defective and that the defect caused the loss. Holding manufacturers and sellers strictly liable encourages businesses to design, manufacture, inspect, and distribute safer products.
  • Absolute liability is more commonly associated with inherently dangerous activities or conditions, such as owning dangerous animals, storing firearms or other weapons, and possessing explosives or highly flammable materials. The party responsible for the hazardous activity or condition may be held liable for resulting injuries or damage even when reasonable precautions were taken. The concept may also apply to an employer's responsibility for an employee's work-related injury, as established by workers' compensation law.

An Insurance Story

The Nelsons lawfully own a venomous snake. Because the animal presents an inherently serious danger, the Nelsons may be held liable for injuries it causes even when they were not negligent. Posting warning signs, verbally advising visitors of the danger, and maintaining appropriate safety measures may demonstrate reasonable care, but these precautions do not necessarily eliminate their liability. If an injured person brings a claim against the Nelsons, the assumption of risk defense may apply. The Nelsons could argue that the claimant knew and understood the danger but voluntarily chose to encounter it. Depending on the applicable law and circumstances, this defense may reduce or prevent the claimant's recovery.

Attractive Nuisance​

A property owner's duty to protect individuals on the premises depends on the person's legal classification. An invitee is someone who enters the property with the owner's express or implied invitation. Property owners generally owe invitees a higher duty of care, which includes maintaining reasonably safe conditions and warning them about hidden hazards the owner knows or should know about. By contrast, a trespasser enters without permission and is generally owed a more limited duty of care.

An exception to the limited duty generally owed to trespassers may arise under the attractive nuisance doctrine. An attractive nuisance is an artificial condition on property, such as a swimming pool, abandoned equipment, or an unsecured structure, that is likely to attract children and expose them to harm. Because children may not fully understand or appreciate the danger, a property owner may have a duty to take reasonable precautions to prevent access or reduce the risk of injury. Therefore, the owner may be held liable when a child enters the property without permission and is injured by the hazardous condition.

Vicarious Liability (Imputed Negligence)​

Although legal responsibility generally remains with the person who caused the harm, certain relationships allow liability to be assigned to another party. This principle is known as vicarious liability, or imputed negligence. Under vicarious liability, the person against whom the claim is made did not directly commit the negligent act but may still be held legally responsible for the conduct of the person who did. For example, a parent or legal guardian may be held responsible for certain actions of a minor child, subject to applicable law. Vicarious liability may also arise in an employer–employee relationship. Under the doctrine of respondeat superior, an employer may be held liable for an employee's negligent actions when those actions occur within the course and scope of employment.

Types of Liability Exposures​

Most liability insurance policies protect the insured against one or more types of liability exposures resulting from the insured's actions or failure to act, also known as an omission.

Bodily Injury Liability​

Bodily injury refers to physical harm suffered by a person, including sickness, disease, and death. A bodily injury liability claim may include expenses or damages for medical treatment, lost wages, mental anguish, and disfigurement.

Medical Payments Coverage​

Medical payments coverage pays reasonable and necessary expenses resulting from covered injuries that occur at an insured location or arise from the insured's activities. Covered expenses may include medical, surgical, X-ray, dental, ambulance, hospital, professional nursing, and funeral costs. Payments are made without requiring proof that the insured was negligent, and payment of these expenses does not constitute an admission of legal liability.

Medical payments coverage provides a limited amount of insurance to pay smaller medical expenses promptly. By resolving these expenses without requiring the injured person to establish negligence, the coverage may reduce the likelihood of a liability claim or lawsuit, which can be more time-consuming and costly for both the injured party and the insurer.

Note

Medical payments coverage is generally designed to pay the medical expenses of other people. For example, the liability section of a Homeowners policy may cover medical expenses incurred by a guest who is injured on the insured premises. However, certain policies provide medical payments coverage for the insured and the insured's passengers, such as the coverage available under a Personal Auto policy. The period during which medical expenses must be incurred and reported varies by policy type. Personal lines policies generally cover eligible medical expenses incurred and reported within three years of the occurrence. Commercial liability policies generally require eligible medical expenses to be incurred and reported within one year of the occurrence. The specific time limit is stated in the policy.

Property Damage Liability​

Property damage liability covers losses resulting from physical injury to or destruction of tangible property belonging to a third party when the damage is caused by the insured's actions. Covered damages may include the cost of repairing or replacing the property, as well as loss of use, which refers to expenses or financial losses resulting from the inability to use the damaged property.

Personal and Advertising Injury Liability​

Personal and advertising injury liability covers certain nonphysical injuries suffered by a third party that do not qualify as bodily injury or property damage. In insurance, personal injury does not mean physical harm. Instead, it refers to specific offenses that may damage another person's reputation, privacy, or emotional well-being. Examples include libel, slander, false arrest, and invasion of privacy. Advertising injury refers to similar offenses committed while the insured is advertising its goods, products, or services. Examples may include misappropriation of advertising ideas, copyright infringement in an advertisement, and defamatory statements made as part of advertising activities.