CHAPTER OBJECTIVES

When you have finished this chapter, you should be able to

• Explain the distinction between a denial of payment by an insurer because there is no liability and denial because there is no coverage
• Identify the coverage features under Section II of the homeowners forms
• Describe the insuring agreements of liability insurance contracts generally and explain the insurer's obligation to defend the insured
• Explain the insuring agreement of the Section II Personal Liability coverage
• Explain the insuring agreement of the Section II Medical Payments coverage
• Recognize significant exclusions under the homeowners Section II
• Describe the personal umbrella liability contracts, including qualification requirements and typical exclusions
• List the available endorsements for broadening Personal Liability coverage

LIABILITY INSURANCE IN GENERAL

In Chapter 27, we examined the principles of negligence that give rise to the legal liability exposure. We noted that the risk of legal liability is a pervasive aspect of the life of every individual, and it is a risk of catastrophic potential. In this chapter, we turn to liability insurance, the form of coverage designed to protect against the financial consequences of negligence: legal liability.

In its simplest form, liability insurance undertakes to assume the obligations imposed on the negligent party in case of legal liability. The liability insurance policy agrees to pay the sums the insured becomes legally obligated to pay, up to the policy's limit when such liability arises out of acts of the insured that are included in the coverage definition. It is commonly called third-party coverage because it undertakes to compensate someone who is not a party to the contract, the injured person to whom the insured is liable. This “third party” is not an insured under the policy and has no direct claim against the insurer. Contractually, the insurer has no legal obligation to the injured third party unless and until the insured's liability has been established in a court of law.

Besides the promise to pay sums the insured becomes legally obligated to pay, most liability policies include a promise by the insurer to defend the insured in suits involving the liability covered under the policy. Thus, automobile liability policies will provide defense for suits alleging negligence in the operation of an automobile, and a premises liability policy will pay defense costs related to insured premises. The basic principle is that the insurer must pay defense costs if it would be obligated to pay damages if the insured should be held liable.

As a practical matter, few liability claims reach trial. Insurers realize that the best interests of all concerned will be served to reach a settlement without litigation, and the insurer normally seeks an out-of-court settlement with the injured party. Most liability policies reserve this right to the insurer. Although the insurance company often deals directly with the injured party, it is not obliged to do so under the contract.

An area frequently misunderstood by the public is the distinction between the liability of the insured and coverage under the liability policy. When presented with a claim, an insurer may attempt to negotiate a settlement, or it may refuse to consider payment. The insurer's payment denial may be based on two different reasons. One is that the loss is not covered under the policy. Here, the insured must assume his or her own defense and, if held liable, must pay the claim. A different situation exists when the company denies payment because it does not feel the insured is legally liable for the damage or injury. In this instance, the insurer is obligated to defend the insured, and if the insured is found to be liable, the insurer will pay for the loss up to the policy limits.

TYPES OF LIABILITY INSURANCE

Most people realize the liability exposure inherent in driving a car. The size of the judgments we see in newspapers acts as a constant reminder of this risk. Recognizing this, most individuals purchase automobile liability insurance to protect themselves against this exposure. At the same time, many fail to recognize the basis of the liability exposure, i.e., the negligent act, underlies liability for acts that have no connection with an automobile. The individual needs protection against the consequences of any negligent act, not just those connected with the automobile. Several forms of liability insurance are available to meet the liability exposure from various sources. For convenience in discussion, we may divide liability insurance into three classes:

1. Automobile liability
2. Employers liability and workers compensation
3. General liability

Usually, these three types of liability insurance are provided under separate contracts. Most general liability policies exclude liability arising out of automobiles and liability for employee injuries. Liability arising out of automobile operation is insured under a separate automobile liability policy, and coverage for employee injury is available under the Workers Compensation and Employers Liability Policy. The discussion in this chapter is concerned primarily with the field of general liability.¹ General liability insurance can be subdivided further into coverages designed to protect business firms and other institutions and to protect the individual. We will confine our discussion to coverage for the individual.

COMPREHENSIVE PERSONAL LIABILITY COVERAGE

The general liability coverage designed to protect the individual is called Comprehensive Personal Liability (CPL) insurance. The coverage is “comprehensive” in that it insures against all types of liability hazards falling within a broad insuring agreement except for those specifically excluded. In general, the coverage is intended to protect against the nonbusiness, nonautomobile exposures of the individual or family unit. Protection exists for legal liability arising out of the premises and for liability arising out of the personal activities of the insured or family members, when on and away from the premises. In addition, the coverage includes employers' liability coverage for injury to domestic employees in those jurisdictions where such workers are not subject to the workers compensation laws. In some states, the policy can be endorsed to provide workers compensation coverage for domestic employees.

CPL coverage may be purchased as a monoline contract, it may be added to monoline dwelling forms by endorsement, and it is automatically included as Section II of the Homeowners Policy.² Since the most widely used means of obtaining the coverage is under the homeowners forms, we will use Section II of the Homeowners Policy as the basis for our discussion.

General Nature of the Coverage

Two basic coverages under Section II of the home-owners are designated Coverage E, Personal Liability, and Coverage F, Medical Payments to Others. There are also four supplementary insuring agreements, called additional coverages. A brief overview of the coverages may be helpful in the detailed discussion of the individual coverages that follows.

1. Coverage E, Personal Liability. Under the insuring agreement of this coverage, the company promises to pay, up to the limit of liability set in the policy, all payments that become the insured's legal obligation because of bodily injury or property damage falling within the scope of the coverage. The standard limit of liability, which may be increased, is $100,000.³
2. Coverage F, Medical Payments to Others. The Medical Payments coverage provides payment for medical expenses incurred by persons who are injured while on the premises with the insured's permission or who are injured away from the premises if the injury results from an activity of the insured or a member of the insured's family. Coverage for medical payments applies regardless of the insured's liability. The basic limit under the homeowners policy for this coverage is $1000, which may be increased.
3. Additional Coverages. The Additional Coverages of Section II provide payment for certain additional expenses that may be incurred by the insured in the event of injury or damage to the person or property of others. These include claim expenses, first aid expense, limited payment for damage to property of others when the insured is not liable, and loss assessment coverage.

Personal Liability Coverage

The Personal Liability coverage is the major component of the CPL coverage. Its insuring agreement is simple and straightforward:

This is a fairly typical liability insuring agreement. In addition to the promise to pay sums the insured becomes legally obligated to pay, the agreement promises defense and reserves to the company the right to make an out-of-court settlement.

Persons Insured One of the most important parts of any liability policy is the definition of “persons insured” because the insurer promises to pay damages or defend under the liability coverage “if a claim is made or suit is brought against an insured.” Like most liability policies, coverage is provided for certain individuals other than the person listed in the policy declarations. In Chapter 24, we noted that the definition of Insured under the Homeowners Policy includes the named insured and resident relatives, other persons under age 21 in the care of the insured, and certain students enrolled in school full-time who were household residents before leaving to attend school. (Insured students include persons under age 24 related to the insured and students under age 21 who were in the care of an insured.) These persons are insureds under Section II of the policy. In addition, for Section II coverages only, the Homeowners Policy contains the following definition:

Under Sections I and II, when the word “an” immediately precedes the word “insured,” the words “an insured” together mean one or more “insureds.”

The inclusion of persons legally responsible for animals or watercraft to which the insurance applies extends coverage for persons to whom the insured may have loaned such animals or watercraft or who have custody for other reasons. If a neighbor takes care of the insured's dog while the insured is on vacation, the neighbor would be covered under the policy in the event of any suit arising out of the dog's actions. However, the exclusion of anyone having custody of an animal or watercraft in the course of business denies coverage to organizations, such as kennels or marinas. The exclusion of persons having custody without permission is self-explanatory.

Finally, the definition of persons insured includes certain persons while operating a vehicle to which the insurance applies. As we will see shortly, this is limited to unlicensed motor vehicles, such as those used for the maintenance of the premises and recreational vehicles. The intent is to provide coverage, for example, to a gardener operating a riding lawn mower. Coverage applies for “any other person using the vehicle on an insured location with your (the named insured's) permission.”

Severability of Insureds One of the conditions in the policy states: “This insurance applies separately to each ‘insured.’ This condition shall not increase our limit of liability for any one ‘occurrence.’” Since the insurance is stated to apply separately to each insured, it is conceivable that one insured under the policy might injure another insured person and have coverage for the resulting liability. Although intrafamily suits are, as explained later, specifically excluded, other suits by an insured against an insured are possible. A residence employee who is covered while operating an insured vehicle, a person having custody of an animal owned by the insured, or someone using an insured watercraft are all insureds under the policy. If any of these persons is injured by another insured, he or she could bring suit and, if the suit was successful, collect under the policy.

Liability Exclusions Two sets of exclusions are applicable to the liability coverage. One set of 12 exclusions (designated A through D and E.1 through E.8) applies to liability and medical payments, and a second set of six exclusions (designated F.1 through F.6) applies to liability coverage only.

A. Motor Vehicle Liability Liability arising out of motor vehicles owned or operated by any insured is excluded in a complex and wordy series of provisions. These include the exclusion (which denies coverage for “motor vehicle liability”), the definition of “motor vehicle,” and a definition of “motor vehicle liability.” There have been mostly unsuccessful attempts to find coverage under the home-owners policy for automobile liability losses through claims against an insured other than the auto operator. These attempts were usually based on the argument that a parent was negligent, not in the operation of an auto but in supervising a minor or by negligently entrusting someone with the auto. In an effort to address these arguments, the definition of motor vehicle liability is written broadly to include liability arising out of the ownership, maintenance, occupancy, operation, use, loading, and unloading of a motor vehicle, as well as liability arising out of entrustment, failure to supervise, or negligent supervision or vicarious liability for the actions of a child or minor involving a motor vehicle. The definitions of watercraft, aircraft, and hovercraft include similarly worded provisions. The motor vehicle exclusion distinguishes between motor vehicles registered for use on public roads or property (or that should be so registered) and other vehicles. The former are excluded. Other vehicles, which are unregistered and are not required to be registered, may be excluded or covered, depending on the vehicle. Unregistered vehicles are excluded if they are operated in (or practicing for) any prearranged or organized race, speed contest, or other competition. Unregistered vehicles rented to others, used to carry persons or cargo for a charge, or used for business purpose are excluded.

Unregistered motor vehicles for which coverage exists include a motor vehicle in dead storage on an insured location, motor vehicles used solely to service an insured's premises, and motor vehicles designed to assist the handicapped if being used for this purpose or parked at the time of the occurrence.

Recreational motor vehicles such as snow-mobiles, all-terrain vehicles, go-carts, and other land motor vehicles designed for recreational use off public roads are divided, for coverage purposes, as owned and nonowned. Nonowned recreational motor vehicles are insured on and off premises. Owned recreational motor vehicles are covered only when on an insured location.

Motorized golf carts owned by an insured are covered while at a golfing facility and parked or stored there or when being used by an insured to play golf or for other recreational activities allowed by the facility. The golf cart must be designed to carry no more than four persons and cannot have been modified after manufacture to exceed 25 miles per hour. Coverage applies while the cart is being used for travel to and from an area where motor vehicles or golf carts are parked or while crossing public roads at designated points to access other parts of the golf course. Finally, owned golf carts are covered while in a private residential community (e.g., “Sun City”) where the insured's residence is located. If it is legal for golf carts to travel on the public roads of the private community, coverage applies to such usage.

B. Watercraft Liability Watercraft exclusion B excludes liability (including negligent entrustment, negligent supervision, and vicarious liability) arising out of the following types of boats:

• Inboard or inboard-outboard motorboats owned by an insured
• Inboard or inboard-outboard motorboats with more than 50 horsepower rented to an insured
• Sailing vessels (with or without auxiliary power) over 26 feet in length owned by or rented to an insured
• Any boats powered by an outboard motor or motors in excess of 25 horsepower if such motor or motors were owned by the insured at the inception of the policy and not listed or reported to the insurer

The exclusion concerning outboard motors, unlike that about inboards or sailing vessels, does not apply to rented motors. Coverage applies to boats below these limits, and the exclusion of larger units may be removed by endorsement for an additional premium. The policy provides that none of the exclusions relating to watercraft apply while the watercraft is stored.

C. Aircraft Liability Next, legal liability arising from the ownership, maintenance, or use of aircraft (including negligent entrustment, negligent supervision, and vicarious liability) is excluded by exclusion C. If the insured owns or rents a private airplane, he or she must purchase aircraft insurance specifically designed for this purpose. The policy defines an aircraft as “any contrivance used or designed for flight, except model or hobby aircraft not used or designed to carry people or cargo.” In addition to airplanes, the exclusion eliminates coverage for ultralights and hang gliders.

D. Hovercraft Liability The Hovercraft Liability exclusion was introduced in the year 2000 revision to address the ambiguity regarding the nature of these vehicles. Although the policy excluded aircraft, motor vehicles, and watercraft, it was argued that hovercraft were technically none of these. The wording of the hovercraft liability exclusion parallels the wording of the motor vehicle exclusion.

E.1. Intentional Injury It is considered contrary to public policy to protect an individual from the consequences of intentional injury to another. For this reason, the policy excludes coverage for bodily injury or property damage that is expected or intended from the insured's standpoint. The exclusion goes on to state the exclusion applies “even if the injury or damage is of a different kind . . . or is sustained by a different person than originally expected or intended.” If Joe throws a bottle at Bill and hits Sherrie, the insurer would likely invoke this exclusion.⁴

E.2. Business Activities The Personal Liability coverage of the Homeowners Policy is designed to provide legal liability arising from the dwelling premises and the insured's personal activities. It is not designed to provide coverage for business or professional activities. Exclusion E.2 makes this clear; it excludes liability “arising out of or in connection with a ‘business’ conducted from an insured location or engaged in by an insured.” The exclusion applies to a business owned by the insured and to a business by which the insured is employed. The scope of the exclusion is partly defined by the policy definition of “business.”

Business means a trade, profession, or occupation engaged on a full-time, part-time, or occasional basis. It means any other activity engaged in for money or other compensation. Four types of activity are excluded from the definition of business (and are, therefore, covered). These include volunteer activity for which no money is received (other than payment for expenses), day care services without compensation (other than the mutual exchange of service), and home day care services to a relative of the insured. The final exception is any activity (other than the first three) for which no insured received more than $2000 in compensation in the 12 months before the inception of the policy.

In addition to the qualifications in the definition of “business,” there are two exceptions to the business exclusion. The first relates to rental activities.

The definition of “business” is sufficiently broad to include an insured's rental activities. The rental activities exceptions to the business exclusion provide coverage for (1) the occasional rental of an insured's residence, (2) the rental of part of the insured premises for use as a residence only (but with no more than two roomers or boarders per family), or (3) the rental of part of the residence as an office, school, studio, or private garage.

The first exception is self-explanatory. The insured is permitted to rent the insured residence to others on a short-term or temporary basis (e.g., while the insured is on a temporary assignment in another city). The second exception permits rental of a single-family unit in the residence (provided there are no more than two roomers or boarders per single-family unit). Finally, a part of the insured residence may be rented to others for use as an office, school, studio, or private garage. Other rental activities may be covered by endorsement to the Homeowners Policy or under a separate business general liability policy.

Coverage for Business Activities Coverage is available by endorsement to the Homeowners Policy for some types of business activities, including businesses conducted from the residence premises. There are four separate endorsements, designed for different business exposures.

Employees who want liability coverage for their activities as employees (as opposed to business owners) may obtain coverage under the Business Pursuits Endorsement. This endorsement is available to clerical office employees, salespersons, collectors, messengers, and teachers. Although the liability insurance purchased by one's employer usually extends coverage to employees, an employee might desire coverage for exposures not covered by the employer's policy or when the employer's coverage is considered inadequate. The endorsement excludes coverage for acts of the insured in connection with a business owned by the insured and injury to fellow employees.

The Homeowners Program rules allow coverage on dwellings with certain “incidental” business occupancies (an office, studio, or school). When a Homeowners Policy is written for one of these permissible “incidental” occupancies, the business exclusion is modified to provide on-premises liability coverage relating to the incidental occupancy by attaching the Permitted Incidental Occupancies (Residence Premises) Endorsement (HO 04 42).⁵

The Home Day Care Coverage endorsement modifies the business activity exclusion to provide coverage for liability arising out of a home day care business operated in the dwelling or another building on the premises.⁶

Finally, coverage may be added to the homeowners policy for certain other home businesses under the Home Business Coverage Endorsement (nicknamed the HOBIZ™). This endorsement provides coverage for business property, loss of business income, and general liability coverage appropriate for the home business activity. The business must be owned by the named insured (or by the named insured and a resident relative) or the named insured and a partner who is a household resident. Three types of businesses are eligible: offices, service businesses, and sales. Businesses engaged in the manufacture, sale, or distribution of food products or personal care products (e.g., cosmetics) and businesses eligible for coverage under the Permitted Incidental Occupancy or the Home Day Care Coverage endorsements are ineligible. The business may have no more than three employees and must have receipts of less than $250,000 annually.

When a business exposure exists that cannot be insured under one of these four endorsements, it must be insured under a business liability policy.

E.3. Professional Liability Exclusion E.3 excludes professional liability, such as the liability that a physician, accountant, lawyer, or other professional might incur. The intent of this exclusion is the same as the business pursuits exclusion discussed earlier. The excluded professional exposures must be insured under separate professional liability policies.⁷

E.4. Uninsured Premises A specific exclusion eliminates liability arising out of any premises owned or rented to any insured that is not an “insured location.” The definition of insured location found in the general conditions states:

This definition includes, first, the listed residence premises and all other residence premises listed in the policy. This portion needs little analysis.⁸ In addition to the residence premises listed, any other residential premises acquired by the insured during the policy term are included.⁹ Premises used in connection with any of the foregoing, such as a garage located elsewhere, are included as insured premises.

The part of the definition that refers to a part of premises not owned by any insured in which an insured is temporarily residing extends the definition of insured premises to include a hotel or motel room or perhaps a cabin on a lake that has been rented to the insured for a summer vacation.

The definition includes vacant land, other than farmland, owned by or rented to any insured. Thus, legal liability arising in connection with a vacant lot owned by the insured is covered automatically in the policy, and no requirement exists that it be listed. Coverage on vacant land even continues following the start of construction of a one-family or two-family dwelling on such land if the dwelling is intended as a residence for an insured.

The next portion of the definition includes individual or family cemetery plots or burial vaults. Since the plot is owned by the insured, if somebody should be hurt there, the insured could have a legal liability.

The final section of the definition is “any part of a premises occasionally rented to any insured for other than business purposes”. It would include, for example, a hall rented by an insured for the purpose of holding a reception or a party.

Any premises not falling within any of the sections of this definition are “uninsured locations.” However, the best example of an uninsured location would be any residence owned by the insured at the inception of the policy and not declared.

E.5. War The next exclusion eliminates coverage for bodily injury or property damage arising out of war, civil war, insurrection, rebellion, revolution, and similar forms of conflict.

E.6. Communicable Disease The communicable disease exclusion eliminates coverage for liability arising out of the transmission of a communicable disease by an insured. Prior to the addition of this exclusion, courts had held that such losses are “bodily injury” within the meaning of the policy coverage and that the bodily injury was not expected or intended by the insured.

E.7. Sexual Molestation or Abuse Exclusion E.7 excludes bodily injury arising out of sexual molestation, corporal punishment, or physical or mental abuse.

E.8. Controlled Substance Exclusion E.8 excludes liability arising

The severity of this exclusion for some people and some lifestyles requires no explanation.

F.1. Assessments and Contractual Liability In addition to the liability that arises out of negligence, liability may be incurred through contractual agreements. For example, a common clause in many leases shifts the liability in connection with premises from the landlord to the tenant or from the tenant to the landlord. Such agreements are called “holdharmless agreements” because one party agrees to hold the other harmless from liability arising out of the premises. Brown, a tenant, may agree to hold Smith, the landlord, harmless from liability arising out of the premises. Jones is injured as a result of a defect in the premises and brings suit against Smith as the owner. Smith is held liable and is ordered to pay a judgment of $25,000. Under the terms of the hold-harmless agreement, Brown will be required to reimburse Smith. The homeowners forms provide coverage for this exposure through an exception to an exclusion.

Under exclusion F.1.a, loss assessments charged against the insured as a member of an association, corporation, or community of property owners is excluded except to the extent that such loss is covered under the Section II Additional Coverage for Loss Assessment (discussed later in this chapter). Such assessments are a type of contractual liability since the association would not have the authority to level such assessments in the absence of an agreement by the insured.

Exclusion F.1.b excludes other liability assumed under contract. Then, in two important exceptions to the exclusion, it provides a broad form of contractual liability to the insured. The exclusion of liability assumed under contract does not apply to (1) written contracts that relate directly to the ownership, maintenance, and use of an insured location or (2) contracts in which the liability of others is assumed by the insured prior to an occurrence. The first exception provides coverage for the types of assumption discussed in our Smith–Brown example. The second exception provides coverage for other contractual assumptions as long as the agreement is executed prior to the damage for which liability is assumed and one of the other exclusions of the policy does not apply.

F.2. Property Owned by an Insured Section II of the Homeowners Policy, like most liability insurance contracts, excludes property damage to property the insured owns. This exclusion prevents family members from suing one another for damage to their property.

F.3. Property Rented to, or in the Care of the Insured Damage to property occupied or used by the insured or rented to or in the care, custody, or control of the insured is excluded. Property of others in the insured's custody may be insured under Section I of the Homeowners Policy (or another form of first-party coverage). This exclusion has an important qualification. An exception to the exclusion makes it inapplicable to property damage caused by fire, smoke, or explosion. This exception provides what is known as Fire Legal Liability Insurance, a special form of coverage designed to protect renters or lessees from claims arising out of fire damage to the rented or leased premises. The fact that the care, custody, and control exclusion does not apply to damage caused by fire, smoke, or explosion could be important to an insured who has rented a dwelling or apartment. Coverage would apply to the building and to furnishings.¹⁰

F.4. Workers Compensation and Other Statutory Benefits Exclusion F.4 eliminates payment for bodily injury to persons who are eligible for benefits under a workers compensation, nonoccupational disability, or occupational disease law.¹¹ The exclusion applies whether the benefits are required by law or the employer has voluntarily purchased workers compensation insurance. Only liability under workers compensation is excluded, not employee injuries. Although workers compensation benefits are excluded, coverage exists for suits by residence employees in jurisdictions where such employees are not covered by the workers compensation law. Residence employees are those employees whose duties relate to the maintenance of the premises, butlers, maids, gardeners, cleaning persons, babysitters, and domestic employees. Coverage is provided automatically for two full-time residence employees in the basic premium. An additional premium applies for each employee over two.

F.5. Nuclear Exclusion The nuclear exclusion was inserted in nearly all liability policies early in the development of nuclear energy as an alternative source of power and has been subject to much misinterpretation. The exclusion states that the policy does not apply to the following:

The exclusion applies only if the insured is also an insured under a nuclear energy liability policy. The initial conclusion might be that the exclusion would rarely apply since homeowners seldom purchase Nuclear Energy Liability policies. However, the Nuclear Energy Liability policy purchased by the nuclear facilities includes a broad definition of persons insured. It includes the firm or organization purchasing the policy and anyone else who might be sued because of a nuclear incident. This means that in the remote contingency of a suit against an individual, the policy carried by the nuclear facility would protect the individual. In short, an insured under the Homeowners Policy will always be an insured under a Nuclear Liability Policy.

F.6. Injuries to Insured Persons The injury-to-insured persons exclusion eliminates coverage for bodily injury to the named insured, resident relatives, other persons under the age of 21 in the care of the insured, and those students who qualify as insureds under the policy. Coverage for suits by one insured against another insured would encourage such suits in situations in which they would not otherwise occur.¹²

Medical Payments to Others

The Medical Payments coverage provides payment for medical expenses incurred by persons who are injured while on the premises with the permission of any insured or are injured away from the premises if the injury results from an activity of the insured or a member of the insured's family. Coverage for medical payments applies regardless of the insured's liability. The basic limit under the homeowners for this coverage is $1000 per person, which may be increased. The insuring agreement provides that medical payments will be paid under a variety of circumstances:

Medical Payments coverage applies regardless of fault. Furthermore, anyone injured within the scope of the coverage may claim directly under the policy. They do not have to have the named insured's consent to enter a claim. The insuring agreement specifically provides that coverage does not apply to the insured or residents of the insured's household, other than residence employees. Residence employees are covered under medical payments for bodily injuries incurred on-premises or off-premises if the injury arises out of or in the course of their employment by the insured.

The scope of covered medical expenses is inclusive, including even funeral expenses. The only requirements are that the expenses be “necessary” and they be incurred or medically ascertained within three years of the accident.

Medical Payments Exclusions The Liability exclusions relating to motor vehicles, watercraft, aircraft, hovercraft, intentional injuries, business pursuits, professional acts, uninsured premises, war, communicable disease, sexual molestation, and controlled substances apply to the Medical Payments coverage. In addition, four other exclusions apply to the Medical Payments coverage.

G.1. Residence Employees Away from the Premises Medical Payments coverage does not apply to injuries sustained by domestic servants or residence employees when they are away from the insured premises and the injury does not arise out of or in the course of their employment by the insured.

G.2. Workers Compensation and Other Statutory Benefits Just as the Liability section of the policy excluded liability imposed under any workers compensation law, medical benefits payable or required to be paid under any workers compensation, nonoccupational disability, or occupational disease law are excluded. This exclusion applies to any person eligible to receive such benefits, including, for example, workers who come on the premises and who are covered under a workers Compensation Policy purchased by their employer.

G.3. Nuclear Exclusion The Nuclear exclusion under Medical Payments excludes coverage for bodily injury resulting from any nuclear reaction, radiation, or radioactive contamination.

G.4. Persons Residing on Premises The final Medical Payments exclusion excludes coverage for any person other than a residence employee regularly residing at the insured location. The purpose of this exclusion is to eliminate Medical Payments coverage for roomers or boarders and the tenants of an apartment on the premises. However, coverage would exist under the Liability section if such persons were injured and brought suit.

Additional Coverages

The Additional Coverages of Section II provide payment for certain additional expenses that may be incurred by the insured in the event of injury or damage to the person or property of others. There are four Additional Coverages under Section II of the homeowners policy: Claim Expenses, First Aid Expenses, Damage to Property of Others, and Loss Assessment.

Claim Expenses The insurer promises to pay, in addition to the limit of liability, all expenses incurred in the defense of any suit under the policy, interest on judgments, plus certain other legal costs. These include expenses incurred by the insured in cooperating with the insurer in defending a suit, including loss of earnings up to $250 a day.

First Aid Expenses The First Aid Expenses coverage promises to pay expenses incurred by the insured for first aid related to any bodily injury covered under the policy. First aid expenses, like defense costs, are payable in addition to the policy limit.

Damage to Property of Others Damage to Property of Others coverage, like Medical Payments, is not a “liability” coverage. It provides some insurance for property damage of others that is caused by an insured but for which he or she would not be legally liable. It is intended to permit some payment for damage for which the insured feels a moral obligation even though no legal one exists. It pays, up to $1000, for damage to the property of others that is caused by an insured regardless of the insured's legal liability. The $1000 limit cannot be increased.

The insuring agreement of this coverage states the following:

The harm must be caused by an insured and the property must have been damaged. If the insured borrows a neighbor's golf clubs and loses one, the loss would not be covered.

Damage to Property of Others Exclusions There are five exclusions relating to this coverage:

Losses Covered under Section I. First, under the Damage to Property of Others coverage, the policy excludes any loss to the extent of any amount recoverable under Section I of the policy. As you will recall, the definition of insured property under Section I includes owned property and any property used by an insured. If the insured borrows personal property, it may be considered insured property just as if it the insured owned it. If such property is damaged by one of the perils insured against under Section I, the insured may collect for the damage under that policy section. However, subject to the coverage limit, payment can be made under Section II for any part of the loss (including the deductible) that is not covered under Section I. The Damage to Property of Others coverage is excess over Section I, but it permits payment up to the coverage limit of any part of the loss not covered by Section I.

Intentional Damage. The coverage does not apply to property damage or destruction caused intentionally by any insured who has attained the age of 13. The Intentional Damage exclusion under the liability coverage does not specify any age limit, thus eliminating all intentionally caused damage. Under the Damage to Property of Others coverage, deliberate damage by insureds under the age of 13 is covered up to a limit ($1000).

Owned and Rented Property. The third and fourth exclusions eliminate coverage for damage to property owned by any insured or owned by or rented to any resident of the insured's household or any tenant of the insured. This exclusion is less restrictive than the exclusion of Damage to Property in Care, Custody, or Control of the Insured in the Liability coverage. The Damage to Property of Others exclusion, like the Liability coverage exclusion, cites damage to property owned or rented, but it does not mention property in the care, custody, or control of the insured. This means that coverage would exist for damage to borrowed property up to $1000.

Business Pursuits, Uninsured Locations, and Vehicles. The fifth exclusion relating to this insuring agreement has three parts. It excludes any damage from the insured's business pursuits. It excludes damage resulting from acts or omissions in connection with uninsured owned or rented premises. Finally, it excludes all damage resulting from the ownership, maintenance, or use of a motor vehicle, aircraft, hovercraft, or watercraft. An exception to this last exclusion provides that the exclusion does not apply to nonowned motor vehicles not subject to motor vehicle registration.

Loss Illustrations Several illustrations will clarify the intent of this coverage of damage to property of others. First, assume the insured borrows a neighbor's power lawn mower. While mowing the lawn, he inadvertently runs over a large rock and damages the machine extensively. Our insured will be legally liable for the damage, but his liability insurance will not cover the loss because of the Care, Custody, or Control exclusion. Since the loss stemmed from physical damage to the property of others and was caused by an insured, the Damage to Property of Others coverage will be applicable up to $1000. The insurance is, thus, designed to provide coverage for property damage for which the insured is liable but that is excluded elsewhere in the contract.

The student, however, should recognize that not all losses involving property of others in the care, custody, or control of the insured are covered. To illustrate, if the borrowed lawn mower had been placed in the insured's garage overnight and had been stolen, the loss would not be paid because there would have been no physical injury or destruction caused by an insured. If lightning had struck the garage and burned it to the ground, destroying the lawn mower, this loss would not be paid for the same reason.¹³

As a second example, assume the insured and her two-year-old son are visiting friends. While the adults are talking, the child finds a bottle of laundry bleach, brings it into the living room, and before anyone can react, slams the bottle down on a glass-topped coffee table. The table is broken, as is the bottle, and the bleach damages part of the rug. The facts would strongly imply no legal liability exists on the part of the child or his parents, but the parents might feel a strong moral obligation to pay for the property damage. Unless an insured is legally liable, the policy's liability coverage would not apply. However, since the loss was caused by an insured (the son), payment would be made up to $1000 under the Damage to Property of Others coverage. The coverage is designed to indemnify for moral obligations like this one even though no responsibility exists.

As a final illustration, suppose the insured's 10-year-old son has a fight with a neighboring child. In revenge, the boy heaves a brick through the neighbor's plate-glass picture window. This loss would not be paid under the liability coverage because it was an intentional act by the insured. However, the coverage for Damage to Property of Others would pay up to $1000 since only intentional acts of insureds who have reached the age of 13 are excluded.

In summary, the coverage provides a limited amount of protection (up to $1000) for Damage to the Property of Others that the insured may have in his or her care, custody, and control. In addition, it provides limited restitution for intentional damage caused by the insured's minor children, provided they are under 13 years of age. Finally, it serves as some coverage in those cases where there is no legal liability but where the insured feels a moral obligation.

Loss Assessment Coverage The Section II Loss Assessment coverage, like the Section I coverage, applies to assessments against the insured by a condominium association or other cooperative body of property owners. Coverage applies for assessments arising out of legal liability covered under the terms of the homeowners liability coverage. Coverage is limited to $1000, but an increased coverage limit is available by endorsement. Coverage is included for the insured's liability as an elected, uncompensated officer, director, or trustee of the corporation or association of property owners. However, the coverage excludes assessments charged against the insured or the group by any government body.

Section II Conditions

Section II of the Homeowners Policy is subject to its own set of conditions and to the general conditions applicable to Sections I and II.

Limit of Liability The Limit of Liability provision states that the liability limit shown in the declarations for Coverage E is the maximum payable, regardless of the number of insureds involved, claims made, or persons injured. The maximum payable for all medical expenses of one person as the result of one accident will not be more than the limit listed for Coverage F in the declarations.

Severability of Insurance The insurance applies separately to each insured. Historically, this has been interpreted to mean one insured could bring suit against another under the policy. Under the Comprehensive Personal Liability (CPL) form, however, suits by the named insured and residents of the household are excluded.

Duties after Loss In the event of loss, the insured must cooperate with the insurer in several ways. In addition to giving notice of loss to the insurer with information concerning the loss (e.g., name of the claimants and witnesses if possible), the insured is required to forward promptly to the insurer every notice, demand, summons, or other process relating to the loss and, at the company's request, cooperate in making settlement, attending trials, and so on. In addition, the insured may not admit liability or voluntarily make payment or assume any obligations at the time of a bodily injury, other than first aid.

Duties of Insured Persons—Coverage F—Medical Payments to Others A person seeking payment under the medical payments coverage must give written proof of loss, authorize the insurer to obtain medical records, and submit to a physical examination by a doctor of the insurer's choice.

Payment of Claim—Coverage F Payment of a claim under the Medical Payments coverage is not to be taken as an admission by the insurer of liability on the part of an insured.

Suits against Us No legal action may be brought against the insurer unless the insured has complied with the policy terms. Furthermore, a claimant does not have the right to bring the insurer into an action to determine the insured's liability. A claimant cannot sue the insurer until the insured's liability has been established by judgment or by agreement with the insurer.

Bankruptcy of Insured A covered person's bankruptcy or insolvency does not relieve the insurer of its obligation under the policy. If the insured is sued and declares bankruptcy, thereby discharging his or her portion of a judgment, the insurer is still obligated to pay the judgment part covered by insurance.

Other Insurance—Coverage E The liability coverage is excess over any other valid and collectible insurance, except for umbrella liability policies or other excess policies written specifically to cover on an excess basis.

Cost of Personal Liability Insurance

The CPL coverage cost is less than one might imagine. Although the premium for the liability section of the Homeowners Policy is included in the basic premium for the policy, the cost per year of a separate CPL policy with the basic $100,000 limit for liability and $1000 for medical payments is about $40. Increasing the limits of liability increases the policy cost slightly. A $300,000 limit raises the cost to about $60, and a $500,000 limit increases the cost to about $70. Higher limits of coverage are available from most companies, but when limits in excess of $300,000 or $500,000 are desired, an Umbrella Liability policy is generally used. In view of the catastrophic potential of the liability exposure and the low cost of increased limits, the sophisticated insurance buyer should elect the higher limits.

Optional Personal Liability Endorsements

Although the liability coverage afforded under the homeowners contract insures most of the nonautomobile liability exposures of the average individual, a number of optional endorsements are available to broaden the coverage or to deal with the specialized exposures of particular individuals. One of these, the Business Pursuits Endorsement, has been discussed. A few of the other optional endorsements are discussed next.

Personal Injury Liability Endorsements The basic insuring agreement of the liability section of the Homeowners Policy, like the separate CPL policy, provides protection against losses resulting from “bodily injury,” which is defined as “bodily harm, sickness or disease, including required care, loss of services, and death that results.” This means there is no coverage for losses from tort actions such as libel, slander, defamation of character, false arrest, or invasion of the right of privacy, none of which involves bodily harm. Coverage for such suits is provided under a separate form of coverage referred to as Personal Injury Liability.

Under the 2011 version of this endorsement, coverage is provided for five groups of hazards:

1. False arrest, detention or imprisonment;
2. Malicious prosecution;
3. The wrongful eviction from, wrongful entry into, or invasion of the right of private occupancy of a room, dwelling or premises that a person occupies, committed by or on behalf its owner, landlord, or lessor;
4. Oral or written publication of material, in any manner, that slanders or libels a person or organization or disparages a person's or organization's good, products, or services; or
5. Oral or written publication, in any manner, of material that violates a person's right of privacy.

The coverage is subject to several exclusions. Exclusions apply with respect to personal injury arising out of (1) acts when the insured knew the act would violate the rights of another and would inflict personal injury, (2) oral or written publication when the insured knew it was false, (3) oral or written publication that occurred before the policy's inception, (4) a criminal act committed by the insured, (5) liability assumed under contract, (6) injury to the insured's employees, (7) the insured's business pursuits, (8) any civic or public activities the insured performs, (9) injury to the named injured or family members, (10) pollution, and (11) fungi, including mold.

Additional Residence Rented to Others In the discussion of “insured locations,” we noted that all residence premises owned by the insured at the policy's inception must be declared and an additional premium paid for each. When the insured is a rental property owner, the policy's basic terms must be altered to provide liability insurance for bodily injury or property damage arising out of such premises. Different endorsements are used, depending on whether the rental unit is part of the insured's own residence or a separate location. These endorsements only provide liability coverage, and separate Dwelling policies are required to provide property coverage.

Watercraft and Snowmobile Endorsements When the insured owns watercraft excluded by the basic provisions of the Homeowners Policy or a recreational motor vehicle, such as a snowmobile, there is a need for additional liability coverage on these items. Endorsements are available for adding coverage on watercraft and snowmobiles under the Homeowners Policy. However, these endorsements provide only liability coverage and do not allow for any reimbursement for the loss of the boat or snowmobile. For this reason, the liability coverage for these items is not usually added to the Homeowners Policy but is carried under a separate policy providing physical damage coverage.

PROFESSIONAL LIABILITY INSURANCE

The term professional liability refers to liability arising from a failure to use due care and the degree of skill expected of a person in a particular profession. In cases in which there is exposure to bodily injury (as with physicians, surgeons, and dentists), professional liability insurance is normally called malpractice insurance. In instances in which the risk involves property damage (including intangible property), the coverage is referred to as errors and omissions insurance; this coverage is applicable to such professions as insurance agents, attorneys, accountants, architects, and real estate agents.¹⁴

Malpractice Insurance

Malpractice insurance, which is written for physicians, surgeons, dentists, and hospitals, provides the best example of professional liability insurance. The need for such protection is obvious. In addition to being exposed to liability that may arise because of a professional mistake or error, members of these professions are subject to suits alleging assault and battery for actions taken without the patient's consent, libel and slander in connection with a breach of professional confidence, false imprisonment or wrongful detention, and invasion of privacy through undue familiarity. There are special coverage forms available for anesthetists, barbers, beauticians, chiropractors, dental hygienists, masseurs, morticians, nurses, opticians, pharmacists, psychiatrists, radiologists, surgeons, and veterinarians. Time and space do not permit a detailed analysis of the various coverages designed to insure the various classes, but a brief examination of Physicians', Surgeons', and Dentists' Professional Liability coverage should suffice to illustrate their nature.

Although there is a standard bureau form of Physicians', Surgeons', and Dentists' Professional Liability coverage, a limited number of companies write most of the coverage using their own special forms. Many of the provisions of these forms have been changed recently, primarily as a result of the difficulties encountered by insurers in this field.

Several features of these forms deserve comment. First, the policy is not limited to bodily injury or property damage; it includes liability for personal injury losses such as mental anguish in which there is no bodily injury. There is not even an exclusion of intentional acts, a logical feature, since the act that gives rise to the liability may be the one that the physician or dentist intended.¹⁵

At one time, most policies were written to cover errors or mistakes made during the policy period, with no time limit on the discovery of the injury. This resulted in a phenomenon known as the “long tail on losses.” If a surgeon left a sponge in a patient and the error was not discovered for 20 years, the insurer providing the insurance at the time of the operation would be responsible for the loss. This made coverage pricing difficult, particularly in view of the rapidly increasing levels of malpractice awards. Many companies found themselves paying 1970 losses with 1950 premiums. To counter the difficulties resulting from these so-called occurrence form policies, many insurers changed to a claims-made form, in which the policy in effect at the time a claim is reported responds for the loss, regardless of when the error was made.

A more recent development is the occurrence-first-reported form, a hybrid between claims-made and occurrence forms. Under the occurrence-first-reported form, coverage is provided if the insured provides notice of an occurrence during the policy period even if a claim has not yet been made. Occurrence, claims-made, and occurrence-first-reported coverage triggers are discussed further in Chapter 32.

A second feature that many insurers have modified is the provision regarding defense and settlement. Under the older policy forms, the insurer was required to obtain the insured's consent before settling any claim out of court. The reason was to protect the doctor's reputation. A voluntary claim payment by the insurance company could be interpreted as an admission of fault and could be injurious to the physician's reputation. Most of the newer policies have deleted the requirement that the insurer obtain the insured's consent before making an out-of-court settlement.

Errors and Omissions Insurance

A wide range of professions have a possibility of property damage resulting from the rendering or failure to render professional services. Included within this group are abstractors, accountants, insurance adjusters, architects, county clerks and recorders, engineers, insurance agents and brokers, lawyers, real estate agents, stockbrokers, and travel agents. In the case of these professions, errors and omissions insurance coverage is available to pay for liability arising out of the performance of the professional duties. Coverage is tailored to the needs of the specific profession. The modern trend is to provide such coverage on a claims-made basis and to delete previous requirements with respect to the insured's consent for an out-of-court settlement.

UMBRELLA LIABILITY POLICY

Many persons, particularly professional and well-to-do members of our society, are subject to liability claims of catastrophic proportions. These claims may stem from personal activities or professional or business pursuits and can exceed the limits of the basic liability forms by hundreds of thousands of dollars. The affluent are subject to high jury awards since they are always regarded as fair game for large settlements. To provide catastrophe liability protection for such individuals, insurance companies have developed the Umbrella Liability Policy. Since 2003, the American Association of Insurance Services (AAIS) and the Insurance Services Office (ISO) have developed standard umbrella policy forms; however, many companies use their own forms. An umbrella liability policy may be described as a broad form of liability insurance, covering general and automobile liability, which is purchased in addition to the separate basic liability contracts.

To qualify for an Umbrella Liability Policy, the insured is required to purchase certain underlying liability insurance. For example, the insurer may require automobile liability insurance with limits of $250,000/$500,000/$100,000 and CPL coverage in the amount of $300,000. If other special exposures exist, coverage will be required for these in the basic program. For example, if the applicant owns a watercraft excluded under the basic CPL, that craft must be insured. The umbrella policy is then written as excess coverage over the limits of the basic policies. The limit of liability under the umbrella may range from $1 million to $5 million.

The Umbrella Liability Policy performs two separate functions, the net effect of which is to superimpose a blanket or umbrella of protection on the individual's other liability coverages. The first function is that of providing “excess coverage” in those instances in which a liability loss covered under the basic policies exceeds the those policies' limits. For example, if the insured is the object of a liability claim for $500,000 covered by the Homeowners Policy or automobile insurance, the basic liability policies involved would respond for the first $300,000, and the umbrella would pay the remaining $200,000.

The second function of the umbrella is to establish broader coverage than provided under the basic contracts. Given the variety of policies available, generalization is difficult, but most policies are written with broad insuring agreements and are subject to fewer exclusions than the basic policies. Thus, many losses normally excluded under the basic contracts are covered under the umbrella. For example, the automobile liability coverage applies worldwide, with no restrictions regarding the type or use of the automobile.¹⁶ In addition, the coverage is usually written to include personal injury hazards and blanket contractual liability.¹⁷

When a liability claim is covered under the umbrella but not by one of the underlying contracts, the umbrella will respond, subject to a self-insured retention or deductible. The size of this deductible varies considerably among companies. On most personal umbrellas, it was originally $5000 or $10,000, but several companies market policies with a retention as low as $250. This deductible applies only where the loss is not covered by the basic contracts. If the loss is covered under the basic contracts, the umbrella responds from the first dollar once these policies are exhausted.

Exclusions under the Umbrella Liability Policy

Although the coverage under the Umbrella Liability Policy is far broader than that of the individual contracts, it does not cover all risks. There are exclusions, and some of them are important. There is an exclusion of owned or leased aircraft, watercraft of the type excluded under the basic homeowners policy, business pursuits, and professional services, unless coverage for these exposures has been provided in the underlying insurance program. If such coverage is afforded by the underlying program, the umbrella covers these exposures. In addition, workers compensation obligations are generally excluded; however, as in the case of the underlying CPL or Homeowners Policy, employers liability coverage is provided. Any act committed by, or at, the direction of the insured with the intent to cause personal injury or property damage is excluded. With the exception of aircraft or watercraft, there is no exclusion of property rented to or in the care, custody, and control of the insured; however, damage to rented or borrowed aircraft and watercraft is excluded. Finally, damage to property owned by the insured is excluded.

Cost of the Umbrella

Despite the high limits and the extreme broadness of the insuring agreement, the cost of the Umbrella Liability Policy is not excessive. Although the premium will vary with the insured's occupation and certain other variables such as the number of automobiles in the family, usually the annual cost is less than $200.

IMPORTANT CONCEPTS TO REMEMBER

third-party coverage

general liability insurance

business pursuits

Business Pursuits endorsement

insured location

motor vehicles

negligent entrustment

Comprehensive Personal Liability

contractual liability

fire legal liability insurance

care, custody, and control exclusion

Medical Payments to Others coverage

personal injury

single limit of liability

communicable disease exclusion

intrafamily suits

damage to property of others

claim expenses

first aid expenses

Loss Assessment coverage

Personal Injury Liability

professional liability

errors and omissions

Umbrella Liability Policy

professional liability insurance

malpractice insurance

long tail on losses

occurrence form

claims-made form

occurrence first-reported form

errors and omissions insurance

QUESTIONS FOR REVIEW

1. Why is liability insurance sometimes called third-party coverage?

2. Briefly explain the definition of the term premises as used in the Homeowners Policy with respect to Section II (liability) coverages.

3. Who is included within the definition of “persons insured” under Section II of the Homeowners Policy?

4. Briefly describe the coverage provided under the Medical Payments coverage under Section II of the Homeowners Policy. To whom does the coverage apply? To whom does it not apply?

5. Jones is playing golf and runs over her partner's foot with a rented golf cart. Will the Personal Liability coverage or the Medical Payments coverage respond for the injury?

6. What coverage exists under Section II of the Homeowners Policy for those situations in which the insured feels a moral obligation but where no legal obligation exists?

7. Jones owns a vicious German shepherd. The dog bites a mail carrier about three blocks away from Jones's premises. Discuss fully the coverage under Section II of the Homeowners Policy for this occurrence.

8. Briefly describe the Fire Legal Liability coverage found in Section II of the Homeowners Policy. To whom does it apply? What factors create the need for this coverage?

9. Explain the nature of the personal umbrella liability policy. In your explanation, be sure to point out the relationship of the umbrella to the underlying coverage and the application of the deductible.

10. Distinguish between a claims-made malpractice policy and an occurrence policy. What factors prompted the development of the most recent of the two?

QUESTIONS FOR DISCUSSION

1. For each of the following losses, indicate whether coverage would exist under Coverage E, the liability coverage, of Section II of the homeowners policy:

1. A young lady of the insured's acquaintance brings suit against him because of scurrilous remarks he made about her virtue.
2. A cleaning lady slips on the wet bathroom floor in the insured's home and brings suit to collect for her injuries.
3. The insured throws a party at which one of the guests has too much to drink and injures a pedestrian while driving home. The injured party brings suit against the insured because the driver became intoxicated at the insured's party.
4. The insured borrows a motorboat powered by an 85-horsepower outboard motor and runs over a waterskier, who brings suit.
5. The insured's wife borrows a friend's mink stole and negligently burns a hole in it with a lighted cigar. The friend demands payment.

2. For each of the following losses, indicate whether coverage would exist under Coverage F, the Medical Payments coverage, of Section II of the Homeowners Policy:

1. The insured's 65-year-old mother-in-law, who is living in his house, falls down the basement stairs and is injured.
2. The insured's dog playfully nips a mail carrier, whose wounds require 14 stitches.
3. The insured's cleaning lady mistakes a bottle of cleaning fluid for gin and has to have her stomach pumped.
4. The insured's babysitter slips on a loose throw rug while carrying the insured's child, and both are injured.

3. For each of the following losses, indicate whether coverage would exist under the supplementary coverage for Damage to the Property of Others.

1. The insured borrows a neighbor's lawn mower; while it is left outside overnight, it is stolen.
2. The insured's nine-year-old son pours sugar in his teacher's gas tank, resulting in extensive damage to the auto's engine.
3. The insured accidentally spills a glass of bourbon on his neighbor's dress, which is ruined as a result.
4. The insured backs his car over a neighbor's child's wagon, and though it is hardly worth a lawsuit, the insured would like to pay for the damage.

4. A friend, explaining his position with respect to liability insurance, states, “I don't feel I need the high limits of liability because I don't make that much money. If I were a doctor or a lawyer, I would carry higher limits of liability coverage, but since I am not, the $100,000 minimum included in my homeowners policy is enough.” Do you agree or disagree? Why?

5. Mary Somers babysits for working mothers. She has 11 small children, ages two to four, in her care. She is concerned about potential liability if one of the children should be injured and wonders if her Homeowners Policy provides any coverage. What advice would you give her?

SUGGESTIONS FOR ADDITIONAL READING

Cook, Mary Ann. Personal Risk Management and Property-Casualty Insurance, Malvern, Pa.: American Institute for Chartered Property Casualty Underwriters/Insurance Institute of America, 2010.

Fire, Casualty, and Surety Bulletins, Personal Lines Volume. Erlanger, Ky.: National Underwriter Company. Available electronically at: http://cms.nationalunderwriter.com/.

Olson, Robin K. “Insuring the Home-Based Business,” CPCU EJournal, July 2006.

WEB SITES TO EXPLORE

Insurance Information Institute	www.iii.org
International Risk Management Institute	www.irmi.com
NAIC InsureU	www.insureUonline.org

¹As we will see in the following discussion, comprehensive personal liability coverage is an exception to the general principle since it includes coverage for injuries to domestic employees.

²Personal liability coverage is available as an endorsement to the dwelling forms under the Personal Liability Supplement. The same endorsement is combined with a set of conditions and a declarations page to form a separate monoline personal liability policy.

³Under a single limit of liability of liability, the insurance company will pay up to that limit for bodily injury or property damage arising out of a single occurrence. This is in contrast with split limits, such as those used in some automobile policies. Automobile limits of $10,000/$20,000/$5000 mean that the insurance company will pay up to $10,000 for each person injured, up to $20,000 for all persons injured, and up to $5000 for property damage arising out of a single occurrence.

⁴Some courts have found coverage in instances when an insured shot at one person and hit another. This led to the rewording about injuries “of a different kind” or sustained “by a different person” in the 2000 revision. In addition, the earlier version excluded loss “expected or intended by the insured” while the new wording excludes loss “expected or intended by an insured.” In Arenson v. National Automobile and Casualty Insurance Co., 286 PC. 2d, 816 (1976), the court held that coverage applied where the parent was held liable for the son's intentional damage despite the exclusion of damage the insured intentionally caused. The court based its decision on the insured who was held liable (the parent) had not caused the damage intentionally. It remains to be seen how courts will interpret the new wording.

⁵This endorsement can be used to modify coverage under Section I of the Homeowners Policy for property used in business. Specifically, it can be used to increase the coverage amount for on-premises property used primarily in business, which is otherwise limited to $2500. It can also be used to cover other structures used for business purposes under Coverage B—Other Structures.

⁶A mandatory endorsement (HO 04 96, No Section II—Liability Coverage for Home Day Care Business: Limited Section I—Property Coverage for Home Day Care Business) is attached to the policy when the Home Day Care Coverage endorsement is not used.

⁷Professional liability insurance is discussed later in the chapter.

⁸In the Condominium Unit–Owners Form 6 only, there is an important difference in the definition of residence premises. Instead of the limitation for other than one-family or two-family residences to “that part of (the) building where you reside,” the definition reads “a condominium unit where you reside shown as the ‘residence premises’ in the Declarations.”

⁹Coverage on additional premises acquired during the policy period is automatic. However, a small additional premium must be paid by the insured for each one of the premises.

¹⁰The landlord might sue the tenant who negligently sets fire to the apartment or dwelling. However, the landlord may not sue but collect instead from his or her fire insurance company. What do you suppose the fire insurer will do?

¹¹In most states, domestic servants in a private home are not subject to the workers compensation law, but the employer may voluntarily bring them under the law by purchasing the appropriate insurance. In California, New Hampshire, New Jersey, and New York, workers compensation insurance is required for all residence employees, and the coverage may be added to the Homeowners Policy under a workers Compensation Endorsement. Other states (Colorado, Connecticut, Delaware, Hawaii, Iowa, Kansas, Kentucky, Maryland, Minnesota, Missouri, New Jersey, Ohio, Oklahoma, South Dakota, Utah, and Washington) require workers compensation insurance for residence employees working some minimum number of hours or with certain minimum earnings. In these states, the coverage is usually provided under a separate workers Compensation Policy.

¹²Intrafamily suits were covered before 1984, and insurers were often called on to pay judgments when one family member injured another. Usually, such suits involved actions in which a parent brought suit on behalf of an injured child against the other parent who negligently caused the injury. Sometimes, when permitted, an injured spouse would sue the negligent partner who caused the injury. Although the common-law rule is that one spouse may not sue the other for tort, some states have modified this rule. Those states in which a suit may be brought by one spouse against the other are Alabama, Arkansas, California, Colorado, Connecticut, Hawaii, Idaho, Kansas, Kentucky, Minnesota, New Hampshire, New York, North Carolina, North Dakota, Ohio, Oklahoma, South Carolina, South Dakota, and Wisconsin. In Louisiana, a spouse cannot sue the other but may sue the other's insurer.

¹³The stolen lawnmower and the one destroyed in the fire would be covered under the Section I property coverage of the insured's Homeowners Policy.

¹⁴Some authors prefer to treat professional liability coverages in the chapter on commercial contracts.

¹⁵The injury must arise out of rendering or failure to render professional service. Liability arising from other causes is not covered, which means that professional liability coverage is not a substitute for other forms of liability insurance. It is a coverage purchased in addition to other general liability coverage.

¹⁶As the reader will realize in Chapter 29, the automobile policy limits coverage to the United States and Canada and imposes restrictions on the automobile type and use that are covered.

¹⁷The breadth of umbrella liability policies is (perhaps) illustrated by two personal umbrella policies, which paid $1.5 million of the legal bills incurred by former President Clinton in the Paula Jones case. Umbrella liability policies were issued to the Clintons by State Farm Insurance Company and Pacific Indemnity Insurance Company (a subsidiary of Chubb Group Insurance). See http://www.washingtonpost.com/wp-srv/politics/special/pjones/stories/pj091097.htm.