Last week's publication was focused on how to buy liability insurance and understanding the way the insurance companies write the coverages. This week I would like to continue our discussion on liability and discuss it with the insurance company and legal standpoints.
This week, we will look at three key circumstances that must occur for there to be a liability exposure. These three things are; a tort must be committed, it must cause a financial burden to a second party, and the potential exists for the need of a legal defense.
The Tort and the Tortfeasor:
For any liability claim to arise, there must be some wrongdoing done by the insured to a second party. This wrongdoing is referred to in the legal field as a "tort." The individual who commits the tort is known as a “tortfeasor.”
The tort can be to a person's body which is known as "bodily injury" in the insurance industry. For example, the tortfeasor is driving his vehicle down the road and hits a pedestrian who is walking across the street. The pedestrian's injuries are called "bodily injury."
Alternatively, the tort can be to someone's property which the insurance industry calls, "personal property." An example of this could be a tortfeasor colliding his vehicle with someone's parked car, or an insured dropping a friends computer on the sidewalk and breaking it.
The main point to understand is that there must be a tort committed and that it must be committed to a second party. I do not have a liability claim if I damage my property or injure myself. Let me use an example as this concept can get confusing. When I worked in claims, many people called in accidents where they backed into their vehicle. Liability does not cover this kind of claim. We have different coverages to cover this claim called "Collision."
A Financial Burden Must Exist:
The second thing that is required for a liability claim to exist is a financial burden. The second party must have sustained some loss that creates a financial need.
Bodily Injury creates medical bills, disability, time off work. These items lead to pain-and-suffering. However, pain and suffering cannot be the only item paid out on a liability claim. There must be a monetary loss from the second party.
Similarly, in if I rear-end the car in front of me, there must be repair costs and replacement costs. There is an actual monetary loss. As simple as it may sound, there are many times when claims get denied because there is no financial loss. Defamation of name is the best example that comes to mind. John does not like Sam. So John tells everyone that Sam is a jerk. Did John commit a tort? Yes, but is there a financial burden? No. Does Sam have a claim against John? No.
However, John does not like Sam. John tells all of Sams clients how deceitful Sam is and that they should take their business away from Sam. Did John commit a tort? Yes, Is there a financial burden? Yes! Does Sam have a claim? Yes!
Let the Legal Battle Begin:
Finally, The third item is not required to have a claim paid. As long as there are both a tort and a financial burden, there is enough for the insurance company to pay a liability claim. However, there is one time a claim can occur if there is not a tort or financial burden on the other party. A liability claim will arise if a lawsuit is filed out of an alleged claim.
What I am saying here is that it is possible that the insured has not committed a tort nor is there a financial burden, but a second party files a lawsuit alleging that a tort and financial burden did occur. We hear of innocent people being taken to court all the time in such a litigious society. When this happens, the insurance company will provide the insured with defense. The liability limits pay for the defense costs.
Let me give you an example of what I mean. As a former Claims Adjuster, I had a claim for a martial arts school. The claimant (plaintiff) filed a lawsuit against my client for injuries he obtained while at the martial arts school. My insured claimed that no injuries arose. During the investigation, we found that the claimant had multiple claims filed for similar issues and was being investigated for insurance fraud. There was no proof of bodily injury nor property damage.
The claimant argued financial burden for medical bills, but he was unable to show proof. We represented our insured in this legal battle and denied any liability coverage to the claimant. However, because there was a lawsuit, the insurance company had a claim open and used the coverage to pay for legal fees, attorney costs, and court fees. The jury ruled in our favor, however, if they had not, we would also have paid for damages. Ultimately the claim was denied, but the liability claim was initially open, and the insurance company spent money under the liability coverage.
When you are considering filing a liability claim, it is important to understand these few things. First, you can not be liable to yourself. Second, there must be a tort and financial loss. And third, the liability insurance will also cover your defense cost as long as you do not exceed the amount of coverage you carry.