Homeowners Audio (Part #3) Liability Insurance

Homeowners Audio (Part #3) Liability Insurance Welcome to the Insurance University audio series. The topic of this presentation is Homeowners Insurance. This is part three in the series. Part one discussed the steps in reviewing the residential property and identifying exposures to be reviewed for company eligibility. In part two we discussed Section I Property Insurance and in this audio we will be talking about Section II Liability Insurance and endorsements. As with the property insurance discussion we will be using the ISO Homeowners Policy as the basis of discussion bearing in mind that individual insurance company forms may differ from the ISO standard form language. In our discussion of property insurance we pointed out the distinction that property is first party coverage and liability is third party coverage. First party coverage pays the insured for damage to property they own or for which they are legally liable. As a contrast, liability does not pay an insured for a loss but rather pays on behalf of the insured because the insured is responsible for an injury or damage to someone else or someone else s property. In reviewing the Liability section of the policy we will be discussing the following components of the policy. Definitions Section II Liability Coverages Exclusions, Additional Coverages and Conditions. We will begin with the Definitions. As relates the liability coverages, probably the three most important definitions: are Bodily Injury ; Property Damage and Occurrence. The lead in paragraph under Personal Liability incorporates all three of these terms by stating: If a claim is made or a suit is brought against an Insured for damages because of bodily injury or property damage caused by an occurrence to which this coverage applies, we will which then goes on to discuss how it will pay. In the paragraph the first defined word is insured which was discussed in our prior audio but we have to revisit it here because there Copyright 2011 Insurance Community Center - Materials created by Laurie Infantino - www.insurancecommunitycenter.com Page 1

is special meaning attached to the word insured relating to liability. The definition expands the term insured as relates animals, watercraft and motor vehicles. The definitions states that as relates animals or watercraft to which the policy applies the insured also includes any person or organization legally responsible for the animals or watercraft owned by the insured. So, for example, if the insured hires a dog walker to walk the dog when they are at work and the dog bites someone both the insured AND the dog walker will probably be sued. Under this definition the dog walker would be covered and defended on the insured s policy. The next defined word in the agreement is bodily injury which is defined as bodily harm, sickness or disease. For example, if an insured was playing golf and mistakenly their golf ball hit another player in the head causing injury the bodily injury sustained by the injured party would be covered on the liability policy. Under the liability section this definition will be narrowed by exclusions such as the intentional acts exclusion which would preclude loss if the insured intentionally injured another person. In addition, bodily injury excludes any personal injury. Personal Injury is distinguished from bodily injury in that personal injury occurs as a result of an insured s actions in damaging another party by such acts as libel, slander, false arrest, wrongful eviction, and invasion of privacy. This is not bodily injury as previously defined but in a broad sense psychological damage such as damage to someone s reputation. The two major allegations in the areas of personal injury are libel and slander. Simply stated, slander is saying something false and damaging that could ruin someone s reputation. For example the insured might accuse the principle of the school of falsifying test results in exchange for money which causes the principle to be temporarily put on suspension from the school. Libel differs from slander in that the injurious statements are made in writing. Using the same example, the insured sends around an email to all the parents in the school that the principle is taking bribe money to falsify test results. In both of these cases there is no coverage under the definition of bodily injury which is further clarified in the liability section of the policy. However there is an endorsement available to add coverage with the Personal Injury Endorsement. Property Damage differs from bodily Injury in that it is physical damage to tangible property which includes the loss of use as a result of the physical damage. Using the same example with the golfing accident, this time the golfer hits his ball into neighbor s plate glass windows that had to be replaced for $2500.00 each. Or an insured that mistakenly dropped a glass of red wine on her host s new white carpeting requiring that the carpeting be replaced. These acts were accidental and covered under the Property Damage definition. There are several definitions included specifically because there will be exclusions or limitations in the form that relate to the defined terms. Examples of these definitions include: aircraft liability; hovercraft liability; motor vehicle and motor vehicle liability; and watercraft Copyright 2011 Insurance Community Center - Materials created by Laurie Infantino - www.insurancecommunitycenter.com Page 2

liability. While limited coverage will be provided for some of these categories there are specific insurance policies designed to cover these types of items. An important definition in the policy is the term business. A Homeowners Policy is designed for a residence occupied and used as a residence. However, it is quite common for a homeowner, now days, to be working out of their home either as an employee working remotely for a company or an individual who actually is running a business out of their home. There are exclusions and limitations in both the property AND liability section relating to business. For that reason it is important to understand how the form defines business. The definition is very broad defining business as a trade, profession or occupation engaged in on a full-time, part time or occasional basis. Because this definition is so broad, the exclusion that will later apply will also be very broad. There are then exceptions based on the money earned per year; if it is volunteer or if it is a day care for which there is no money earned. We will be revisiting the issue of business in the home when we look at both the property and liability coverages and then the endorsements that are available. This discussion was an overview of the definitions in a Homeowners Policy. Again we caution that every insurance company form has to be reviewed to determine the meaning and intent of the definitions in their specialty forms The Liability section of the policy provides for two coverage agreements: Personal Liability and Medical Payments to Others. Beginning with the Personal Liability. Note that the title does not say premises liability and that is an important concept to understand. The liability coverage is not restricted to an act committed on the insured s residence premises but rather provides coverage if a claim is made against an insured for bodily injury or property damage caused by a covered occurrence that occurs anywhere the world. There is no territory definition in the standard ISO Homeowners Policy. An insured could be on vacation in Florida or even out of the country where they inadvertently injure someone and coverage would apply. A word of caution, however, if an act occurs in a foreign country such as Mexico, the laws in Mexico may dictate how the claim is settled. The Mexican government may not recognize that insurance company s authority thereby requiring the insured to pay the expenses and settlement first and then the insured would seek reimbursement from their own insurance company. Personal Liability has paragraphs that discuss how the form will pay. The first part deals with damages payable on the form and states the form will pay liability claims up to the limit specified on the policy. The second part states the form will provide a defense at the company s expense by counsel chosen the insurer. The defense paragraph states that the insurer s duty to settle or defend ends when their limit of liability for the occurrence has been exhausted by payment of a judgment or settlement. What this paragraph did NOT say was that Copyright 2011 Insurance Community Center - Materials created by Laurie Infantino - www.insurancecommunitycenter.com Page 3

the cost to defend the action was limited by the limit of insurance. This is often stated as the defense cost is outside of the limit. Often times the cost to defend a lawsuit far exceeds the judgment imposed. The second coverage provided under the Section II Liability Coverages is Medical Payments to Others. It is important to read between the lines on the title of the coverage. It does NOT say Medical Payments to Others for which the insured is legally liable. For the most part when we use the term legally liable, specifically as relates this policy, we are discussing negligence or the allegation of negligence on the part of the insured. So when this coverage is titled simply Medical Payments to Others it does not imply that the insured is negligent or legally liable for the medical payments. For example, the homeowner invites a friend to lunch and the friend trips on the door threshold when they entered and falls to the ground and breaks their leg. The medical payments states it will pay the necessary medical expenses that are incurred or medically ascertained within three years from the date of an accident that caused bodily injury ONLY to a person on the insured location and with the permission of the insured. The form states the bodily injury had to arise out of a condition on the insured location or the activities of an insured or caused by a residence employee or caused by an owned animal. Immediately following the Liability Coverages are the exclusions on the policy. We will discuss some of the major exclusions although the form should be reviewed in careful detail for all of the excluded situations. One of the first exclusions is for motor vehicles because they should be covered on specific policies such as the Personal Auto Policy. There are certain limited situations where there is coverage for motor vehicles such as when they are in dead storage on the insured location or a motorized golf cart under defined circumstances. There is a similar exclusion for Watercraft Liability with limited coverage provided by an exception to the exclusion for sailing vessels that are limited in size or inboard/outboard boats limited in horsepower. There is an endorsement available to add liability and medical payments to Watercraft however a better solution would be to insure the watercraft on a separate policy covering both the boat and the liability for the boat. Some of the additional liability exclusions include: Aircraft Liability Hovercraft Liability Liability arising out of acts that were expected or intended to cause injury such as purposely hurting someone Professional Services such as if an insured is conducting a business out of their home, such as doing bookkeeping and is sued for errors in accounting that caused damage to their customer Copyright 2011 Insurance Community Center - Materials created by Laurie Infantino - www.insurancecommunitycenter.com Page 4

Communicable Disease Sexual Molestation, Corporal Punishment; Mental Abuse Sale of a controlled substance as defined in the Federal Food and Drug Laws as cited in the form Two exclusions that have remedies by attachment of endorsements are the bodily injury to employees and business exclusions. Bodily injury is excluded for any person eligible to receive any benefits provided or required under any Workers Compensation Law; Nonoccupational Disability Law; or Occupational Disease Law. In many states, California included, Workers Compensation is a required endorsement and is rated based on the number of hours an employee works. For example if you have a housekeeper once a month that would be less expensive than if you had a live in housekeeper in residence five days a week. In order to qualify for Workers Compensation coverage for a residence employee they must have worked 52 hours for that employer and earned no less than $100.00 in wages in the ninety calendar days immediately prior to the injury. The business exclusion eliminates any bodily injury or property damage arising out of or in connection with a business conducted from an insured location whether owned or operated by an insured. There are some exceptions to the exclusions but more importantly several endorsements that can be added to the policy to expand coverage including: Home Business; Home Day Care Coverage; and Business Pursuits. Note that if the insured is actually conducting business out of their home a more appropriate solution is to provide a Business Owners Policy for the insured also known as a BOP. This concludes our discussion of the Liability Section of the Homeowners Policy which then leads us into our last liability topic for our personal insureds which is Excess Liability policies and Personal Umbrella coverage. Let s start with a basic understanding of both terms. An Excess Liability Policy which provides increased limits of liability in excess of a scheduled underlying Homeowners Policy. The Excess Policy can also be written to provide excess limits over other policies such as the Personal Auto Policy. The Excess Policy does not provide any broader or different coverages then those provided on the Homeowners Policy. Note that an Excess Policy may, in fact, be more restrictive than the coverage provided on the Homeowners Policy although that is fairly uncommon but still needs to be assessed. While the intent of the excess policy is specifically to provide excess limits and not expand coverage the Umbrella is written to both provide excess limits and provide coverage that may not be contained in the Homeowners Policy which is referred to as the underlyer. Copyright 2011 Insurance Community Center - Materials created by Laurie Infantino - www.insurancecommunitycenter.com Page 5

One of the qualifying conditions to purchase an Umbrella Policy is that the homeowner s liability or personal auto liability limits must be written at required limits of insurance. For example, the homeowner s minimum limits in order to qualify for an Umbrella could be $300,000. The umbrella policy can be written for various amounts such $1,000,000 up to $5,000,000 depending on the company. Umbrellas typically are not exceedingly expensive while providing additional limit; additional coverages and a separate duty to defend the insureds. Some insurance companies may call their umbrella policy an excess liability policy. ISO has provided a standardized umbrella policy, but the majority of insurance companies use their own form. This means that the forms can vary widely and care should be taken to review the forms from your available markets. A personal umbrella policy is a critical policy that should be offered to every client. This concludes our discussion of the Homeowners Policy. Within the University we have a Homeowners Checklist; Homeowners Exams and articles in the Community on specific topics. Copyright 2011 Insurance Community Center - Materials created by Laurie Infantino - www.insurancecommunitycenter.com Page 6