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AUTO INSURANCE GUIDE AUTO INSURANCE GUIDE Completed Operations ................................. 32PART 1 LIMITS OF LIABILITY ........................................... 33SECTION I — EVOLUTION OF MULTIPLE-LINE OTHER USUAL EXCLUSIONS IN ALL SCHEDULE LIABILITY POLICIES ............................................. 34INSURANCE ......................................................... 5PURPOSES AND SIGNIFICANCE OF MULTIPLE-LINE Liquor Control Laws ..................................... 34INSURANCE ......................................................... 5 Workers’ Compensation and Employer’s Liability Exclusions .................................................... 34 What Multiple-line Insurance Includes ............ 6 Growth of the Multiple-line Concept ............... 7 Care, Custody or Control Exclusions ............. 34 Early Mono-Line Specialization ................. 7 X, C and U Exclusions .................................. 35 PRODUCT LIABILITY INSURANCE ........................ 35 Contrasting Trends of the Early 1900s ............ 7 Modern Multiple-line Legislation ............... 9 Modern Trend in Products Liability Law ......... 35 Recent Changes to Multiple-line Insurance ...... 9 Products Liability Coverage........................... 36 A TYPICAL POLICY ............................................. 37 Methods of Change ................................. 9 Requirements for Multiple-line Operations10 Policy Territory ............................................. 37NATURE OF THE LIABILITY HAZARD ................... 11 Applicable Limits .......................................... 38 Coverage Limits of Liability ..................... 38INTRODUCTION TO TORT LAW .......................... 12 Classification of Torts ................................... 12 Occurrence .................................................. 39NEGLIGENCE ..................................................... 13 PRODUCTS HAZARD CLAUSE ............................. 40 Injury or Damage Away From Premises ........ 41 Nature of Negligence ................................... 13 Standard of Care ......................................... 14 Possession Must Be Relinquished .................. 41 Elements of the Cause of Action ................... 15 COMPLETED OPERATIONS CLAUSE .................... 42 Completion of Operations ............................ 42 The No-Duty Rules ....................................... 15 Causation .................................................... 16 Exclusions to Completed Operations Clause . 43 Contributory Negligence .............................. 16 PRODUCTS LIABILITY EXCLUSIONS ..................... 44 Sistership Exclusion ...................................... 44SPECIAL NEGLIGENCE PROBLEMS ....................... 17 Malpractice .................................................. 17 Injury to Products Exclusion .......................... 45 Product Liability ............................................ 18 Injury to Work Performed Exclusion .............. 45 Business Risk Exclusion ................................. 46STRICT LIABILITY ................................................ 19JURIDICAL RISK .................................................. 19 PUNITIVE DAMAGES .......................................... 46 Cost of Defense ........................................... 19 COMPREHENSIVE LIABILITY INSURANCE ............. 47 Development of Blanket Liability Coverage .... 48 Claims Consciousness .................................. 20 Fact Distortion ............................................. 20 Types of Comprehensive Liability Policies ....... 48 Uncertainty in Legal Rules ............................ 21 COMPREHENSIVE GENERAL LIABILITY POLICY ..... 49 Insuring Clauses .......................................... 49 Legislation by Juries ..................................... 21GENERAL LIABILITY INSURANCE ......................... 22 Exclusions .................................................... 50CONCEPT OF A SCHEDULE POLICY .................... 22 Exclusions Applying Both to the Bodily Injury and Property Damage Coverages ................. 50INSURING AGREEMENTS .................................... 23 Bodily Injury Liability ..................................... 23 Exclusions Applying Only to the Bodily Injury Property Damage Liability ............................. 24 Insuring Agreement ..................................... 52 Exclusions Applicable Only to Property Damage Medical Payments ........................................ 24 Contractual Liability ..................................... 24 Insuring Agreement ..................................... 52 Defense, Settlement, Supplementary Minimum Policy Premiums and Comprehensive Coverage Charge ........................................ 53 Payments .................................................... 25 Definition of Insured .................................... 25 COMPREHENSIVE AUTOMOBILE LIABILITY Accident Versus Occurrence ......................... 26 POLICY ............................................................. 54 Comprehensive Liability Policy ....................... 54 Difference Between O. L. & T. and M. & C. .... 27 Elevator Liability ........................................... 28 ADDITIONAL POINTS ABOUT THE POLICIESLIABILITY CLAIMS ARISING OUT OF DISCUSSED ....................................................... 55 Personal Injury Versus Bodily Injury .............. 55CONSTRUCTION AND ALTERATION ................... 29LIABILITY FROM ACTS OF INDEPENDENT Caused by Accident Versus Occurrence ........ 55CONTRACTORS .................................................. 29 Occurrence Basis Property Damage .............. 55 Worldwide Territorial Provision ..................... 56THE PRODUCTS-COMPLETED OPERATIONSHAZARD ........................................................... 31 Company’s Exclusive Right to Settle Claims .... 56 Products ...................................................... 31 Composite Rating ......................................... 57 1

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AUTO INSURANCE GUIDETHE “WRAP UP” UNDERWRITING CONCEPT ........ 58 How Are Losses Settled? .............................. 77COMPREHENSIVE PERSONAL LIABILITY POLICY ... 58 PAP ENDORSEMENTS ......................................... 77FARMER’S COMPREHENSIVE PERSONAL LIABILITY Extended Nonowned Coverage .................... 77POLICY .............................................................. 59 Named Nonowner Coverage........................ 78PART 2 Miscellaneous Type Vehicle Endorsement ...... 78SECTION I — AUTOMOBILE INSURANCE ............ 60 Snowmobile Endorsement ............................ 78 Problems Associated with Automobile Accidents Limited Mexico Coverage .............................. 78 and Automobile Insurance ........................... 60 Coverage for Damage to Your Auto (Maximum Large Number of Automobile Accidents .. 60 Limit of Liability) ........................................... 78 High Cost of Automobile Accidents ......... 61 Joint Ownership Coverage ........................... 79 Uninsured and Underinsured Drivers ..... 61 Auto Loan/Lease Coverage .......................... 79 Difficulty of Some Persons in Obtaining Towing and Labor Costs Coverage............... 79 Automobile Insurance ............................ 61 Other Endorsements .................................... 79 Methods of Compensating Automobile Accident HARD-TO-INSURE DRIVERS ................................ 80 Victims ......................................................... 61 Insuring Hard-to-Insure Drivers ................... 80 Compulsory Insurance ........................... 62 Specialty Insurers ......................................... 80 Financial Responsibility Laws .................. 63 State Programs ............................................ 81 Unsatisfied Judgment Funds .................. 63 Automobile Insurance Plans ................... 81 Uninsured Motorists Coverage ............... 63 Joint Underwriting Associations .............. 81 Underinsured Motorists Coverage .......... 64 Reinsurance Facilities ............................. 81 No-fault Automobile Insurance .............. 64 SHOPPING FOR AUTOMOBILE INSURANCE ........ 81 Types of No-fault Laws ........................... 65 PERSONAL UMBRELLA LIABILITY INSURANCE ...... 83 Types of No-fault Benefits ....................... 66 General Nature ............................................ 83THE PERSONAL AUTO POLICY ............................ 67 Underlying Coverage Requirements .............. 84 Format of the PAP ........................................ 67 Who Are the Insureds? ................................ 85 Eligibility ...................................................... 67 What Exclusions Apply? ................................ 85 Definitions ................................................... 68 NO-FAULT AUTO INSURANCE ........................... 86 Covered Auto ........................................ 68 RECENT DEVELOPMENTS .............................. 86 You ....................................................... 69 BACKGROUND ............................................ 89 Family Member ...................................... 69 TYPES OF INSURANCE ....................................... 95 Occupying ............................................. 69 Personal Auto Insurance Coverages ............. 96 Policy Territory ....................................... 69 Protection for Auto Owners/Drivers .............. 97PART A—LIABILITY COVERAGE ........................... 69 Medical Payments Coverage ................... 97 What Is Covered? ........................................ 69 Collision and Comprehensive ................. 98 Who Are the Insureds? ................................ 70 Uninsured Motorist Coverage................. 99 What Exclusions Apply? ................................ 71 Miscellaneous Coverages ..................... 100 Other Insurance .......................................... 72 Umbrella Coverage .............................. 101PART B—MEDICAL PAYMENTS COVERAGE .......... 72 The Personal Auto Policy ............................ 102 What Is Covered? ........................................ 72 Personal Auto Liability Underwriting and Who Are the Insureds? ................................ 73 Ratemaking ............................................... 103 What Exclusions Apply? ................................ 73 Discounts ............................................ 103 Other Insurance .......................................... 73 Auto Liability Claims ............................. 104PART C—UNINSURED MOTORISTS COVERAGE ... 73 How Rates Are Set ............................... 105 What Is Covered? ........................................ 73 Are You a Good Risk? .......................... 106 Uninsured Vehicle ........................................ 74 Your Insurance Profile: Age, Sex and Who Are the Insureds? ................................ 74 Marital Status ...................................... 106 What Exclusions Apply? ................................ 74 Your Driving Record ............................. 106 Other Insurance .......................................... 74 The Records of the Family Members WhoPART D—COVERAGE FOR DAMAGE TO YOUR Live With You ....................................... 107AUTO ................................................................ 75 Your Car ............................................. 107 What Is Covered? ........................................ 75 Bodily Injury Hazard ................................... 107 Collision ...................................................... 75 The Claim Handling Process ....................... 107 Other than Collision ..................................... 75 Keep a Written Record .......................... 108 What Exclusions Apply? ................................ 76 Processing a Claim ............................... 108 2

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AUTO INSURANCE GUIDE Declaration of Total Loss ...................... 109 Automobile loss exposures ......................... 130 The Other Person’s Insurer .................. 109 The personal auto policy (PAP) ................... 131 Negligence Laws .................................. 110 The Necessity of Liability Insurance ............. 132 Property Damage Claims ...................... 110 Beyond the Statutes ............................. 133 The Innocent Passenger ....................... 111 SECTION V—INSURANCE RATING LAWS ........... 134 Commercial Auto Liability Insurance ..... 111 General Standards ..................................... 135 Commercial Auto Insurance Coverages 112 Adequacy ............................................ 135 Automobile Physical Damage Insurance 112 Responsiveness .................................... 136 Physical Damage Rates ........................ 113 Stability ................................................ 136 Coverage for Truckers .......................... 113 Rate Structure ...................................... 136 Age Considerations ............................. 113 section vI—The Process of MANUAL Vehicle Maintenance and Safety ........... 114 RATEMAKING .................................................. 137 Motor Vehicle Records .......................... 114 How Rates Are Determined ........................ 137 Types of Insurance Truckers Need ........ 114 A Review of Classifications .......................... 138 Interstate Insurance Requirements ........ 115 Rating Methods .......................................... 138 Commercial Auto Liability Underwriting Loss Ratio Method ................................ 139 and Ratemaking ................................. 116 Pure Premium Method .......................... 139 Covered Autos ..................................... 116 Rating Statistics .......................................... 141 State Requirements .............................. 116 Loss Statistics ....................................... 141SECTION II — AUTOMOBILE INSURANCE Determining Expense Data ......................... 142RATING .......................................................... 117 Formalizing Ratemaking Procedures ........... 142 A Brief History of Automobile Insurance ...... 118 SECTION VII—REGULATION OF RATES ............. 143 Why Is Automobile Insurance Mandated?... 119 The Legal Basis for Regulation of Rates ....... 144 Two Kinds of Risks ............................... 119 Alternative Plans ........................................ 146 Types of Loss ....................................... 119 What Is an AIP? ................................... 146 What Is Peril? ....................................... 120 AUTOMOBILE INSURANCE MADE EASY ............ 147 Kinds of Hazards ................................. 120 Proof of Financial Responsibility .................. 148 The Chance of Loss .............................. 120 Auto Insurance Coverages ......................... 148 The Degree of Risk ............................... 120 Liability Coverage................................. 148 The Concept of Insurance .......................... 121 Medical Payments Coverage ................. 149 Rates ......................................................... 121 Personal Injury Protection (PIP) Liability and Negligence ............................. 122 Coverage............................................ 149 Absolute Liability .................................. 122 Uninsured/Underinsured Motorist (UM/ Strict Liability ........................................ 122 UIM) Coverage .................................... 149SECTION III—PERSONAL AUTO INSURANCE AND Collision (Damage to Your Car)COVERAGES AVAILABLE ................................... 122 Coverage............................................ 149 Differences Between Commercial and Personal Comprehensive (Physical Damage Other Automobile Coverage ................................ 123 than Collision) Coverage ...................... 149 Personal (Private) Coverage.................. 123 Towing and Labor Coverage ................ 150 Coverage for Public Automobiles .......... 123 Rental Reimbursement Coverage .......... 150 Automobile Insurance Rating Plans ............ 124 Coverage for Stereo Equipment .................. 150 Personal Automobile Physical Damage . 125 Insurance Coverage When Renting a Car ... 150 The “Insured” ...................................... 125 Coverage When Driving in Other States, Insuring an Automobile—Commercial Canada, and Mexico .................................. 150 or Private .................................................. 126 Coverage of New or Additional Automobiles151 Physical Damage ................................. 126 Shopping for Auto Insurance ..................... 151 The Basic Policy .................................... 126 Understanding Rates ................................. 151 The Family Policy .................................. 126 Factors that Affect Your Premium ......... 152 Special Package Automobile Policy ....... 127 Discounts and Surcharges ................... 152SAVING MONEY ON YOUR INSURANCE ........... 128 Premium Finance Companies ............... 153 GAP insurance: Specialty policies help protect Losing Your Insurance ............................... 154 new car buyers .......................................... 128 Your Rights Against Unfair Discrimination .. 155SECTION IV—LIABILITY .................................... 129 Auto Insurance for “High Risk” Drivers ....... 155 Personal Automobile Liability ...................... 129 After the Accident... What Now? ................. 155 3

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDE Accidents Caused by Other Drivers ............. 156 Getting Your Car Repaired ......................... 157 Getting a Rental Car .................................. 158 Filing a Claim ............................................. 158 Automobile Insurance for Young Drivers .... 159 Removing Your Children from Your Policy .......................................... 159 Saving Money on Insurance for Young Drivers ..................................... 160FREQUENTLY ASKED QUESTIONS .................... 160COMMON TERMS ............................................. 1624

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDE PART 1 SECTION I — EVOLUTION OF MULTIPLE-LINE INSURANCE Had an insurance expert in the United States gone to sleep a few years ago and notawakened until today, he or she would have a tremendous adjustment to make inreorientation to current insurance ideas and practices. One of the most significant changesobservable would be the trend toward multiple-line insurance. The essence of multiple-line insurance is the combination of the two traditional lines, orgeneral types, of insurance known as fire insurance and casualty insurance. These lines were,for a long time in the history of American insurance, separated by law and custom (unlikeEuropean insurance which had few such restrictions). Today all states permit fire and casualtyinsurance to be written in one contract by an insurance company or group. Multiple-linecompany groups, multiple-line companies and multiple-line contracts are all part of the trend,with the combination of fire and casualty insurance in a single contract being the mostimportant recent development. The reasons why the multiple-line trend has occurred and the methods by which the changehas been achieved are the subject of this section. PURPOSES AND SIGNIFICANCE OF MULTIPLE-LINE INSURANCE The underlying basic motives influencing company management decisions in enteringmultiple-line operations are desires for (1) profits, (2) power, (3) prestige and (4) benefits topolicyholders. The relative strength of each of these motives depends on the circumstancesinvolved in the decision-making process of the individual companies. Perhaps a better way of classifying such basic objectives is to identify as goals theimprovements which multiple-line insurance may achieve: (1) lower costs, (2) more and bettercoverage and (3) greater convenience. These goals are logical ones for companies, agentsand policyholders alike. For the insurance company, they may be attained by economies ofsize; reduction of overlapping or duplicate services; stability of loss ratios through diversifi-cation among many perils; greater satisfaction and ease of loss adjustment under broaderpolicies; large insurance amounts in relation to values exposed to loss; less adverse selectionagainst the company; fewer contracts and records; and simplified billing systems. Specific motives for writing multiple-line insurance may also exist. Examples of these moredetailed motives are the hopes for maintaining or improving the industry position of acompany, future increased capacity for writing more and larger risks because of better spreadof loss, broader multiple-line services on a wider geographic basis and the unification ofcompany departments into integrated operations units. Multiple-line underwriting is an accomplished fact in many facets of insurance. Most ofthe major insurance companies are now operating on a multiple-line basis. Certainly,however, not all companies have thrown aside the “American System” of limiting andcompartmenting insurance. Mono-line insurance companies can still be identified, operatingsuccessfully in one or a few closely related parts of the insurance business. Many companiesthat are licensed for multiple-line operations are and shall be for many years, practicallyspeaking, single line insurers with a decided emphasis on either property or liability insurance.5

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDE Insurance contracts, too, are often multiple-line in nature. The best example of a multiple-line insurance contract is perhaps the homeowners policy. This contract, combining fire, theftand liability insurance in one “package” contract, accounted for only $30,000 in premiumsin 1950. Homeowners contract sales dramatically increased to $179 million in 1956, $770million in 1960 and $10 billion in 1990. Additional examples include the rapid introductionof forms for office contents, industrial and commercial property, public and institutionalproperty, and farmowners, as well as special multi-peril contracts for many specificbusinesses. Currently, commercial multiple peril net written premiums are about $1.5 billionand homeowners premiums are more than about $10 billion.What Multiple-line Insurance Includes If the whole field of insurance today were divided into logical parts, the division wouldinclude: (1) property, (2) liability, (3) life and (4) health insurance. Unfortunately for thestudent of insurance, the growth of insurance has not always followed the logic of theory.History, tradition and legal requirements have played important parts in developing insurancein separate compartments, or lines of insurance. For many years, marine, fire and lifeinsurance were the titles for the major lines in the United States. Companies specialized inproviding separate financial protection against such perils. Casualty insurance did not appear until the latter part of the nineteenth century, its mostrapid growth occurring in the present century. Liability, theft, automobile, workers’ compen-sation and health insurance, as well as miscellaneous categories of coverage such as glass,boiler and machinery, and fidelity and surety bonds, often were thrown together underdefinitions in the state laws as casualty insurance. A company would write one, a few or allof these kinds of casualty insurance by meeting the capital and surplus requirements of thestates in which it did business. In recent years a somewhat different classification is more meaningful, even though lawsof the states may still use the traditional groupings. Briefly, marine, fire and allied lines ofinsurance are referred to as property insurance; casualty insurance has become primarilyliability insurance as public liability, automobile and workers’ compensation insurance havegrown in importance; life and health insurance have become more closely related. Although multiple-line insurance developed historically as a term combining fire andcasualty insurance, one might argue today for a redefinition of its use to mean property plusliability insurance. Most of the legal barriers between these major kinds of insurance havebeen removed. “All lines” insurance is a newer, but in many ways parallel, development in insurance. Theterm includes property, liability and life and health insurance written together by onecompany, company group or contract. Evidence of this trend abounded during the last decade,too, as probably three-fourths of the larger property-and-casualty companies or groups nowown a life affiliate. Many companies have added life insurance facilities in the past few years.The development of “package companies” writing all kinds of insurance, perhaps in the futurein a single contract of protection, deserves its own special analysis. However, multiple-lineinsurance and its growth will point out many of the objectives, benefits, problems and pitfallsof the broader all-lines movement. 6

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDEGrowth of the Multiple-line ConceptEarly Mono-Line Specialization As one learns about multiple-line insurance, he or she might easily question why thecombination of fire and casualty insurance has been so belated in arriving on the Americanscene. The answer is not obvious, especially for a business which has built its growth andstability on the concept of proper spreading of losses. Diversification has long been a major goal of insurance. The fallacy of too great ageographical concentration of property risks has been dramatized in stories about the Chicagoand San Francisco fires, and in such modern examples as the Texas City or Hurricane Donnadisasters. How is it, then, that insurance companies who practiced the old adage of “not puttingall their eggs in one basket” were apparently tardy in adapting the same idea to productdiversification by lines of insurance? The full answer lies somewhat buried in history. Research about the first Americaninsurance companies brings forth evidence that almost all insurance in the late eighteenthand early nineteenth centuries was written by mono-line companies. Although often notlimited by statute or charter to doing business in one line, these early pioneers voluntarilylimited themselves to specialized parts of the insurance field. The reasons are partiallyconjecture, but the small size of many of the early insurance companies, the lack of capitalfor expansion and other factors undoubtedly were important. It seemed part of the philosophyof the times to “stick to one’s own business,” and not venture needlessly into more uncertainkinds of insurance as the needs for other coverages grew. The idea persisted past the middle of the nineteenth century, when the first insurancedepartments in the United States appeared to provide supervision for the by-then well-established business of insurance. The legislatures of the states and the administrators in theinsurance departments decided that limiting insurance companies to one or a few closelyrelated kinds of business was good regulation as well as good business. It was easier to providelaws for insurance “by line,” with specific licensing and taxation laws applied separately tomost kinds of insurance. So the concept of mono-line insurance changed from what had beenmerely business practice to the laws of the U.S., and the “American” system of compartmentinginsurance was firmly established. This development occurred in spite of common use of the multiple-line idea for many yearsin Europe. In Lloyd’s of London and other English insurers, all kinds of insurance had beencombined successfully for centuries. The other European nations also did not usually restrictinsurance companies to specific kinds of insurance. Then, as now, most laws and regulationsapplied to insurance in general rather than to individual lines of insurance. In the United States,the trend almost from the start was toward specialization rather than diversification by linesof insurance. Thus it remained until the twentieth century.Contrasting Trends of the Early 1900s The legal obstacles to multiple-line insurance were quite simple and effective. In orderto do business in most states, a company had to obtain a charter and a license which specifiedthe kinds of insurance contracts it could write. Under the licensing laws, a fire company could 7

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDEnot write insurance on casualty perils, and a casualty company could not write insurance onfire perils. A few states had laws which permitted multiple-line insurance, but the “Appleton Rule”of New York State was a deterrent to any insurance companies using the broader powers.This rule, first set forth about 1900, said that out-of-state companies must follow all domesticcompany laws. Thus, a Wisconsin insurance company, even if Wisconsin statutes permittedmultiple-line insurance, could not write such contracts in New York, in Wisconsin, or in anyother state if it wanted to do business in New York. Since many of the companies wanted tobe admitted to New York State (for prestige, market or other reasons), the Appleton Ruleeffectively discouraged multiple-line insurance companies outside of New York. Theextraterritorial effect of this important rule continued its restrictions on underwriting powersof companies until 1949, when New York permitted full multiple-line companies. Legal barriers against multiple-line insurance were not complete. A single company couldnot write both fire and casualty insurance in the early 1900s (a few exceptions existed byspecial charters), and in general that situation continued until mid-century. However,beginning in the 1920s, the laws of many states did permit several companies to conduct amultiple-line business as a group of companies. A fire company could own a casualty company,or a casualty company could own a fire company, and circumvent the restrictive nature of thestate laws. Such company groups of “fleets” became common in the 1920s and wereespecially significant in the rising automobile insurance market of that decade. By 1940 almost100 company groups were in operation. Much of the early history of multiple-line insurance centers around these groups ofcompanies. They combined fire and casualty insurance in operating their business, eventhough legally such perils could not yet be combined in one company or one contract. Onemust be careful in studying the multiple-line groups in the 1920s and 1930s, as opposed tothe later development of single multiple-line companies and multiple-line policy contracts inthe 1980s and 1990s. Another fast-growing part of the insurance market was inland marine insurance. Asrailroad and motor truck transportation risks grew, inland marine insurance coveragesexpanded to provide broad protection. Often times such contracts were exempt from therestrictive laws preventing fire and casualty companies from writing multiple-line insurance.Many of the early marine insurance “block” contracts were multiple-line in nature, combiningfire, theft and a wide variety of other perils. “Floater” policies on movable goods often werewritten on an “all-risk” basis. The trend was confined in its scope by the Nation-Wide Definition and Interpretation ofthe Insuring Powers of Marine and Transportation Underwriters in 1933. With industryagreement, this method of permitting multiple-line contracts for certain purposes and typesof inland marine risks was codified into the laws of most states. Insurers were put back intotheir “compartments,” and the traditional American system of mono-line insurance wasstrengthened again. The inland marine contracts were specifically limited to insurance ongoods in shipment, instrumentalities of transportation such as bridges and tunnels, and certaindefinite categories of personal property floater risks.8

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDEModern Multiple-line Legislation Although the tide was subdued until the 1940s, it could not be stemmed. Increasingagitation for broader multiple-line powers by fire and casualty insurance companiesappeared. The most significant landmark in this growing urge to permit multiple-line insurancewas the work of the Diemand Committee of the National Association of InsuranceCommissioners. The report of the Diemand Committee in 1944 strongly advocatedimmediate but limited multiple-line powers. It recommended that the state laws be changedas soon as enabling legislation could be passed to permit any fire or casualty company to writemultiple-line insurance of five specific kinds: (1) outside the U.S., (2) reinsurance, (3)automobile insurance, (4) aircraft insurance and (5) personal property floaters. The logic of modern needs prevailed. The result was “partial” multiple-line laws, whichappeared in most of the states between 1944 and 1947. By 1947, these five kinds of multipleline insurance usually could be written by a single insurance company, licensed either as afire company or a casualty company. These statutes did not permit complete or “full” multiple-line insurance by a company, but they were indicative of the, by then, strong trend towardmultiple-line operations. Passage of “full” multiple-line insurance laws permitting a single fire or casualty companyto write almost any peril except life insurance was the final step. A few states already hadsuch laws, and in fact more than 20 states had such legislation in the statutes before otherstates passed the “partial” laws. The trends overlapped, although the significant turning pointwas action by the state of New York. The Appleton Rule referred to earlier was the brakeapplied to out-of-state companies which might otherwise have “gone multiple-line” sooner. From a legal standpoint, the year 1949 was the culmination of the trend toward multiple-line insurance laws. New York’s “full” multiple-line law was passed, and the new era of fire-casualty insurance began in earnest. By 1955, the last state (Ohio) permitted multiple-lineinsurance companies.Recent Changes to Multiple-line Insurance With an understanding of the background of multiple-line insurance, one can appreciatethe fact that progress has been slow and that a trend has not been consistently apparent.During the last two decades, however, this trend has been almost overwhelming in its rapidand widespread effects.Methods of Change The changes to multiple-line companies have been accomplished primarily in three ways:(1) multiple-line company groups (often used as an intermediate legal step), (2) new companycharters or charter amendments and (3) company mergers. The changes made by the vastmajority of insurance companies were gradual. Legal and operational changes often involveda series of steps over a period of years. However, looking at the insurance business as a wholecauses one to be amazed at the extent of the trend within one generation. Groups of companies operating more or less as multiple-line entities have been animportant method of combining fire and casualty insurance. Legislation since the 1920s haspermitted companies in a given fleet to do business together, the techniques involving acombination of operations through either stock ownership, common management personnel 9

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDEor reinsurance arrangements. One might imagine a declining role for these group operationssince 1950, when the multiple-line laws of most states permitted a single company to writeall fire and casualty kinds of insurance. However, the number of groups continues to rise asmono-line insurance companies purchase other companies or begin new affiliates. Althoughmergers may reduce the number of company groups eventually, market growth andexpansion into multiple-line business still continue to increase the number of groups. Suchinsurance company groups account for almost two-thirds of the total fire and casualty businesstoday. Individual insurance companies, as separate corporate entities or as members of companygroups, are now also a major part of multiple-line insurance. Through new charters, oramendments to old charters, many companies have achieved multiple-line status duringrecent decades. Variation in the state laws prevents generalization from being accuratewithout exceptions, but it is fair to state that most of these changes have occurred since 1940.The trend has been most pronounced since 1949, and today it is rare to find a major insurancecompany that does not do business in both the fire and casualty fields. The increased numberof charter amendments in the early 1950s indicates that the normal method for an establishedsingle line insurer to embark on multiple-line operations was to expand the charter powersthrough amendments permitting the company to write additional kinds of insurance. Even newcompanies formed in the past decade have often been established as single line insurers, thenlater expanded to new lines as their surplus growth permitted them to meet financialrequirements for multiple-line licensing. Company mergers, in which one company isabsorbed into another, are an increasing phenomenon. Mergers often have multiple-linediversification as a major objective. While formation of company groups and expansion ofcharters and licensing powers prevailed in the two decades immediately preceding 1950,mergers of existing companies have been a major trend since the late 1990s. One rarely readsan insurance periodical today without noting some proposed, in process or completed merger.Many of these mergers involve not only a change to a multiple-line company, but often area combination of two or more multiple-line companies into a larger multiple-line insurer.Requirements for Multiple-line Operations In order to become a multiple-line insurer, a single company or a company group mustmeet certain legal requirements in each of the states in which insurance is to be sold. Someof these requirements are classified as general legal procedures, others are primarily financialand a third category includes a wide variety of operational changes necessitated by thebroadened product diversification of multiple-line insurance. The legal and financialrequirements start with the first step which must be taken to obtain multiple-line authority.This process is more inclusive than just legal sanction under the new multiple-line laws tocombine fire and casualty insurance. It means the whole series of procedures to achieveproper incorporation, charter powers and licensing under the various state laws. Writtenproposals, public advertisements, stockholder or policyholder approval, hearings, and thefiling of charter and bylaws are required in most states to attain or change legal incorporation.Then, application is made for a license, or certificate of authority, to write insurance of specifiedkinds. Before a company acquires a license and attains multiple-line authority, the mostimportant requirement which must be met is the minimum capital and surplus standard. Theinsurance codes of the states vary greatly in setting these minimums. In several states a10

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDEmultiple-line insurer needs only a surplus of $100,000 to obtain a license. Other states, suchas California, Connecticut, New Jersey and New York, require more than $2 million ofpolicyholder’s surplus (capital plus surplus) before a full multiple-line license will be issued.The range of financial requirements is amazing, the strictest state requiring 35 times as muchpolicyholder surplus as does the most lenient state. The average state sets the minimumpolicyholder’s surplus requirement at between $500,000 and $750,000. The financial requirements are obviously for the purpose of assuring basic financialsolvency of the companies. The state laws specify that surplus requirements by the companiesmust be met before beginning business. Many states also require the amounts to bemaintained as the company operates its multiple-line business. The wide scope of operational changes required by multiple-line insurance is significant.The major functions of insurance companies have all been responsive to the multiple-linetrend. These changes may not be required in a legal sense, but they have occurred on awidespread basis. Perhaps some of them are not essential requirements for multiple-lineaction; instead, they are labeled as results for the majority of the insurance companies. Marketing of insurance is one such area tremendously affected by multiple-line ideas.Account selling, embracing all kinds of insurance, is advocated for both personal and businesspolicyholders. The advantages of one contract, one bill and one agent are extolled in theinsurance advertisements. The changes which such a new system has brought to the insurancebusiness within a few years are spectacular. They pervade almost every phase of agent andcompany marketing techniques, from recruiting and training agents to prospecting forpolicyholders. Contracts have been redesigned, manuals and rates changed, commissionscombined, bills consolidated in premium financing plans, and sales departments reorganized.The adjustments are still continuing. Other major insurance functions have not escaped the effects of multiple-line changeseither. Administrative services within insurance companies have been realigned to meet newmultiple-line needs. Records, filing systems, statistics and research activities have beenreappraised to accomplish objectives more efficiently. Insurance supervision by the state haschanged to include multiple-line examinations and licenses for agents. Executives havebroadened their knowledge to include new fields of insurance. Legal departments havestudied new cases as they have occurred under changed wording in new contracts. In all, fewareas of the insurance business have escaped the requirements and results of the multiple-line trend.NATURE OF THE LIABILITY HAZARD So far, this manual has addressed mainly hazards that are, in a sense, natural hazards— a building burns, a ship sinks or is damaged by storm or collision, a gem disappears in transit,or hail destroys a crop. The owners, or those with security interests in the property, maypurchase property insurance to indemnify themselves against the damage suffered from thedestruction or loss in value of the property. Such insurance might be termed “loss” insurance. Liability is a hazard of quite another sort, for it is purely an artificial creation of the law.Insurance designed to protect against the liability hazard has characteristics which vary,depending on the way in which the legal system structures the liability. It is possible to conceive11

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDEof a legal system that makes no provision at all for liability of one person to another; personsliving under such a system would not need liability insurance. The contrast of late nineteenth century rules respecting the employer’s liability to his orher employee for injury suffered in the course of employment with the present rules underworkers’ compensation laws, illustrates the range of variation. Under the former, there wasno liability unless the employer him/herself was negligent. He or she was not vicariouslyresponsible for the negligence of his or her employees. In addition, courts were quick to findan “assumption” of any given risk by the employee, or to find that he or she was negligentand therefore disqualified from recovery. By contrast, under modern workers’ compensationlegislation, an employer is liable for all personal injuries by accident “arising out of and in thecourse of the employment.” The employer is liable no matter how careful he or she may be,even if the injured employee is careless. Moreover, he or she is liable not for a lump sumdetermined by a jury, as in the common law negligence action, but for a scheduled amountfixed by statute and payable in installments. Obviously, insurance policies designed to protectthe employer against liability would be dissimilar in the two cases. Under the common lawrules, employers might even feel that they needed no insurance protection, so unlikely asuccessful suit would be against them. In this section, some of the doctrines of the legal system under which we live are explained.This is preliminary to a study in the following chapters of the different kinds of liability insurancedeveloped to meet the needs artificially created by the doctrines of the legal system. INTRODUCTION TO TORT LAW Basically, the hazard to be insured against is the possibility that one may be held liablein a court of law, or by an administrative body such as an industrial commission administeringa workers’ compensation law, to pay damages to another person for injury to the latter’sperson, property or other interests. This liability is the creation of the law of torts. Attentionhere is restricted to tort law, as it exists in the United States at the present time. The courtshave developed most of tort law, though legislatures have occasionally made importantcontributions, as in the case of workers’ compensation. In our federal system, the law of tortsis mainly determined by the states rather than by the federal government, and varies fromone state to another. There are more than 50 different systems of tort law in the United States,and this diversity will continue as long as the federal system lasts. Anyone who must handlepractical problems in tort law or liability insurance must not forget the variation that exists.In dealing with a claim, the insurer must operate within the framework of a single state’s law. It is fortunate for present purposes that the differences are less important than thesimilarities, so that an introductory statement may legitimately describe these 50-odd systemsas if they were one. In this section, the discussion is at a level of generality that permitstreatment of the systems as if they were uniform.Classification of Torts The person on whom a loss initially falls could protect him/herself by purchasing lossinsurance, whether accident insurance for injury to his or her person, collision insurance forinjury to his or her car, or fire for the burning of his or her home. If he or she wants completeassurance of full compensation for his or her loss, he or she must purchase such insurance,for the starting principle of tort law is that a loss will be left to be borne by the person on whom 12

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDEit happens to fall unless there is some good reason for transferring it to another. The rulesthat determine when such a loss will be transferred are the rules of tort law. Basically, there are three reasons for a transfer. The actor must pay the injured personfor the damages caused by his or her action (1) if he or she intended to cause harm or (2)if he or she acted in a way that negligently caused harm or (3) if his or her activity is one ofa small number of activities that are regarded by the law as so dangerous that anyoneengaging in them must pay all damages caused, however careful he or she may have beennot to cause harm. These three categories are sometimes referred to as (1) the intentionaltorts,(2) negligence and (3) absolute or strict liability for extrahazardous activity. Illustrations of the intentional torts are assault, battery, trespass to land and libel. Thoughthere are cases in which these torts are, for certain purposes, included within the scope ofcoverage of an insurance policy, no insurance written has as its main purpose the protectionof the insured against liability resulting from his or her own intentional torts. Indeed, suchcoverage might be regarded as contrary to public policy. But there is no objection to insuranceagainst the intentional torts of one’s employees, and such coverage is obtainable. NEGLIGENCE The reason for transferring loss that is most important for liability insurance is that thedefendant has been negligent. Negligence is conduct that is blameworthy. It produces liabilitybecause it creates a greater risk of causing damage than the actor may legitimately imposeon another. It would be quite possible, of course, to have a legal requirement that any personcausing harm to another should pay for any damage caused by his or her conduct, irrespectiveof fault. Indeed, this is what the law has chosen to do for extrahazardous activity, the thirdcategory. However, to so rule would undoubtedly have the consequence of making personsmore reluctant to undertake activity that caused risk of harm to others. In the period of theindustrial revolution it might have had disastrous results in discouraging enterprise, sincebusiness activity by its nature subjects people to risks, and automatic liability would have madeentrepreneurs reluctant to create new business enterprises. Thus, the law long ago decidedto give its stamp of approval to most ordinary activity by declining to shift any loss resultingfrom it so long as the actor was exercising reasonable care. This means, for example, thata person driving a car is not liable for injuring or killing another, provided he or she was drivingcarefully; that is, with that standard of care that is ordinary and normal in society and thatis required by the law. The loss remains where it falls initially unless there is some good reasonto shift it. In this case, the good reason would be negligent or careless driving. Similarly, adoctor treating a patient is not liable if the patient dies as a result of the treatment, unlessthere was a failure to exercise appropriate care. Liability arises only if the conduct is notreasonable. It is not possible within a few pages to do justice to the subject of negligence,on which volumes have been written. All that is attempted here is to sketch the main outlinesof the doctrine, as a basis for understanding the nature of the liability insurance policy.Nature of Negligence Negligence is carelessness; it is the absence of that amount of care or standard of carethat the law requires the actor to exercise. It is not a state of the actor’s mind; it is conductthat does not meet the standards set by the law. The tests of the existence of negligence areobjective, not subjective. Quite obviously, the amount of care required by the law is not always13

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDEthe same. It varies depending on the relationship of the parties, on the foreseeability of theharm, on the seriousness of risks, on the qualifications of the actor and on other factors. Butunless he or she suffers from a special incapacity such as is inherent in being a child, the actormust conform to a standard of care that would be exercised by a reasonable person undersimilar circumstances. Though the child will only be held to a standard consistent with his orher capacity, a grown person must, in general, meet the standard of the reasonable personwhether he or she is capable of it or not. The law does not take account of the deficienciesof the actor, though it will raise the standard if he or she holds him/herself out as having specialqualifications, as in the case of a medical specialist. The standard of the reasonable person,or the reasonably prudent person, is the basic operating principle of negligence law, andpervades the whole.Standard of Care There is a variety of ways of ascertaining the standard. First, in some cases there arestatutes or ordinances prescribing certain clearly defined conduct. Failure to conform to the statutory requirement will be negligence, provided the statutewas enacted to protect a class of people, of whom the plaintiff is one, against the very kindof harm inflicted. Thus, when there is a train wreck caused by the absence of safety equipmentrequired by statute, it is a clear case of negligence. Second, sometimes the courts will prescribe detailed and precise requirements, theviolation of which will constitute negligence. In an earlier day, some courts held that whenan automobile driver came to a railroad crossing, he or she had to stop, look and listen, andif the view was obstructed, he or she even had to get out of his or her car and go look up anddown the track. Failure to do so was negligence. Of course, the stop, look and listen rule in this extreme and specific form would be outdatedin the days of high-speed transportation, but there exist other illustrations of specific standardsof conduct imposed by courts, violation of which is negligence. On the whole, neither the court nor the legislature lays down explicit rules of conduct asa standard of required care. Instead, the court simply instructs the jury in general terms aboutthe principle of law and leaves it to the jury to decide what the reasonable person would do. The standard is a flexible standard applied by the jury. The infinite variety of circumstancesunder which people perform acts that may cause harm to others renders it absolutelyimpossible to define in advance precise rules of conduct adapted to the many diversecircumstances. The law must be stated in general terms, leaving to some tribunal a considerable discretionin applying the standard to the specific facts of the case. Sometimes, the nature of the accidentclearly suggests negligence. In such cases, the court may sayres ipsa loquitur(the thing speaksfor itself), and place the burden on the defendant to show that the accident happened withoutnegligence. The mere proof of the accident will get the plaintiff to the jury and support a juryfinding for the plaintiff. Examples are sponges left in a surgical wound, or a barrel rolling out of a second-storywindow. There are also occasions when reasonable people could not disagree, on the 14

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDEevidence presented, and then the court will take from the jury its power to find or denynegligence.Elements of the Cause of Action The separate elements or requirements that are said to be necessary to establish a causeof action in negligence are: (1) a legal duty to conform to the standard of the reasonableperson, (2) breach of that duty by failure to live up to the standard, (3) actual harm or damageto the plaintiff’s interests and (4) a causal connection between the breach of duty and the harmthat is close enough to satisfy certain standards.The No-Duty Rules Thus far, the nature of the reasonable person standard has been discussed. Everyone hasbeen presumed to have a duty to use reasonable care all the time, but this is not completelyaccurate. Courts frequently deny recovery in actions for negligence on the grounds that thedefendant owed no duty of care to the plaintiff. There are really two kinds of situations in which the court will say there is no duty. In onekind, the statement is only another way of saying that the defendant was acting in a reasonableway. Thus, a court might decide that a doctor sued by an uninoculated patient who got rabieshad no duty to inoculate against rabies because he or she had no knowledge that his or herpatient was bitten by a rabies-susceptible animal. When the court says “no duty” in thissituation, it means that the doctor was acting reasonably under the circumstances. However, there are many cases in which conduct is not reasonable but in which there isno duty to act in a reasonable way. Thus, suppose a strong swimmer stands on a pier andwatches a child drown a few feet away, making no effort to save him or her. The conduct isfar below any reasonable standard, but in this case the swimmer has in truth no duty to act. There are many cases in which there is no duty in the latter sense. Thus, while a landownerhas a duty to see that the condition of his or her premises is such that persons going by alonga public way are not endangered, he or she has no duty of care to trespassers coming on hisor her property. Even if the property is unsafe and likely to cause harm to a trespasser, he or she is notliable if he or she fails to use care to put it in safe condition. As a matter of fact, this particular“no-duty” rule can be carried even further, for the landowner has no duty of care even towardlicensees and social guests coming onto the property with permission. It is only toward the so-called “invitee” — a person coming onto the property for a businesspurpose advantageous to the landowner — that there is a duty to use care to put the premisesin reasonably safe condition. In other words, the reasonable person rule applies only withrespect to the invitee. In the other cases there is no duty at all, except to refrain from affirmative acts intendedto do harm, or from active negligence with respect to persons whose presence is known. Sometimes the consequences of the no-duty rule with respect to trespassers appearinhumane, and this has led many courts to modify the rule. The “attractive nuisance” doctrine 15

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDEis one modification. Under this doctrine, trespassing children are treated as if they werebusiness invitees, to whom the landowner owes a duty to make the premises reasonably safe.The doctrine is applied when there is something on the land that attracts children to trespassin order to play. Examples are railroad turntables and pools of water. The attractive nuisancedoctrine has not been adopted everywhere. There are other “no-duty” rules. The seller of land and the lessor of land are held to haveno liability for disrepair of the premises, after the new buyer or the lessee has had time torepair. Thereafter a person injured even on the public way cannot recover from the seller orthe lessor. Much more important to the field of insurance, however, is the no-duty rule that in formertimes sheltered from liability the suppliers of chattels, who had no duty except to theirimmediate vendees. Thus, the manufacturer and all wholesalers of commodities had no duty to the ultimatepurchaser to make sure that the commodity was what it purported to be and that it was safefor human use. This inhumane doctrine has been softened in the past few decades, andmanufacturers and suppliers of chattels have been made liable for injury resulting from thecondition of the chattels. It has even become possible to argue that the trend is going too farin extending the liability of remote parties in the chain of supply. But whatever the merits of the rule, the gradual change in the law by extending the rangeof the duty of care has made product liability an important part of liability insurance.Causation It would not be appropriate here to deal at any length with problems of causation in thelaw of negligence. The requirement that there must be a reasonable close causal connectionbetween the conduct that breaches a duty of the actor toward the injured party and the ensuingharm is a very difficult requirement to interpret and apply. There must be at least a causal connection in fact. This means that there is no liability, ingeneral, if the harm would have happened anyway. But in addition, there must be what thecourts call “proximate” cause. By this is meant that there must be an unbroken chain of events. If there are intervening acts of events, such as the subsequent negligence of a third personor an act of God, that make the causal connection between the negligent act and the harmseem too remote, then there will be no liability. Under what circumstances the connectionwill be regarded as too remote, or conversely, when it will be regarded as proximate, arequestions of great subtlety.Contributory Negligence Even if a plaintiff who has an interest protected by law is able to show that the defendanthas breached a duty, and that the breach of duty led proximately to harm or damage to theprotected interest, he or she will still lose if the defendant can show that the plaintiff was alsonegligent with respect to his or her own interests, even to a small extent. 16

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDE This is the doctrine of contributory negligence. Some statutes replace it by a “comparativenegligence” doctrine, under which the plaintiff’s negligence, if relatively minor, merelyreduces recovery and does not bar it altogether. But there are even more complications than this. If the plaintiff, by his or her contributorynegligence, has gotten him/herself into a position of danger from which he or she cannotextricate him/herself, and thereafter the defendant is negligent, then in some jurisdictionsa “last clear chance” doctrine will neutralize the contributory negligence defense. The above brief sketch will suffice to describe the field of liability most relevant to liabilityinsurance, for most policies are designed to protect the policyholder against the consequencesof a lawsuit for negligence. The automobile liability policy; the owners’, landlords’ and tenants’liability policies and the general liability policy all have as their main thrust the protection ofthe policyholder’s pecuniary interests against such attack. SPECIAL NEGLIGENCE PROBLEMSMalpractice Contrary to the notion that prevails rather widely among laypeople, there is no specialdoctrine of “malpractice.” Doctors and other professionals are liable for negligence inaccordance with the general principles already explained. But malpractice is currentlyreceiving so much attention that a few special observations about it may be helpful. The discussion will be directed specifically toward medical practice, though the principlesare the same for all professionals. The duty of the physician is only to use reasonable care in diagnosing and treating his orher patients. He or she has no duty to effect a cure or even to improve the patient’s conditionunless he or she has assumed such a duty by promising results. The duty of reasonable careexists whenever there is a relationship of doctor and patient; the fact that the patient is a charitypatient does not diminish the doctor’s duty at all. Even if he or she volunteers his or her servicesin an emergency case, he or she still has at common law the duty of reasonable care.Unreasonable claims against doctors who have volunteered their services in emergencieshave led very recently to a rash of “Good Samaritan” statutes, relieving them of liability orat least lessening the standard of care required. The degree of care required is that which other practitioners of the same kind usuallyexercise in the same or similar localities under similar circumstances. It will be noted fromthis statement that the level of care required: (1) varies with the size of the community, (2)varies with the level of the training of the doctor, so that a specialist is held to a higher standardthan a general practitioner and (3) varies with time, so that the doctor is under some obligationto keep reasonably abreast of new developments in his or her field. Moreover, the standardof care is that applicable to the school to which the doctor belongs, so that a homeopathicphysician is judged by different standards than apply to the allopathic school. Doctors may render themselves liable in a great variety of ways. A wrong diagnosis willnot necessarily lead to liability, but a superficial diagnosis will. If the doctor does not followgenerally accepted procedures in either diagnosis or treatment, he or she may be held guiltyof negligence. If he or she fails to give proper instructions to the patient, or to a nurse, or to 17

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDEhospital attendants, he or she may be liable. If he or she fails to consult the patient’s priorphysician to get the full background of the case, he or she may be liable. If a generalpractitioner fails to refer the patient to a specialist, or one specialist to a different one, whensuch handling is indicated by the diagnosis, he or she may be liable. If he or she abandonsthe case without giving the patient time to get another doctor, or if he or she exposes the patientto contagious disease by carelessness, he or she may be liable. These only illustrate and donot exhaust the ways in which a doctor may fail to exercise reasonable care. Ordinarily, the doctor cannot be adjudged negligent unless there is, in the record,testimony of medical experts on which such a finding can be based. Unsupported lay testimonyis not enough. The only exception is in those cases where the nature of the event is such thatan absence of negligence seems highly improbable — a so-called res ipsa loquitur case.Medical testimony by one doctor against another is not easy to obtain, and this has led courtssometimes to extend the res ipsa loquitur doctrine beyond its normal limits. The most common application of the res ipsa loquitur doctrine is in the cases of a foreignobject left in a surgical wound, the extraction of the wrong tooth, of X-ray burns and the like. The malpractice liability of lawyers, accountants, dentists and even insurance agents isbased upon identical principles, though none of these other fields has been developed by asmuch litigation as malpractice of medical practitioners. But malpractice liability is receivinggreater attention in these fields, too, and the need for malpractice, or error and omission,insurance has increased dramatically.Product Liability We have already seen that a broad “no-duty” rule formerly sheltered suppliers of chattelsfrom liability to anyone except their immediate vendees. But the rule has been eroded overthe last century by a series of exceptions that have at length made the rule itself obsolete.The exceptions to the no-duty rule were three: (1) cases in which the seller knew that thechattel was dangerous and failed to disclose the fact, (2) cases in which the chattel wasfurnished for use on the seller’s premises and (3) the most important exception, sale of anarticle imminently or inherently dangerous to human safety. The category of things“imminently” or “inherently” dangerous was a vague and poorly defined category, but in thiscentury it has expanded so that this third exception has virtually swallowed up the rule. Thedecisive case came in 1916, when the ultimate purchaser of an automobile was injured bythe collapse of a defective wheel. The manufacturer was held liable. Superficially, the casewas merely a slight extension of the class of “inherently dangerous” articles, but in reality itpointed the way to a major extension of liability. The foregoing development was an extension of negligence doctrine, by limiting oreliminating a “no-duty” rule. But another development also took place, in which a strict liabilityon a theory of “warranty” has been extended to the ultimate purchaser or user of a commodity.The seller’s warranty is a term of the contract of sale, express or implied, making the selleran “insurer,” to at least some extent, of the quality and safe condition of the goods. Thoughit has its origins in tort and is a hybrid, the warranty has more affinity now to a contractualobligation. Thus, if negligence cannot be proved, in at least some jurisdictions it is possibleto impose a “products liability” on most persons in the supply chain without any showing ofnegligence at all. 18

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDE In any case, few manufacturers or sellers of articles that can possibly cause harm ifdefective can afford to be without products liability insurance to protect against the possibilityof liability for bodily harm or property damage to the ultimate purchaser or user. STRICT LIABILITY Brief consideration is now given to strict or absolute liability, against which insurance isalso possible and prevalent. The strict liability cases are a miscellany, and seem to beincreasing in number, both as a result of case law development and of statutes. Strict liabilityis imposed whenever the hazards created by the conduct are such that it seems unsound socialpolicy to permit the actor to impose any risk of such harm on the person injured. The first illustration is workers’ compensation. After the human costs of the industrialrevolution had become appreciated, and after industry had become well enough establishedthat it could bear heavy incidental costs more easily, workers’ compensation laws wereenacted, imposing on employers the costs of the physical harm caused to the persons of theemployees by the industrial process. This liability was imposed irrespective of fault. Exceptin the case of the employer large enough to self-insure, insurance of the risk was made virtuallycompulsory as well. The use of explosives is another activity that results in strict liability for the user in somejurisdictions. Quite reasonably, the user is compelled to treat all damage caused by his orher activity as a cost of the enterprise in which he or she is engaged. Damage caused bytrespassing cattle is an early common law illustration of strict liability. A more modern commonlaw illustration is the collection on one’s land of large quantities of substances likely to escapeand to do damage if they escape, such as a reservoir of water. In all of these and in othercases some jurisdictions have created liability without fault. Although some of these risks areunusual and difficult to insure, there is nothing improper about them as a subject for insuranceactivity. Some are no doubt included in policies that are mainly directed at negligence. Theunderwriter, however, is likely to be concerned if there are possibilities for strict liability withinthe scope of the policy, for the problems and dangers of the two are quite different. JURIDICAL RISK So far, the law of torts has been outlined as it appears in the opinions of the courts andin the enactments of legislatures, describing the theoretical framework of the law underlyingthe liability insurance policy. However, there is another dimension of risk that is of greatimportance in liability insurance. Intervening between the theoretical formulation of the legaldoctrine and the decisions of actual cases is the process of judicial administration. Law mustbe applied, and it is applied by a system of courts and administrative agencies in which thehuman element is all too apparent. Some inadequacies are inevitable in any system of judicialadministration. Among them are risks against which one must insure, if he or she seeks fullprotection against loss.Cost of Defense The first of these risks is the risk of incurring costs because one is defendant in a lawsuit.Lawsuits may be started whether there is negligence or not. One law professor used to makethis point to an early class in torts by asking the question, “Can the injured person sue in thiscase?” As he or she expected, the answer frequently came back “no.” He or she would then 19

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDEreply, “You are dead wrong. Any fool can sue. The real question is whether he or she can win.”It is of the greatest importance to the development of liability insurance that any person canbe sued. No person, however careful he or she may be, can have real assurance that he orshe will not be the defendant in a lawsuit alleging that he or she negligently injured theplaintiff’s person or property. If the court eventually finds the policyholder negligent, the costof defense increases the burden of the judgment, and the policyholder needs protectionagainst both. But more importantly, even if the court eventually holds that the individual wasnot negligent, the costs of investigation, trial and sometimes appeal may make the ultimatevindication a Pyrrhic victory. Lawyers are professionals whose services do not come cheaply,and quite aside from the legal fees, the costs of a trial in a personal injury case may be verysubstantial indeed. The stakes are high in these days of high verdicts, and in order to protecthim/herself against liability by default, the defendant may have to employ not only one ormore attorneys, but also photographers, doctors, private investigators, engineers and otherexperts. One may insure against these costs, and it is important to insure. In our system, thisis a part of liability insurance, though theoretically the costs of defense could be separatelyinsured.Claims Consciousness The risk of unjustified claims is becoming constantly higher, as the prevalence of liabilityinsurance makes the public even more claims conscious. The development of liabilityinsurance teaches the public generally that there is a ready source of funds against whichjudgments can be collected. This makes the public more conscious of the possibility of successin personal injury lawsuits and thus more ready to bring them. Liability insurance is plaguedby a problem that is an inevitable result of its own successful development. An insurance-buying public is a claims-conscious public.Fact Distortion Discussion of the cost of defending an unjustified lawsuit leads to another related risk—the risk that is inherent in the difficulties of the fact-finding process itself. There is no assurancethat even extreme care will prevent the filing of unjustified lawsuits. Moreover, there is noassurance that a court will always decide that the claim is unjustified whenever the facts, ifthey were known, would dictate such a result. Often, not the facts but rather distortions arepresented to the jury (or to the court). Many factors distort the jury’s perception. First, thereare subjective factors in the jury itself — a dislike for the defendant because on the witnessstand he or she appears to be obnoxious, or has an objectionable lawyer; a liking for theplaintiff, or his or her lawyer; a feeling that somebody should pay whenever anyone is hurt,and the election of the defendant to be the payor simply because he or she is able to pay,or because he or she is probably insured, or because the individual came out of the accidentwithout injury and should be made to share the loss. These subjective factors are not undereffective control by the judge or by the law, for though there can be reversal of a verdict forthe plaintiff if the jury admits that it was influenced by extraneous considerations, there canbe none if the jury’s reasons remain unexpressed, provided its verdict is one that reasonablepeople could reach. Some objective factors, too, distort the perceptions the jury forms of the event. Mostimportantly, a visual image must be converted into words by witnesses. In their nature, wordsare imprecise instruments. Moreover, many witnesses are inexpert in the use of language. 20

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDEFurther, each witness saw only a portion of the event and saw it from a vantage point thatprovided some distortion. Delay in the process of litigation ensures that the testimony comesat a time when memory has begun to fade. Again, in the process of preparation for trial, thetestimony may be distorted by the questioning of counsel, which has an influence on the wayin which witnesses formulate their stories, even when there is no improper “coaching” of thewitness. And, of course, testimony may be perjured. Finally, the testimony is subject to thedistorting influences of the trial itself. It is presented in an artificial form and the witness maybe subject to a severe cross-examination, designed to destroy the effectiveness of his or hertestimony. Cross-examination is often successful in doing so even when the testimony isaccurate. When all these possibilities for distortion are considered, one wonders how so much truthmanages to come through in a trial of a lawsuit. But even if one can rely on the system toproduce a brand of justice that is right more often than it is wrong, it is clear that such justiceis only a rough approximation, and that the system makes a good many errors. The risk ofsuch error must be insured against, even by an individual who knows he or she is alwayscareful.Uncertainty in Legal Rules Other risks are inherent in the nature of the judicial process, existing even when casesare tried by judges, but even more clearly when they are tried by juries. One risk is theuncertainty of the legal rules themselves. Even when a rule of law is seemingly formulatedin a clear and precise way, it is often difficult to decide whether to apply it to a set of facts.Often, more than one possible rule may be applicable, and the need to determine which ruleto apply gives discretion to the tribunal. Sometimes, the selection of the rule turns on themeaning given to a key word. For example, a defendant landowner has no duty of care toa trespasser on the land, but has a duty to someone lawfully using the adjoining public way.A great deal depends on the point at which a person ceases to be a user of the public wayand becomes a trespasser. This makes for doubt in the application of a set of legal rules; theyhave a deceptive appearance of certainty that does not hold up. This difficulty is seldomappreciated by the layman; even the lawyer is not always fully aware of the range of choicethat is thus left to the tribunal.Legislation by Juries This is not the only way in which legal uncertainty may appear. A judge or jury may befree to decide a case without articulating reasons for the decision. In doing so, the law maybe altered without perception of any change by outsiders. New doctrines are “bootlegged” into the law. For example, the doctrine of contributorynegligence is, in theory, a part of the law of negligence where not changed by statute. Juriesare instructed by the judges that if the plaintiff is negligent, even slightly, they must find forthe defendants. This is a standard instruction. But if the jury sees that the plaintiff was onlya little bit negligent, and thinks that while it would be fair to reduce the amount of his or hercompensation, it would not be fair to deny recovery altogether, it may find for the plaintiff,but in a lesser amount than it would have done had the plaintiff not been negligent. So longas the jury does not explain what it is doing, it has uncontrolled power so to act. In this way,the jury is applying in the common law action for negligence ade facto doctrine of comparative21

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDEnegligence. The doctrine reduces the amount of recovery because of the plaintiff’scontributory negligence, without barring him or her completely. All of these risks are inherent in the nature of the legal process, quite apart from the riskof liability created directly by the law. They are risks against which insurance is necessary.Fortunately, they do not require a separate type of insurance, for they are naturally assimilatedwithin the liability insurance policy. But it is impossible to understand fully the nature andoperation of liability insurance without understanding these peripheral risks.GENERAL LIABILITY INSURANCE The term “general liability insurance” embraces liability insurance other than automobile,aviation, workers’ compensation, employer’s liability, and the liability portion of the boilerand machinery and marine coverages. A typical general liability policy provides for one or more of the following coverages, asselected by the insured:1) Bodily injury liability.2) Property damage liability.3) Medical payments. (Sold only in connection with accidental bodily injury liability insurance.) CONCEPT OF A SCHEDULE POLICY In direct damage insurance, the expression “peril” is used fairly consistently to refer to loss-causing phenomena such as fire, windstorm, hail and so on. In liability insurance terminology,there is no one expression uniformly used to refer to types of liability claims. In this section,the expression “hazard group” is used for the purpose of identifying activities and areas ofexposure.The major general liability hazard groups include:1) Premises and operations.2) Elevator.3) Construction and alteration.4) Protective (independent contractors).5) Products — completed operations.6) Contractual liability (separately available as to bodily injury liability and property damage liability). Originally, the industry developed separate policies for each of the major hazard groupssuch as premises-operations, elevator and products. An insured who wished coverage underseveral hazard groups needed just as many policies. Separate policies still exist in some companies, but their use is infrequent. Instead, mostnow provide schedule-type policies. Each such schedule policy provides insurance for suchcoverages and such hazard groups as the policyholder selects. Thus, the individual maypurchase bodily injury (B.I.) and property damage (P.D.) liability for premises and operationsonly and decline to purchase elevator, products or other hazard group coverage eitherbecause he or she has no exposure in such fields, because he or she desires to “self-insure”22

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDEsuch exposures, or (more rarely) because he or she is purchasing such coverages from anotherinsurer. Each of the hazard group portions of a schedule policy provides the same coverage aswould exist in a separate policy. Each of the listed hazard groups is designed to be mutuallyexclusive of the others, just as the separate policies were.Many companies maintain two different schedule liability policies:1) A policy for owners’, landlords’ and tenants’ risks.2) A policy for manufacturers’ and contractors’ risks. “Owners, landlords and tenants” is an insurance classification for a wide group of riskswhose primary (not sole) exposure is that arising out of occupancy of premises, including otherexposures that are not strictly “premises” matters, but which have customarily been rated inthe “O. L. & T.” section of the “General Liability” rate manual. Such risks are rated on somebasis other than payroll, such as area, frontage, admissions, sales or receipts. Typical O. L.& T. risks include apartments, hotels, office buildings, theater, retail stores, wholesalers andstorage warehouses. The Manufacturers’ and Contractors’ (popularly known as “M. & C.”) group of classifica-tions is intended for risks such as those suggested by the phrase, whose activities mightembrace not only premises exposure but also considerable exposure not directly related toany particular premises. These risks are rated in the M. & C. portion of the liability manualand are usually rated on the basis of payroll. In order to save supplies, companies will often combine the two by using a single jacketwhich provides all provisions common to both policies. They will attach to the jacketappropriate supplements as may be necessary according to whether the risk falls in the O.L. & T. or the M. & C. classification, and according to what hazard groups are insured, forinstance, premises and operations, elevator, product and/or independent contractors. Schedule policies provide only for such hazard groups and coverages as are specificallyindicated, generally by showing a premium charge on the “schedule” or declarations page.Thus, there is insurance for stated hazard groups only, as contrasted with the concept — usedin comprehensive policies — of embracing all liability hazards not specifically excluded. INSURING AGREEMENTS The insuring agreements in schedule liability policies are generally applicable to both O.L. & T. and M. & C. contracts. Some variations are pointed out in a subsequent section.Bodily Injury LiabilityThe company promises: To pay, on behalf of the insured, all sums which the insured shall become legally obligatedto pay as damages because of bodily injury, sickness or disease, including death at any timeresulting therefrom, sustained by a person, caused by accident and arising out of the hazardshereinafter defined. 23

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDE The term “bodily injury” is not synonymous with “personal injury.” It does not include suchtypes of tort damage as defamation, libel and slander, false arrest or imprisonment, maliciousprosecution, invasion of privacy or withholding of civil rights.Property Damage Liability In almost the same language as in the B.I. insuring agreement, the company promisesto pay the insured’s liability for damages because of damage to or destruction of property,including the loss of use thereof, caused by accident.Medical Payments The bodily injury coverage provides for only those damages for which the insured is legallyliable. This liability may include the reasonable medical expenses of the claimant. Manyinsureds find it desirable, however, to provide for the payment of medical expenses of thoseinjured upon their premises or in their business operations, regardless of the question of faultor legal liability. They may, if they desire, purchase medical payments coverage providingfor reasonable and necessary medical expenses incurred within one year from the date ofthe accident. The per person limit chosen is often $250 or $500 but can be much higher. Medical payments coverage is like accident insurance, payable regardless of fault, andpayable in addition to any sums the claimant may be entitled to recover by way of damagesagainst the insured. Many claimants are content to accept the payment of medical expenseswithout pursuing any claim for damages. Medical payments coverage under a general liability policy customarily excludes thenamed insured, his or her business associates, employees or tenants. Otherwise, thecoverage would provide a 24-hour accident coverage for those customarily on the premises.Contractual Liability The B.I. (bodily injury) and P.D. (property damage) insuring agreements quoted abovecover the insured for sums the individual is “legally obligated to pay as damages.” This wordingwould include liability assumed by contract in absence of any exclusion in another part of thecontract. Schedule liability policies customarily exclude all liability assumed by the insured “underany contract or agreement,” except in cases where products liability insurance is purchased,warranties of goods for products. The reason for the contract liability exclusion is that underwriting of the policy is based onthe concept that the risks assumed by the insurer will be those normally expected in a riskof the general class insured. If, however, the insured has expanded his or her own liabilityby voluntary agreement, then the attitude of the underwriter as to acceptance or rating maybe somewhat different. Thus, if the owner of a store has assumed liability for injuries causedby independent concessionaires, he or she has expanded his or her own liability beyond thatordinarily contemplated. Liability of others assumed by “hold harmless” or other contracts has become so customaryin certain situations that coverage is ordinarily granted as part of the “premises” exposureby means of a separate insuring agreement covering “incidental written agreements.” This24

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDEinsuring agreement operates to except from the contract liability exclusions relating topremises:1) Easement agreements, except railroad grade crossing agreements.2) Agreements required by municipal ordinance, except in connection with work for the municipality. (Example: a hold harmless agreement required by a municipality as a condition to permitting a store to build a vault under its sidewalk.)3) Elevator or escalator maintenance agreements.4) Leases of insured premises. It should be noted that the contract liability exclusions of a policy do not exclude liabilitythat would exist against the insured in the absence of the contract. As to contract liability not falling within the listed exceptions to the exclusion, the insuredmay protect him/herself by purchasing the fourth coverage available under the scheduleliability policy — that of contractual liability. This coverage provides for separate statementof B. I. and P. D. limits. It is thus possible to purchase contractual liability insurance for B. I.or P. D. alone, even though the other coverages embrace both. This coverage, as printed in the policy, provides the insured with protection against theliability assumed by him or her under certain specific types of written agreements. Othercontracts may be covered by specific endorsements. Many insureds overlook liabilities they have assumed in contracts, particularly those inconnection with leases, permits or contracts to supply services, do construction or makeinstallations. While insurance companies, agents and brokers should point out the possibilityof contract exposures, they cannot be expected to be so familiar with the customer’s affairsas to detect these exposures unless they are brought to their attention by the insured or theattorney who may have examined the contract on behalf of the insured.Defense, Settlement, Supplementary Payments In addition to agreeing to pay for the damages for which the insured is held liable, thecompany agrees, as to B. I. and P. D. coverages, that it will defend any lawsuits against theinsured alleging injury covered by the policy and seeking damages, even if the suit isgroundless, false or fraudulent. The company agrees to pay the various expenses incidentalto legal proceedings such as the cost of appeal bonds, bonds to release attachments, expensesof litigation and investigation, costs, interest accruing after entry of judgment (until thecompany has paid its portion of the liability) and reasonable expenses incurred by the insuredat the company’s request. These expenses are payable in addition to the policy limits. Although the company is obligated to defend suits against the insured, the agreementspecifically reserves to the company the right to make such investigation, negotiation andsettlement of any claim or suit as it deems expedient.Definition of Insured On the point of who is protected by the policy, the term “insured” is very broad. It includesthe persons named as insured in the declarations and also includes any executive officer,director or stockholder of the named insured while acting as such, and any firm or organization 25

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDEacting as real estate manager for the named insured. Insurance in the name of a partnershipprotects the partners for their liability as such. In the absence of a specific endorsement to the contrary or in absence of their beingincluded as named insureds, the policy does not protect anyone other than those describedabove. Thus, insurance in the sole name of a tenant does not protect the landlord. Insurance in the name of an employer does not automatically protect his or her employee.In most cases, extensions in the contract may be made (sometimes without additionalpremiums and sometimes with an additional premium less than the cost of separate insurance)to provide such additional protection. Covering several interests under one policy, however,requires that the interests so grouped share the protection afforded by the applicable “perperson,” “per accident” or “aggregate” limit. It is not multiplied or accumulated by reasonof several insureds being protected as to a single accident or occurrence.Accident Versus Occurrence Each of the insuring agreements discussed thus far covers only injuries “caused byaccident.” Certain types of injuries for which an insured may be liable are not “caused byaccident.” The term “accident” contemplates an undesigned, sudden and unexpected event. Itgenerally contemplates a single happening traceable to a definite time, place and cause. Theconcept also generally negates a deliberately intended act, even though the act may havean unexpected result. Construction of the terms “accident” and “caused by accident” has proven troublesome.Judicial precedents are by no means in accord. For example, liability was denied for diseaseof a tenant alleged to have arisen out of the landlord’s failure to provide heat. There are caseson both sides of the question as to whether or not the gradual contracting of a disease or illness(such as radium poisoning or dust diseases) over a lengthy period constitutes an accident.Another difficult group of cases is that involving the natural and inevitable result (even thoughnot intended) of acts deliberately and intentionally undertaken. For example, dribbling paintdown the side of a house by an insured working on the house was held not to be “caused byaccident.” Erecting a building — an intentional act — inadvertently over the property line washeld not to be an accident. Damage resulting from an assault or deliberate trespass by an insured is, of course, not“caused by accident” from the standpoint of such insured. Even here, the courts havesometimes found coverage on the grounds that the damage was sudden and accidental asviewed from the standpoint of the injured party. In order to protect against an insured’s vicarious liability for assault and battery committedby employees in the course of employment, liability policies usually state that assault andbattery shall be deemed an accident unless committed by or at the direction of the insured. Most companies provide optionally, and for an additional premium — usually speciallyrated — that the phrase “caused by accident” may be deleted and the word “occurrence”substituted. This substitution affects not only the coverage but also the limits of liability 26

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDEapplicable to allied items of damage. Such endorsements often define “occurrence” as anevent or continuous or repeated exposure to conditions, which unexpectedly causes injuryduring the policy period. Exposure from a single source is deemed to be one occurrence andthus subject to the applicable liability limit. While occurrence coverage is freely available for bodily injury, underwriters are less willingto grant (and charge substantially higher rates for) an “occurrence” endorsement whenapplied to property damage liability. Such endorsement is particularly dangerous from anunderwriting standpoint in connection with property damage liability sold under the products-completed operations hazard group. Elimination of the “caused by accident” feature in suchcases may have the unintended result of making the policy a sort of “manufacturers’malpractice” cover guaranteeing against usual and expected claims for re-execution of workor replacement of products because of faulty design or workmanship.Difference Between O. L. & T. and M. & C. The principal (not sole) difference in coverage between the O. L. & T. and the M. & C.policies is found in the hazard group dealing with premises-operations. In the O. L. & T.contract, the premises-operations hazard is described as: “The ownership, maintenance oruse of the premises and all operations necessary or incidental thereto.” The “Definitions”section of the O. L. & T. contract defines “premises” as the premises designated in thedeclarations and ways immediately adjoining. There is no coverage for undeclared premisesexcept for a limited automatic coverage of newly acquired premises. The off-premisesoperations covered by the O. L. & T. contract are those necessary or incidental to the describedpremises. The M. & C. description of the premises and operations hazard is slightly different. Themodified definition, therefore, is: “The ownership, maintenance or use of the premises, andall operations.” Under the M. & C. contract, no definition of “premises” is required. Thedeclaration customarily lists premises owned or occupied by the insured but the coverage isnot limited to those listed. Subsidiary O. L. & T. exposures of an M. & C. risk may be included under the M. & C. form.However, they take the rates and premium bases developed by the O. L. & T. portion of theliability manual. If an insured bought all of the coverages available under the schedule liability policy andvarious optional endorsements, plus an automobile policy and a malpractice contract for anyprofessional liability, he or she would have fairly broad liability insurance protection. If thatwere his or her choice, however, he or she could probably accomplish the same object moresimply by purchasing a Comprehensive General Liability Policy which would automaticallyembrace all of the indicated exposures except malpractice. The principal present purpose of the schedule policy, therefore, is to permit picking andchoosing — by agreement between insured and underwriter — just what exposures will becovered under this particular contract and what will be left to other contracts or to “self-insurance.” Each of the different blocks or areas of insurance is designed to be mutuallyexclusive; overlapping (with one or two specific exceptions) is not intended. To produce themosaic effect, each hazard group carries its own set of exclusions. The bulk of this languageis not to eliminate risks considered uninsurable, but simply to mark out the dividing lines 27

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDEbetween hazard groups and the dividing lines between this type of general liability insuranceon the one hand and, say, automobile, marine or other property insurance, on the other. A look — as an example — at some (not all) of the premises-operations exclusions mayhelp to illustrate the point. All liability arising out of the ownership, maintenance or use ofaircraft is excluded. Liability from automobiles and watercraft is similarly excluded if theaccident occurs away from the premises. The premises-operations coverages also exclude the elevator hazard. The purpose hereis to permit (or require) coverage under the elevator portion of the policy. Another exclusiontypical of this compartmentalized approach excludes liability for damage to a building or toproperty within buildings caused by discharge, leakage or overflow of water or steam fromplumbing, heating, refrigerating or air conditioning systems, steam pipes, collapse of tanks,automatic sprinklers, or rain or snow coming through defective doors and windows, and soon. This exposure may be covered by removing the exclusion for an additional premium orby purchasing a separate policy covering water damage and sprinkler leakage liability. Thepremises-operations coverage also excludes liability arising from products, completedoperations and work of independent contractors. Similarly, the other coverages carry comparable exclusions which rule out protectionagainst legal claims which can be defended and/or paid under the premises-operationscoverages.Elevator Liability Under a schedule liability policy, there is no automatic coverage of elevators operated,maintained or controlled by the insured. It must be specifically purchased. Liability of a tenantin a building, including contractual liability under the lease, for the operation of elevators usedwith other occupants, is included in the premises-operation hazard and no specific elevatorcoverage is required. The term “elevator” includes passenger escalators; the term may or maynot include a dumbwaiter, depending on size. There is nothing that requires special comment in regard to bodily injury liability or medicalpayments coverage under the elevator hazard group. However, property damage liabilitycoverage is somewhat different. It does not contain the usual exclusion of liability for damageto all property in the care, custody or control of the insured. Instead, the exclusion is confinedonly to property owned, occupied, rented or used by the insured. Thus, in the usual case, theliability of the insured for personal property of others, while being transported on the elevator,is covered. On the other hand, if the elevator controlled by the insured gets out of hand anddamages a building rented to the insured, there would be no coverage. Elevator collision insurance may also be purchased on an optional basis. It is effected byattaching an endorsement to the schedule policy. It does not cover any loss paid under theproperty damage portion of the policy. It is sold only on policies where property damageliability insurance is also included. It covers any damage by collision of the elevator with anyother object and thus covers damage to the elevator itself and damage to the insured’s ownproperty regardless of whether the property involved was on or off the elevator. 28

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDELIABILITY CLAIMS ARISING OUT OF CONSTRUCTION AND ALTERATION Special attention should be given to construction and alteration work planned by aninsured. The treatment for all such hazards is not automatically provided under the O. L. &T. or the M. & C. contract. Further, the method of handling such exposures differs in the twocontracts. First, there is a certain amount of automatic coverage without additional premium underthe premises and operations section of both policies. This section covers normal maintenanceand repairs where new construction or demolition is not involved and there are no structuralalterations involving the changing of building size. In such a case, since the premises andoperations insuring clause covers all operations necessary or incidental to the insuredpremises, coverage is automatically provided to the named insured. This statement is truewhether the work is done by the employees of the insured or by independent contractors. In the case of the O. L. & T. policy, it should be noted, however, that only described premisesare covered. The M. & C. policy covers all premises of the insured. Where the alterations go beyond routine maintenance or minor alterations not involvinga change of size, and involve demolition, new construction or change in the size of the building,there is no automatic coverage under the premises and operations hazard group of the O.L. & T. policy. Coverage of the named insured must be added at the described location bytaking out insurance under division 3 of the policy — “structural alterations-independentcontractor hazards.” This requirement exists whether the work is done by independentcontractors or by the insured’s own employees. As to the M. & C. contract, however, the liability of the named insured for such major workis automatically covered by the premises and operations hazard group if the work is done byemployees of the insured. Additional premium, if any, is payable on audit. But if the work isdone by independent contractors, there is an absence of coverage under the premises andoperations hazard group and the exposure is covered only if coverage has been purchasedunder division 3 of the policy — “independent contractors’ protective liability.”LIABILITY FROM ACTS OF INDEPENDENT CONTRACTORS Ordinarily, when one assigns a task to be completed by an independent contractor for afixed or determinable price, there is no employer-employee relationship or principal-agentrelationship which would make the person for whom the work is being performed liable forthe independent torts (negligent or intentional) of the contractor, his or her subcontractorsor employees of either. The owner of land may contract for the erection of a building of a certainsize and specifications. The contractor undertakes to erect it within a stated time, and the exactmethod is up to the contractor. He or she may do the work through his or her own employees.He or she may subcontract it. He or she establishes working hours and construction methods.The landowner retains limited, if any, supervision and no day-to-day control. It is even possiblethat the task of supervision may be entrusted to another independent contractor such as anarchitect or consulting engineer. Liability for torts is, therefore, primarily a responsibility of the contractor or subcontractorwhose negligence (or whose employees’ negligence) caused the accident. This point may be29

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDEfurther supported by contract provisions whereby the contractor and/or subcontractorsassume the entire liability not only for their own negligence but also for acts of concurrentnegligence on the part of the contractor and the owner, and, in some cases, even of the owner’ssole negligence. Under such circumstances, some owners and principals feel that they have adequateprotection by reason of the contractor’s hold harmless agreement and, therefore, require noinsurance. This feeling is, for the most part, wishful thinking. The owner has not shed all of his or her exposures by a hold harmless clause. He or shestill has risks remaining which cannot effectively be transferred and he or she will needinsurance for these. First, as owner of land on which construction is being done, he or shemay be liable for certain claims that arise simply because of the ownership of land and arenot related to the contract. (He or she is automatically covered for such premises exposureunder the premises-operations part of an M. & C. Liability Policy and he or she may be coveredunder an O. L. & T. Liability Policy if the premises are described in the declarations or bysuitable endorsement.) Second, he or she is liable for his or her own acts of negligence. Suchnegligence may have been in failure to use due care in the selection of the contractor, or someaction in the scope of the owner’s limited supervision. Courts are not inclined to construe “holdharmless” and other indemnification agreements as protecting a person against his or herown active negligence. Third, there may be nondelegable duties imposed upon an owner ofreal property either by statute (such as scaffolding acts) or by common law. Presence of the independent contractor has reduced the exposure of the owner to ultimateliability for torts of the contractor and his or her “subs.” However, even if he or she doessucceed in transferring ultimate liability from him/herself to the general contractor, the owneris still open to being sued. He or she needs, at the least, protection against costs of litigation. There are a number of ways of attempting to handle exposures inherent in the owner-principal-general contractor-subcontractor relationship. One method was to include theowner as an additional insured under the M. & C. coverage maintained by the generalcontractor with respect to the work in question, but this method is seldom used now. Currently, the usual arrangement is for the owner to protect him/herself by carryingowner’s and contractor’s protective liability coverage insuring against contingent liability foractivities of independent contractors. Such coverages normally exclude any act or omissionof the named insured or his or her own employees other than general supervision of the workperformed. Such acts or omissions are covered under the premises-operation hazard. Under the M. & C. Liability Policy, liability for independent contractors may be coveredon a blanket basis by purchase of insurance under the independent contractors hazard group.This coverage is not confined to construction or to structural alterations and it also givesprotection for the insured’s contingent liability arising out of the actions of an independentcontractor used by the insured to do servicing or installation work. Printed portions of the O. L. & T. Liability Policy make provisions for optional coverage formajor structural alterations, new construction and demolition, whether done by the namedinsured’s own employees or by contractors. In the usual O. L. & T. risk, this activity will bethe type of independent contractor hazard encountered. If coverage is desired for otheroperations which are the subject of independent contracts, it may be included by endorsement.30

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDEPremium is most often based on the contract price or other payments made to the independentcontractor.Several additional points worth noting are as follows:1) In the M. & C. policy, the premises portion is rated on the basis of the insured’s own payroll. Ordinarily, no premium is collected on the payroll of independent contractors. In keeping with this feature, the premises-operations portion of the policy excludes liability properly covered under the “independent contractor’s” hazard group.2) While the M. & C. Liability Policy does contain a specific hazard group to cover the insured’s contingent liability for activities by independent contractors, the O. L. & T. Liability Policy, on the other hand, has no express exclusion or definition of the independent contractors’ hazard. Remember, however, that the O. L. & T. premises coverage applies only to premises specifically described in the declarations and operations necessary or incidental thereto. Thus, unlike the M. & C. contract, there would be no automatic permanent coverage of a premises on which, for example, a new store or a new hotel was being built by independent contractors.3) In the O. L. & T. policy, installation work done by independent contractors is automatically included in the premises-operations coverage if the installation is an operation necessary and incidental to the activity at the insured premises. No separate insurance is ordinarily needed. THE PRODUCTS-COMPLETED OPERATIONS HAZARD The exposure of liability for products or workmanship in business is steadily increasing.The number of product claims arising out of alleged injury from products improperly made,improperly labeled or improperly packaged is constantly increasing. The cases are virtuallyinfinite in variety. They range from the traditional cigarette butt in a bottle of soda or pieceof glass in the hamburger, all the way to multi-million-dollar suits alleging destruction of anaircraft and death of its occupants as a result of a defective part or component.Products Products liability may be purchased as an optional coverage under a schedule liabilitypolicy. As a general rule, it is desirable to purchase this coverage from the same insurerfurnishing “premises-operations” cover. Some underwriters will refuse to accept productscoverage without also insuring the premises-operations hazard. This refusal is a consequenceof the difficulty in establishing a dividing line between products liability on the premises andthat off the premises;, that is, between the operations hazard and the completed operationshazard. It is not uncommon, however, to find the products liability hazard carried with aninsurer other than the insurer of the premises hazard. This situation is likely to occur in thecase of products not freely underwritten. Thus, a manufacturer may wish to go to a specialrisk market, apart from this usual liability insurers, to obtain coverage on something such asa new and untried hair lotion or face cream. On occasion, distributors and retailers of a productare provided products protection under policies maintained by the manufacturer of theproduct. 31

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDE Most products liability coverages also apply to injury from containers such as bottles orcartons in which the product is packaged. Vending machines are not considered a productsexposure on the part of the company on whose premises they are placed. They are usuallycovered as part of the “premises,” and rated under the O. L. & T. section of the manual. The time element in products liability insurance is important. The policy applies only toaccidents which occur during the policy period. The date of the accident is the time when thedamage resulted. It is not the date of the incident or neglect which caused the product to beharmful. Neither is it the time when the claim is presented. If an insured or insurer terminatesproducts liability coverage, and the insured does not replace it, the insured has no protectionagainst future accidents from goods already sold and in the hands of distributors or the public.Conversely, when a products liability risk is accepted by an underwriter, in absence of specialexclusionary language, he or she will automatically assume liability for future accidents onproducts sold and operations completed long before the risk was offered. Premium is generallycharged on the basis of sales or units or some other measure of current volume. The premises-operations coverage, of course, excludes products liability. It is also intendedto exclude any liability for accidents from completed or abandoned operations. In the usualcase, both of these are accidents occurring away from the insured’s premises. The scheduleliability policy excludes from the premises-operations hazard any liability arising from theproducts-completed operations hazard as defined in the policy. Except for certain risks indicated in the rating manual classifications and in the policydeclarations (principally food-handling risks such as restaurants, hotels and certain foodstores), products liability arising out of an accident occurring on the premises of the insuredis covered under the premises-operations hazard. For example, if the customer in a hardwarestore is injured while examining a defective piece of lawn furniture, or his or her clothes aresoiled while examining improperly packaged paint, or some similar event occurs, thepremises-operations portion of the coverage responds regardless of whether or not theinsured had purchased products liability insurance. But an accident occurring after possessionof the goods had been relinquished and the goods have been taken from the insured’spremises is covered only under the products-completed operations portion of the policy. Inthe case of restaurants and the food-handling risks noted, there is no products coverage underthe premises feature.Completed Operations Closely related to products liability is “completed operations” liability. The premises-operations portion of the policy is intended to cover accidents that occur while insuredoperations are going on. For example, suppose the manager of the hardware store mentionedabove undertakes to install linoleum in a customer’s kitchen. Suppose further that, whileinstalling the linoleum, he or she negligently damages the house or injures a third person anda claim is made against the hardware store. The hardware store liability insurance appliesas a part of the operations hazard included as incidental to use of the premises as a hardwarestore. On the other hand, the premises-operations hazard is designed to exclude such incidentsas the one involved in a well-known case where an electrical contractor was hired to connectmotors to fans in poultry incubators as a part of a general change in electrical current used 32

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDEin the area. Many months later the fans were turned on when the incubators were put in use.Because they had been improperly installed, a large number of eggs failed to hatch. This errorwas not covered since it came under the completed operation exclusion which provides thatthere will be no coverage arising out of the hazard of operations if the accident occurs afterthe operations have been completed or abandoned and the accident occurs away from theinsured’s premises. Operations are not to be deemed incomplete because of having beenimproperly or defectively performed, or because further operations may be required pursuantto any agreement, such as a service agreement. (The loss, of course, would have been coveredif insurance was purchased under the “products-completed operations” hazard group.) By specific language it is made clear that completed operations are covered under theproducts-completed operations hazard group and not the premises-operations group, eventhough the operations themselves, as contrasted to the accident, took place on the insured’spremises. Expressly excepted from the completed operation hazard (and hence covered under thepremises-operations portion of the policy) are such activities as pickup and delivery, leavingof tools, uninstalled equipment and abandoned or unused materials. Also excepted are certainspecific classifications where the rating manual includes completed operations coverage aspart of the premises and operations hazard.LIMITS OF LIABILITY Bodily injury liability insurance, as covered in the schedule liability policy or separate O.L. & T. and M. & C. contracts, provides separate limits of liability for each person and for eachaccident. Property damage liability insurance sets forth a limit applicable to each accident. The term “standard limits” refers to the amount of coverage embraced in the premiumquotation in the rate manual. These are usually $5,000 each person and $10,000 eachaccident for bodily injury, and $5,000 each accident for property damage liability. Optional“Excess Limits” may be purchased, increasing the sums insured. Medical payments insurance premiums are quoted in terms of a limit for each person of$250, $500 or $1,000, subject to a total limit of $10,000, $25,000 or $50,000 for eachaccident. Per person and often total limits can be raised. The “each person” limit is themaximum amount of the company’s liability for all damages (including damages claimed byanother person, such as a husband, for care and loss of services) arising out of injury, diseaseor death sustained by one person as a result of any one accident. The “each accident” limitis subject to the each person limit and states the total limit of the company’s liability for alldamages sustained by two or more persons as a result of any one accident. It is importantto know in connection with the “each accident limit” that under the products hazard, alldamages arising out of one lot of goods or products prepared or acquired by the insured shallbe considered as arising out of one accident regardless of the fact that injury may occur atdifferent places and times. In property damage liability, the “each accident” limitation is the maximum amountpayable for all damages to property and loss of its use as a result of one accident, regardlessof the number of persons or owners involved. Where limits are stated only in terms of “eachperson” and “each accident, “ payment does not (as is sometimes the case in propertyinsurance) reduce the policy as to future accidents.33

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDE Thus, on an annual policy, it is possible to expend the limit in a single accident in one monthand pay the same sum all over again in the future without having to “restore” the coverageby payment of an additional premium. However, there are some types of exposure wherethe possibility of multiple accidents is such that, in order to avoid an undue accumulation withinthe policy period and still permit a high limit per accident, it is necessary to place an“aggregate” limit on total payments for all accidents during the policy period. This situationexists in the case of products exposures. An aggregate limit is the total limit of the company’sliability for the indicated hazard group during the policy period. In the case of three-yearpolicies the aggregate limit, if any, is applied separately to each annual period. Excepting contractual liability limits, there is no accumulation of limits of liability by reasonof overlapping coverage of a specific accident among more than one hazard group. In suchcase the highest “each person” and “each accident” limit applies. Several insureds coveredin the same policy share limits.OTHER USUAL EXCLUSIONS IN ALL SCHEDULE LIABILITY POLICIES While, as indicated above, most of the exclusion language is to determine the dividing linebetween elements of coverage, there are some exclusions which limit the policy as a whole.War Exclusion War risks are excluded from the medical payments coverage, “first aid” and contractualliability insurance.Liquor Control Laws Some states have laws imposing special liability upon operators of business in which liquoris sold, based on the concept of making owners or operators of such premises liable foraccidents and injury which result from the careless sale of alcoholic beverages. B.I., P.D. andmedical payments coverages of the schedule liability policy exclude liability imposed upon theinsured as a person engaged in the business of manufacturing, selling or distributing liquor(or as the owner or lessor of premises used for such purposes) by reason of any statute orordinance dealing with alcoholic beverages. This exclusion is popularly known as the “dramshop law exclusion.”Workers’ Compensation and Employer’s Liability Exclusions The policy excludes any obligation under a workers’ compensation, unemploymentcompensation or disability benefits law and any bodily injury, sickness, disease or death ofan employee of the insured arising out of and in the course of his or her employment.Care, Custody or Control Exclusions Liability insurance is intended as protection against “third party” exposures. It is notintended to take the place of fire, windstorm or other property damage coverages on theproperty of others in the insured’s possession. Accordingly, property damage liabilitycoverages customarily exclude damage to property owned, occupied by or rented to theinsured, property used by the insured, property in the “care, custody or control” of the insuredor property over which the insured for any purpose is exercising physical control. Thus, ageneral liability policy maintained by a bailee does not cover his or her liability for damage 34

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDEto property he or she is holding for others. Considerable difficulty has been experienced inconstruing the exclusion where there is some question as to just what portion of the damagedproperty is under the “care, custody or control” of the insured. In general, the exclusionoperates to eliminate coverage on that part of a building or premises on which the insuredwas working but may still protect him or her from damage to other portions of the buildingor premises not within his or her control. On specific applications, underwriters will sometimes afford broader property damageliability insurance by eliminating or modifying the “care, custody or control” exclusion as tocertain types of property.X, C and U Exclusions Property damage liability coverages for certain classifications in the M. & C. section of the“General Liability” manual provide that the normal coverage for these risks — identified bysymbols X, C or U after the manual code number — excludes property damage from blasting,explosion, collapse of property and damage to underground property. These exclusions areput into the policy by special endorsement when the policy is written for risks in the indicatedclassifications. Subject to individual underwriting, an insured may obtain removal of theexclusion. PRODUCT LIABILITY INSURANCE Under traditional rules of contract law, which stem from the customs of ancientmarketplaces, manufacturers and sellers of products were essentially responsible only to theirimmediate purchasers for injuries caused by their defective products. Thus, a third party whoeither obtained the product from the purchaser or suffered injury as a bystander could notrecover from a retailer or manufacturer as a result of this privity barrier. Only within the last few decades has an injured third party with no direct relationship(privity) to a manufacturer, distributor or seller of a product been able to recover for damagessustained as a result of a defect in that product. It is this expansion of products liability lawthat has given rise to a need for products liability insurance coverage.Modern Trend in Products Liability Law The law recognizes that manufacturers, distributors and sellers owe certain duties toanyone who foreseeably may come in contact with their products. Parties may recoverdamages for their injuries based upon various theories of liability including fraud,misrepresentation, negligence, breach of warranty and strict liability in tort. A manufacturer owes a duty to exercise reasonable care in designing, testing, manufacturingand packaging its product. The manufacturer also has a duty to warn of any risks or dangersinherent in its product that are not obvious. Any breach of these duties, or the negligentperformance of them, may result in liability. Warranties may be express or implied. Any affirmation or fact or promise made by theseller that relates to the product and is part of the basis of the bargain creates an expresswarranty that the product will conform to such affirmation or promise, even though the seller 35

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDEdoes not use formal words such as warranty or guarantee. An implied warranty of fitness fora particular purpose arises when the buyer makes known to the seller the particular purposefor which the product is to be used and that the buyer is relying upon the seller’s skill andjudgment to select or furnish a suitable product. When a merchant sells goods, an impliedwarranty of merchantability arises that the goods are fit for the ordinary purposes for whichthey are used. An injured party can recover for bodily injury or property damage resultingfrom a breach of any of these warranties. An injured user or consumer may also recover damages from a seller of a defective productbased on a theory of strict liability in tort. This theory generally permits recovery for injuriescaused by defective and unreasonably dangerous products, even though the seller hasexercised reasonable care in the preparation and sale of the product.Products Liability Coverage Present products liability insurance coverage had its beginnings in the mid-1920s. As theprivity barrier fell and theories of strict products liability were expanded, products liabilityinsurance coverage adapted to meet the needs of industry. Products liability coverage is usually contained in a Comprehensive General LiabilityPolicy. However, this coverage may be included in other types of policies such as druggists’or storekeepers’ liability insurance. In rare instances, some businesses may prefer to obtainonly that form of products liability coverage available separately as Products-CompletedOperations Liability. Most insurers, however, are reluctant to write this insurance withoutPremises and Operations coverage. The basic purpose of products liability insurance is to provide coverage for damagesimposed upon an insured, by reason of law, for injuries arising out of the insured’s product,if such injuries occur after the insured has completed the product or work out of which theoccurrence arises. Two operative provisions are necessary to implement this purpose: (1) Products Hazardcoverage for bodily injury or property damage away from the insured’s premises arising outof the insured’s product after the insured relinquished possession, and (2) CompletedOperations coverage for bodily injury or property damage arising after the insured’s workhas been completed. Although possession of the product and location of the occurrence maybe irrelevant to the question of whether the injured party will ultimately recover damages fromthe insured, they can become significant factors regarding the question of whether the insuredis covered for the damages claimed under the insurance policy. Essentially, the Products Hazard provision gives the insured coverage for occurrencesarising from products. Completed Operations provides coverage for occurrences arising outof completed work or services. Depending upon the specific needs of the insured, it may notbe necessary to purchase coverage for both risks. In order to comprehend products liability coverage, it is necessary to understand somegeneral provisions contained in the typical Comprehensive General Liability Policy. The policycontains the following parts: declarations, insuring or coverage agreements, definitions,conditions, exclusions and endorsements. Those risks actually insured can only be determinedby evaluating not only what is given, but what is excluded. Certain risks may be either 36

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDEspecifically included or excluded. Although coverage for a particular risk may appear to begiven by the insuring agreement or a declaration, the insured may find there is no coveragebecause the risk does not fall within an applicable definition, is subject to a condition that hasnot been met, falls within an exclusion or has been “endorsed off the risk” (specifically excludedby an endorsement). Moreover, you get what you pay for. Products liability coverage may be automaticallyincluded in some standard forms of Comprehensive General Liability Policies. Withoutpayment of a specific premium, however, such coverage may well be “endorsed off the risk.” In other forms of policies where the risks regarding Products Hazard and CompletedOperations are within the policy exclusions, products liability coverage may nonetheless besecured by endorsement and payment of an additional premium. Generally, an insured’s business will automatically be covered for a new product or linethat arises during the policy period. The insured, however, must pay an additional premiumfor this coverage. Thus, the insured should understand that the premium for products liability coverage mayincrease during the policy period if new products are marketed. A TYPICAL POLICY While each business should have a policy tailored to its own needs and each policy shouldbe read carefully, there are some provisions common to most policies.A typical policy provides:The company will pay on behalf of the insured all sums which the insured shall becomelegally obligated to pay as damages because of: bodily injury or property damage towhich this insurance applies caused by an occurrence ... The company shall not beobligated to pay any claim or judgment or to defend any suit after the applicable limitof the company’s liability has been exhausted by payment of judgments or settlements. The phrase “to which this insurance applies” points to the fact that in order for the insuredto be indemnified by its insurer, the policy must contain a provision pursuant to which the riskhas been insured. Even if there is a general provision providing such coverage, the specificrisk must not have been excluded by any other provision of the insurance policy. For example,a drug manufacturer may have specifically purchased Products Hazard coverage, but thepolicy may contain an endorsement providing that there is no coverage for injuries arisingout of the sale, manufacture or distribution of any oral contraceptive. Accordingly, the drugmanufacturer will not have insurance coverage for losses arising out of oral contraceptivedrugs because such coverage has been specifically excluded by the endorsement.Policy Territory The Comprehensive General Liability Policy provides coverage for property damage andbodily injury occurring within the policy territory, which generally encompasses the UnitedStates of America, its territories and possessions, and Canada. Coverage also generally extends to international waters and airspace if the damage orinjury does not occur during transportation or travel to or from a foreign country. 37

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDE Businesses that produce products for foreign markets or perform operations abroad mayneed to expand the general coverage provided. By way of endorsement, the policy territorycan be expanded to include foreign countries, and the insured may obtain worldwide coverageif necessary. However, since a typical condition of such endorsement is that claims or lawsuitsbe brought or enforced in the United States, manufacturers with facilities in foreign countriesshould consider obtaining special insurance tailored to their particular needs.Applicable Limits The insurance coverage purchased by an insured is, of course, limited. Since the potentialfinancial exposure associated with some products may be in the multi-million-dollar rangeor higher, a business should attempt to estimate the potential financial exposure arising fromits products. This may be a difficult, if not impossible, task. A manufacturer may be unableto predict and measure the probability or severity of injury from a product before actual injuryoccurs. Thus, the applicable policy limits can be significant, particularly where one productcauses serious injury to a substantial number of people. The applicable limits of a company’s liability are usually contained in an endorsement.Coverage is generally limited in two ways: a limit of liability for each occurrence and an overalllimit regarding the amount of money the insurer will pay on behalf of the insured in any givenyear during the policy period. By way of illustration, such endorsement may provide:Coverage Limits of Liability1) Bodily Injury $25,000 each occurrence $50,000 aggregate2) Property Damage $5,000 each occurrence $25,000 aggregate In this example, the insurance company is liable for a maximum of $25,000 per occurrencefor bodily injury and $5,000 per occurrence for property damage, regardless of the ultimateliability of the insured to those who are damaged by the insured’s product. In other words,if three people each recover $10,000 in damages for bodily injuries arising out of one accidentor occurrence involving the insured’s product, the insured cannot recover the total of $30,000from the insurance company pursuant to the policy, but may only recover $25,000. On theother hand, if three people recover $10,000 in damages for bodily injuries arising out of threeseparate accidents or occurrences involving the insured’s product, then the insured canrecover the full $30,000 from the insurance company. Once the aggregate limit has been reached, coverage is exhausted. The aggregate limitis usually applicable to each year during the policy period. By way of illustration, if six peopleeach recover $10,000 for bodily injury from the insured for six separate accidents oroccurrences in the same year, the insurance company is responsible to indemnify the insuredfor only $50,000. The aggregate limits may become especially significant when one of theinsured’s products causes substantial injury. 38

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDE A determination of whether there is one or more occurrence when a product causes injuryis important in determining the limits of coverage. Where a product causes many injuries, doesthe “per occurrence” limit apply or is the “aggregate” limit applicable? For example,contaminated bird seed was sold to eight retailers who in turn sold it to customers. After thedeaths of many birds, the question arose as to whether the eight sales of the contaminatedproduct was one occurrence or eight occurrences. An interpretation that it was eightoccurrences required the insurance company to indemnify the insured for a sum up to theaggregate limit.Occurrence A typical policy provides: “The company will pay ... damages ... caused by an occurrence....” Most liability policies in use today are “occurrence” policies. Occurrence is defined as:an accident, including continuous or repeated exposure to conditions, which results inbodily injury or property damage neither expected nor intended from the standpointof the insured. The definition of “occurrence” specifically excludes the infliction of intentional or expectedinjury. Thus, there is no coverage for marketing a product the insured knows will causedamage. For coverage to attach, the injury must occur within the policy period. It is the injury, ratherthan the negligent act or mistake that created the product defect that is significant. The injurymay be to persons or property. The injury may be sudden or the gradual result of repeatedexposure. By way of illustration, assume a component of an automobile is defective. Acustomer drives out of the showroom and is injured when he or she loses control of the carbecause of the component’s malfunction. This is a “sudden” occurrence. Or, assume thecustomer drove the automobile out of the showroom and the car appeared to handle properly.As the customer drove the car, however, the component gradually eroded and weakened.After the car was driven 5,000 miles, the defective component caused the driver to lose controlof the car and injured him or her. This too is an occurrence. As long as the injury occurredduring the policy period, the insured may recover. The definition of occurrence makes it unnecessary to determine the specific time of theinjury causing event, as long as the injury occurs during the policy period. Thus, in our lastexample, it would be unnecessary to determine when the component part became sufficientlyweakened to cause the injury. When terminating a business, a manufacturer should continue its products liabilityinsurance because there may be a defect in a product that causes an occurrence after thebusiness has closed. For corporations, the insurance should be maintained at least throughthe statutory “winding up” period provided by the applicable state’s corporation law. Since an “occurrence” during the policy period triggers coverage, the interpretation of“occurrence” will determine whether the damage in question is covered by the policy. Themeaning to be given the term “occurrence” is being considered by several courts where injuredpersons have been exposed to asbestos products over a substantial period of time. In manyof these cases, an injured plaintiff was diagnosed as having lung disease more than 20 yearsafter initial exposure to asbestos. Assuming the injured claimants recover damages from the 39

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDEmanufacturers, the critical question to be determined from the standpoint of insurance is“when did the injury occur?” Did the injury occur upon exposure to one asbestos fiber or manyasbestos fibers? Did the injury occur when the first cell change took place in the injured party’slung? Did it occur at or near the time of diagnosis? The federal appellate courts that have addressed this issue agree that each inhalation ofasbestos caused impact upon lung tissues and is an “occurrence” within the meaning of theinsurance policy. The meaning of occurrence is apt to continue to be of importance to manufacturers becauseit appears that more persons, including workers and consumers, are seeking damages forinjuries claimed to have been caused by hazardous products manufactured and sold manyyears before diagnosis of illness.PRODUCTS HAZARD CLAUSE The jacket definition of Products Hazard in the Comprehensive General Liability Policystates:\"Products Hazard” includes bodily injury and property damage arising out of the namedinsured’s products or reliance upon a representation or warranty made at anytime withrespect thereto, but only if the bodily injury or property damage occurs away frompremises owned by or rented to the named insured and after physical possession of suchproducts has been relinquished to others. Providing the insured pays the requisite premium, this clause provides insurance coveragefor damages arising out of the named insured’s products. Insured damage includes both bodilyinjury and property damage. Coverage is also provided for damages or injury arising out ofreliance upon a representation or warranty (e.g., implied warranty of fitness for a particularpurpose, implied warranty of merchantability and express warranty) made regarding theinsured’s product. To assure that there is coverage for such warranty claims, the provisionexcluding liability assumed by the insured under the contract has been modified from suchexclusion product claims based on warranty. For Products Hazard coverage to attach, all of the following factors must be present: (1)a product or reliance on a representation regarding a product has caused injury or damage;(2) the injury or damage occurred away from the insured’s premises and (3) the insured gaveup physical possession of the product before the injury or damage occurred. The Products Hazard provision has been interpreted broadly. For example, a mail-orderhouse negligently sold a tear gas device to a minor. The insurance company argued that theProducts Hazard provision should be limited to defective products as opposed to negligentsales. The court rejected this argument. The broad construction given to this clause by the court indicates that the insured is coveredfor injury caused by the manufacture (including defective design, improper workmanship andinadequate testing), sale, handling or distribution of the product. Thus, a retailer should becovered if he or she negligently sells a product to a minor, mistakenly delivers the wrongproduct or fails to warn of a danger inherent in the product.40

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDE In order to fully understand the Products Hazard Clause, it is necessary to review otherdefinitions contained in the policy, such as the definition of products.Products are defined as follows:“Named insured’s products” means goods or products manufactured, sold, handled ordistributed by the named insured or by others trading under his or her name, includingany container thereof (other than a vehicle). “Named insured’s products” shall notinclude a vending machine or any property other than such a container, rented to orlocated for use of others but not sold. A product is usually a tangible substance in which one trades. However, it need not bethe item one trades in primarily. In one case, a bottled gas dealer provided gas cylinders tohis or her customers at no charge. When a cylinder exploded, it was held to be “goods” withinthe Products Hazard Clause. Under the Products Hazard Clause, a product includes any container holding the product,other than a vehicle. Most policies, however, specifically state that a product does not includevending machines or any products that are rented, leased or bailed but not sold. Accordingly,one engaged solely in the business of leasing or renting equipment does not generally needProducts Hazard protection. However, such a business should consider obtaining a policy witha Premises and Operations provision.Injury or Damage Away From Premises Products Hazard coverage is provided “if the bodily injury or property damage occurs awayfrom premises owned by or rented to the named insured ...” This language is intended tofulfill the purpose of product liability coverage, which is to provide insurance for losses arisingafter the product has been completed and put into the stream of commerce. For certain businesses, however, such as a restaurant, where products are consumed onthe premises, the typical Products Hazard would be of no benefit to the insured. Suchbusinesses should obtain a standard endorsement that redefines Products Hazard wherebycoverage attaches “after physical possession has been relinquished.” The phrase “away frompremises” thus would be omitted in a standard restaurant endorsement.Possession Must Be Relinquished Not only must the occurrence take place away from the insured’s premises, but ProductsHazard coverage attaches “only if the bodily injury or property damage occurs ... after physicalpossession of such products has been relinquished to others.” The legal distinction between “custody” and “possession” and the passage of legal titleto the product is insignificant for the purpose of Products Liability coverage. The transfer ofphysical possession is the critical event. For example, assume an insured is a retailer engaging in a promotional scheme to sellappliances. A potential customer takes the appliance home on a special 10-day trial offer,actually intending to return it at the end of the trial period. The appliance explodes in thepotential customer’s kitchen, causing serious bodily injury. Since the occurrence took placeaway from the retailer’s premises and the retailer relinquished physical possession of the 41

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDEappliance, coverage is provided under the Products Hazard Clause. For the purpose ofproducts liability coverage, it is unimportant that legal title to the appliance remained withthe retailer.COMPLETED OPERATIONS CLAUSE Under modern tort law, one may be held liable for damages arising from services or workperformed carelessly. This liability can be imposed long after the completion of the work inquestion. Building and construction contractors are obvious examples of businessmen whoshould purchase Completed Operations coverage.The Comprehensive General Liability Policy jacket defines this clause as follows:“Completed operations hazard” includes bodily injury and property damage arising outof operations or reliance upon a representation or warranty made at any time withrespect thereto, but only if the bodily injury or property damage occurs after suchoperations have been completed or abandoned and occurs away from premises ownedby or rented to the named insured. “Operations” include materials, parts or equipmentfurnished in connection therewith. Operations shall be deemed completed at theearliest of the following times:1) When all operations to be performed by or on behalf of the named insured under contract have been completed.2) When all operations to be performed by or on behalf of the named insured at the site of the operations have been completed.3) When the portion of the work out of which the injury or damage arises has been put to its intended use by any person or organization other than another contractor or subcontractor engaged in performing operations for a principal as a part of the same project. Operations which may require further service or maintenance work, or correction, repairor replacement because of any defect or deficiency, but which are otherwise complete, shallbe deemed completed. Completed Operations coverage is similar to Products Hazard coverage in that: (1) bodilyinjury and property damage are covered; (2) the damage in question may arise out of eitherthe insured’s operations or reliance upon a representation or warranty in connectiontherewith; (3) coverage is provided only if injury or damage occurs after completion orabandonment of the operations; and (4) if the occurrence takes place away from the insured’spremises. While Completed Operations coverage is aimed at insuring exposures arising outof completed work or services, it includes materials, parts or equipment furnished inconnection with such services or operations.Completion of Operations There is a fine line between Premises and Operations Liability coverage and CompletedOperations coverage. The insurance policy contains three clauses defining when operationsare considered complete. Operations are deemed to be complete when any one of the following events takes place:42

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDE1) The contract terms have been met.2) All work at the site of operations is finished. (Where a project involves work at many locations, the Completed Operations clause applies to each site or location as the work is finished at that location. Thus, if the same type of accident occurs at two different locations, and the operations are incomplete at the first location and complete at the second, theoretically, Premises and Operations coverage should apply to the former and Completed Operations coverage should apply to the latter.)3) “When the portion of the work out of which the injury or damage arises has been put to its intended use ...” (By way of illustration, where a tenant moves into a completed floor of a building still under construction, and that tenant suffers injury as a result of the negligent services that went into constructing that floor, operations will be deemed complete, even though the entire building has not been completed. However, if upon completion of that one floor, the contractor stores materials there before a tenant moves in and an injury arises out of the work performed on that floor, Completed Operations coverage does not apply. Such injury should be covered by Premises and Operations Liability coverage.) The operations are deemed complete at the earliest happening of any of the three eventslisted above. Completed Operations coverage attaches even if further service is required bythe insured, providing that service is in the nature of maintenance work, correction, repairor replacement because of any defect or deficiency. Thus, an insured who must repairdefective work should not be concerned regarding his or her Completed Operations insurancecoverage. For example, where a contractor must return to a finished building to replaster adefective ceiling, he or she will still be covered by the Completed Operations provision if theceiling falls and injures someone.Exclusions to Completed Operations Clause The definition of Completed Operations contains the following three specific exclusions. The completed operations hazard does not include bodily injury or property arising out of:1) Operations in connection with the transportation of property, unless the bodily injury or property damage arises out of a condition in or on a vehicle created by the loading or unloading thereof.2) The existence of tools, uninstalled equipment or abandoned or unused materials.3) Operations for which the classification stated in the policy or in the company’s manual specifies “including completed operations.” Damage or injury arising out of operations in connection with transportation of propertyis excluded. However, where the injury or damage arises out of a condition created by theloading or unloading of a vehicle, the Completed Operations insurance coverage is applicable.An example of the second exclusion is where a contractor finished a building, turned it overto the owners and a tenant was injured by uninstalled materials left at the building by thecontractor. This type of injury, as well as damage arising out of operations in connection withtransportation of property, falls within the Premises and Operations Liability clause. The thirdexclusion to the Completed Operations clause refers to damage or injury arising out of those43

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDEoperations included in the Premises and Operations Liability clause by the policy itself or theinsurance company’s manual. PRODUCTS LIABILITY EXCLUSIONS The purpose of products liability insurance is to indemnify the insured for losses incurredas a result of property damage or bodily injury to a third party (e.g., consumer, user, bystander)arising out of the insured’s products or services. Products liability insurance is not intendedto provide coverage to the insured for (1) losses incurred because the insured has to recalldefectively designed products, (2) injury to the insured’s products or work, or (3) lossesresulting from the failure of the insured’s work to serve the purpose or function intended. Whilethe insured may be legally liable for such losses, they are not covered under products liabilityinsurance.Sistership Exclusion It is not unusual these days to read or hear that a manufacturer or distributor is recallinga product from the market. The cost of recalling a product may be extremely high. The Food and Drug Administrationrequired Bon Vivant to remove 4 million cans of soup from the market when it was suspectedthat some had caused botulism. Following the recall costs and adverse publicity, Bon Vivantfiled for reorganization under the Bankruptcy Act. When an engine fell off a major airline’sjet, all DC-10s were grounded for inspection. The inspection costs, economic loss fromgrounded planes, cancelled reservations and other losses from adverse publicity had a greatimpact upon the airline industry. A governmental agency may compel or influence a manufacturer to recall a product, orthe manufacturer itself may initiate the recall. It is unwise for a manufacturer to delay recallinga product if it is expected that the product may cause injury. Pursuant to the definition of“occurrence,” products liability insurance does not provide coverage for “expected” bodilyinjury or property damage. Where a manufacturer has reason to know that one of its productscan cause injury, it may be necessary to recall the product in order to maintain products liabilitycoverage for that product. Although a manufacturer or distributor may be under an obligation, legal or otherwise,to recall, inspect, replace or repair its products, most liability policies do not provide coveragefor these risks, which are excluded by the sistership exclusion. This exclusion applies to bothproducts and completed work, and excludes expenses incurred by the insured or anyone else(e.g., the insured’s buyer). This exclusion applies whether the expenses are incurred inconnection with withdrawing products or work from the market or in connection with the lossof use of products before they are actually marketed. Furthermore, the exclusion is applicableto products recalled because of a suspected (as well as a known) defect. This exclusion also applies to those situations where the defective work or product is onlya part of the ultimate product. For example, assume that the insured utilizes a componentpart in manufacturing its product. Further, after the insured’s product is marketed, it isdiscovered that the component part is defective. As a result, the insured must recall the entireproduct from the market. This loss may not be recovered, pursuant to either the insured’spolicy or the component part manufacturer’s policy because of the sistership exclusion. 44

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDEHowever, some courts do not interpret the sistership exclusion in this manner and may allowcoverage for the component part manufacturer who is sued by the manufacturer of the productfor the costs of recalling the product. In summary, the sistership exclusion is intended to exclude expenses incurred in connectionwith withdrawing a product from the market. This exclusion is not applicable to bodily injuryor to damage to other tangible property caused by the insured’s product. Manufacturers who need recall insurance may be able to obtain it from some insurancecompanies. It should be specifically requested by the insured and would require an additionalpremium. When requesting recall insurance, management should consider all of the expensesthat could arise from the recall and seek appropriate coverage. Examples of expenses incidentto product recall are: telephone, telegraph, radio, television and newspaper announcements;costs of stationery, postage and printing of announcements; personnel costs, includingadditional personnel and overtime for regular personnel; costs of inspection and costs ofreturning nondefective products to the customer. Since product recall insurance is likely tocover only products in the United States and Canada, those businesses servicing internationalmarkets should be knowledgeable of their individual insurance needs.Injury to Products Exclusion Products liability insurance is intended to provide coverage for bodily injury or propertydamage arising from the insured’s products, but it is not intended to provide coverage forexpenses incurred in connection with the replacement or repair of the insured’s products whichthemselves become damaged. The insured must bear any losses associated with repair orreplacement of defective products, regardless of whether the defect was caused by themanufacturer or the supplier of a component part. The following exclusionary language appears in most liability policies to cover suchsituations: This insurance does not apply to property damage to the named insured’s products arising out of such products or any part of such products. Where an insured, in manufacturing a product, utilizes a component part that is defective,and if as a result the insured’s product is inoperable or damaged, the exclusion applies. Theinsured cannot recover for any losses incurred in the repair or replacement of the product.Moreover, the supplier of the component part will not be covered under its policy forreplacement of the defective component part. However, the question arises as to whetherthere is coverage under the supplier’s policy where the component part causes damage tothe manufacturer’s product. The answer should be in the affirmative because the supplier’sproduct has caused damage away from the supplier’s premises after the supplier hasrelinquished possession of the component part. In one case, this exclusion did not precludecoverage where a hot water heater installed on a boat caused damage to the boat. The courtreasoned that the hot water heater was the product out of which the accident occurred.Injury to Work Performed Exclusion The obligation of the insured to repair or redo defective work is specifically excluded: 45

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDEThis insurance does not apply to property damage to work performed by or on behalfof the named insured arising out of the work or any portion thereof, or out of materials,parts or equipment furnished in connection therewith. Thus, where an insured must repair a ceiling it installed, it may not recover the replacementcost from its insurer. This exclusion applies whether or not the insured’s operations arecompleted.Business Risk Exclusion The business risk exclusion is based upon an intention to exclude coverage for damageclaims arising out of the product’s failure to perform the function or purpose intended by themanufacturer if such failure arises out of a defect or mistake in design, formula, plan,advertising material or printed instruction prepared by the insured. It should be noted thatthis clause does not exclude coverage for claims of bodily injury or damage to property causedby the insured’s product. The business risk exclusion states that the policy does not apply to loss of use of tangibleproperty which has not been physically injured or destroyed resulting from:1) A delay in or lack of performance by or on behalf of the named insured of any contract or agreement.2) The failure of the named insured’s products or work performed by or on behalf of the named insured to meet the level of performance, quality, fitness or durability warranted or represented by the named insured. But this exclusion does not apply to the loss of use of other tangible property resulting from the sudden and accidental physical injury to or destruction of the named insured’s products or work performed by or on behalf of the named insured after such products or work have been put to use by any person or organization other than an insured. This exclusion does not distinguish between management and employee error or designand production error. The exclusion is designed to eliminate insurance coverage for those risksmore appropriately shouldered by the insured in the normal course of its business. Where an insured is responsible for constructing a building and fails to complete thebuilding by the time specified in the contract, the insured may be liable for losses arising fromits delay in performing its contractual obligations. However, the insured will not be able torecover this loss pursuant to subsection (1) of the business risk exclusion. Subsection (2) would exclude losses such as those incurred as a result of the failure of aboiler to heat an amount of water as represented by the insured. Any loss of use of the buildingfrom this failure to perform as represented should not be covered by the policy. However,this exclusion contains an exception. If the boiler accidentally and suddenly breaks down,causing no other injury, and is essential to the building, this loss of use of the building iscovered. (This loss of use falls within an exception to an exclusion from coverage.) PUNITIVE DAMAGES A person instituting a products liability lawsuit usually seeks compensatory damages torestore or compensate for the loss. In some instances, injured plaintiffs have succeeded inrecovering punitive damages in addition to compensatory damages. Punitive damages are 46

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDEawarded to punish a defendant for his or her outrageous, wrongful conduct and to deter thedefendant and others from engaging in similar wrongful acts. In states that permit a punitivedamages award in a products liability case, it must generally be established that the sellerrecklessly disregarded the safety of product users. Where punitive damages are awarded, the question arises as to whether an insured mayrecover for such expenditures pursuant to its products liability insurance. This question hasbeen answered both affirmatively and negatively by courts. In resolving this issue, courts havebeen called upon to interpret the insurance policy to determine whether punitive damageawards are within the provided coverage. In making such determination, it is necessary tolook to the specific policy language in question. In some instances, courts have been calledupon to interpret an insurance policy which provides coverage for damages awarded “becauseof bodily injury” or “because of property damage.” This language has been construed toexclude punitive damages. On the other hand, where the insurance policy provides coveragefor “all sums for which the insured is legally liable ... as damages,” it can be argued that punitivedamages are included in the term “all sums.” Accordingly, this language has been construedto provide coverage to the insured for punitive damages. Beyond the policy language in question, courts are also confronted with questions of publicpolicy in deciding whether an insured may recover for punitive damages under an insurancepolicy. Awards of punitive damages are based on various rationales, which include, amongothers, punishment of a wrongdoer and deterrence of others from engaging in similar conduct.These public policy reasons may be undermined by permitting a wrongdoer to pass off theassessed punishment to its insurer. Accordingly, even where punitive damages arguably fallwithin the coverage of an insurance policy, a court may not permit an insured to recover suchloss from the insurer on the ground of public policy. In some instances, however, public policymay not be offended by permitting an insured to recover from its insurer for a punitive damageaward. For example, a business may be held liable for punitive damages for an act done byone of its employees. Where the business did not take part in the wrongdoing and is onlyvicariously liable, neither the “punishment” nor “deterrence” purpose of awarding punitivedamages is affected by permitting insurance coverage. Recently, as punitive damage awards began to increase in frequency and size, someinsurers endorsed punitive damages off the risk, specifically excluding them from insurancecoverage. Consequently, although a manufacturer obtains product liability insurance, he orshe should not expect all damages associated with his or her product to be covered byinsurance. The best “insurance” against punitive damage awards may be pre-marketing andpost-marketing efforts to reduce the risk of injury or damage from a product.COMPREHENSIVE LIABILITY INSURANCE In the preceding sections, the multitude of liability hazards is noted as is also the use ofschedule and specialized liability policies. This item-by-item enumeration of the earlydevelopment of liability insurance strongly underscores the maxim that necessity is the motherof invention. Clearly, third party liability insurance, rather than being the product of orderlyplanning, grew as the need arose for each specific coverage. Thus, old records disclose thatan Employer’s Liability Policy was modified by endorsement to afford protection against claimsthat might be brought by the public. Similarly, a Team’s Liability Policy was originally utilized47

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDEto insure early model automobiles. Such improvisation is a far cry from the “comprehensive”liability policies.Development of Blanket Liability Coverage Gradually, the single-hazard approach became increasingly awkward. The reasonsinclude the following: (1) the difficulty of developing a separate policy to cover each newlyrecognized hazard, (2) the confusing variety of rating techniques and premium basesemployed and (3) the dangerous likelihood of either gaps or overlaps occurring in the intendedprotection. Thus arose the stimulus to search for a better system, that is, a blanket coverageconcept for writing insurance in multi-liability hazards. The advent of the schedule liabilitypolicy was a step in an evolutionary process of improvement. The schedule policy is animprovement over the use of several single-hazard policies. The step was not a very inspiredone, however, for it preserved the shortcomings of named peril insuring language. Moreover,the absence of a specific premium charge for a division of coverage meant that no insurancewas extended under that section of the policy. Undoubtedly, the growth and increased complexities of the business community in theimmediate post-depression period supplied potent pressure for a more inclusive, yetstreamlined, liability insurance arrangement. Thus, in 1940, “The Comprehensive LiabilityInsurance Program” was created — a joint development effort of the National Bureau ofCasualty and Surety Underwriters and the Mutual Casualty Insurance Rating Bureau.Individual companies had for some time been experimenting in selective situations withspecial combinations of liability covers, automatic pickup and deletion of exposures, and withindividually negotiated premium bases. This treatment developed into a definite trend earlyin the 1930s in certain western states, but the first formalized attempt at a countrywideuniform coverage program was initiated in 1939 through the ratings organizations mentionedabove. “Comprehensive,” as it pertains to insurance, means “covering all hazards of a given typewith the exception of individual hazards specifically excluded. Clearly, therefore, adoption into insurance language of the label “comprehensive” liabilitycoverage did not imply an all-risk policy without conditions, limitations or exclusions. Thedevelopment of comprehensive liability insurance involved the substitution of blanket insuringagreements for the specified perils phraseology. It involved also the facility to cover undera single policy all of an insured’s liability exposures, however numerous, varied or widespreadthey might be and whenever they might arise during the policy period. In other words, thenewly adopted comprehensive concept not only embraced insurance against specificallyenumerated hazards, but also against unenumerated, unrecognized or newly arisingexposures. That the drafters planned soundly is shown by the fact that the original programcontinues to be employed, virtually unchanged, a quarter of a century later.Types of Comprehensive Liability Policies The following types of comprehensive liability contracts are in general use throughout theinsurance industry:1) Comprehensive General Liability Policy (CGL). 48

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDE2) Comprehensive Automobile Liability Policy (CAL).3) Comprehensive Liability Policy (CL) (being a combination of the CGL and CAL, hence the broadest policy offered as far as scope of coverage is concerned).4) Comprehensive Personal Liability Policy (CPL).5) Farmer’s Comprehensive Personal Liability Policy (FCPL).6) Storekeeper’s Liability Policy (while denied the label “Comprehensive,” it employs a single blanket insuring agreement, and hence seems properly to belong with the family of comprehensive covers).7) Hybrid liability, miscellaneous casualty and property covers, namely the various Homeowner’s Policies, special Manuscript Policies, the Composite Mercantile Policy (widely utilized in Canada), and recently a wide variety of new contracts combining or “packaging” liability and property exposures, but which preserve the form and substance of the several comprehensive liability covers. Considerable differences of opinion may arise as to whether the varying combinations ofliability and property covers now developing properly fit within the comprehensive liabilitycategory or, in fact, represent an entirely new family of insurance contracts. In this section,it is sufficient to take notice of this highly important and continuing development, and to bealert to the tremendous competitive pressures implied in this experimentation. Scope ofcoverage, breadth of a company’s underwriting powers, financial capacity, lowered premiumsand economies of packaging several insurable hazards together are all being vigorouslybrought to bear in keen sales battles aimed at capturing the commercial risk’s favor. COMPREHENSIVE GENERAL LIABILITY POLICYInsuring Clauses The bodily injury liability insuring clause of this contract reads as follows: To pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of bodily injury, sickness or disease, including death at any time resulting therefrom, sustained by any person and caused by accident. The property damage liability insuring clause reads: To pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of injury to or destruction of property, including the loss of use thereof, caused by accident. Standing alone, these two insuring agreements are remarkable in the breadth andliberality of the protection they extend. Each of the liability hazards treated in the two precedingchapters can be covered under the Comprehensive General Liability Policy (assumingnecessary endorsements) and, additionally, any newly arising hazards which may cause bodilyinjury or property damage are automatically covered. Thus, the protection of this policyautomatically tracks (1) changed or new business operations, (2) additional locations, (3)expansion of an enterprise into additional states, (4) development of new products, (5)alteration of premises and (6) acquisition of other business entities. (This point presumes theabsorption of such additional business entities, for if the other legal entity continues, it would49

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDEbe necessary to endorse its name onto the policy in order to effect coverage in its behalf.)In short, a blanket commitment is made to assume under a single policy all responsibility ofa named insured for bodily injury or property damage caused by accident — limited only bythe policy conditions and exclusions.Exclusions A truth within the insurance industry is that restrictions, limitations and qualifying termsappear throughout the terminology of every policy and that reference to the exclusions sectionalone is not sufficient to ascertain the precise boundaries of the intended coverage. While ittherefore follows that a policy must be analyzed as an instrument of the whole, such note ofcaution does not prejudice the basic principle that the Comprehensive General Liability Policycovers all losses except those specifically excluded. Exclusions are sometimes classed eitheras premium exclusions or underwriting exclusions, although this distinction may seemmeaningless to one who accepts the theory that every risk can be insured at some price.Exclusions Applying Both to the Bodily Injury and Property Damage Coverages The Comprehensive General Liability Policy does not apply:1) To liability assumed by the insured under any contract or agreement other than (a) if in writing, a lease of premises, easement agreement, agreement required by municipal ordinance, sidetrack agreement, or elevator or escalator maintenance agreement; and (b) as respects the insurance which is afforded for the products liability hazard, a warranty of goods or products. Excluded types of written contractual agreements may usually be covered upon specialnegotiation between insured and insurer to set a fair premium for such transfer of risk andthe establishment of appropriate underwriting controls over the additional types of liabilitiesassumed. This is regarded as a combination premium and underwriting exclusion. However,some underwriters offer coverage for liability of others assumed under any contract oragreement if it is in writing, feeling that it is preferable to constrict the contracted in selectedsituations, but being generally content to provide blanket contractual coverage.2) To any obligation for which the insured may be held liable in an action on a contract or an agreement by a person not party thereto. This is known as the “third-party beneficiary exclusion” and was adopted in the fall of 1955as an additional exclusion or underwriting limitation. It is significant primarily in connectionwith insureds who do work for governmental bodies wherein by the terms of the workagreement a contractor may be required to assume full responsibility for all injury or damagesustained by the general public and without regard to negligence on his or her part. Wheresuch agreements exist, a member of the public need only show that he or she was damagedby reason of the insured’s operations and then claim as a third-party beneficiary under theagreement to which he or she is not even a named party. Various court decisions are on recordawarding a third party recovery from the contractor, regardless of whether the injury ordamage sustained was due to his or her negligence or other legal fault. Such a contractualcommitment represents a positive extension of the ordinary concepts of legal liabilityinsurance, and, accordingly, good underwriting practice dictates that the making of suchagreements be discouraged — hence the exclusion. While its waiver might be obtained 50