INSURETALK: LIABILITY RISKS PERSPECTIVE AND INSURANCE COVERS OPTIONS

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What is Liability Risk? It arises from any action obliging someone to pay compensation for another person’s loss. This stems from a breach of some legal obligation, usually following a negligent act. Accordingly, liability rules, especially those formulated in delict or the law of tort, aim to achieve two fundamental objectives. One is to ensure that people who are injured due to the wrongdoing of others are compensated. The other objective is that to the extent that the wrongdoer can be found liable for the harm he/she has caused the law of delict or tort performs the corrective justice role of deterrence.

Ownership of an object attracts liability risks. The notion of compensation today is no longer confined to negligent or wrongful behaviour. Today a person or entity can be liable simply because it is the owner of the object deemed to be the origin of the loss. Merely owning the vehicle and driven by another person can result in you having a liability if the vehicle is involved in an accident. When you sell a vehicle ensure you change the ownership as well to avoid liability risk as a result of ownership. Lesotho is increasingly becoming a litigious society in comparative terms within the region, and hence this increases the legal risk exposure to any company or individual. The only major challenge is the inefficiency of the legal system, and the longer it takes for a claim to be finalized, the higher the likelihood that the final settlement will be magnified by inflation. Court awards logically have to take the time value of money into account.

Examples of the liability risks. It sounds remote when you haven’t experienced a liability and yet there are so many possibilities. Using your vehicle on the public roads exposes you to legal risks. This can come in the form of hitting another road user either property or bodily injury or death of a pedestrian. Have you ever imagined wrongfully driving into another vehicle worth M2,000,000? Imagine running a service station business and a misfuelling is committed by the fuel attendant and replacement of an expensive engine is required. Liability arising from defective workmanship in a construction project of a bridge that you may have executed. The examples are numerous to mention, and in different sectors and the liability risk will potentially wipe out all your wealth as an individual or profitability as a company.

What is major challenge with liability risks? The size of the exposure is unknown and because one cannot be sure in advance what type of wrong, they will commit in future. What the number of third-parties are going to be and perhaps more crucially what the courts will deem to be appropriate compensation. It is therefore prudent to transfer liability risks to insurance companies and any other risk carrier like the government through designed statutory schemes. Most insurance companies in this market provide liability insurance covers for different business and personal activities.

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What is the importance of liability insurance? It takes on the financial consequences of the insured’s legal liability following damages suffered by third-parties. Liability insurance therefore provides protection for wrongdoers. The third-parties of the wrongful acts are guaranteed of compensation in the existence of the right liability insurance policy. In terms of the deep pocket theory, the third parties will rather go after the insurance companies instead of someone who is financially incapable.

Another importance is that liability insurance also promotes entrepreneurial activities in those people with business ideas are not afraid to implement them because they can transfer the risk of harm to third parties to liability insurers. Facilitation of trade is a critical purpose of the public liability insurance, and this gives those who intend to trade in hazardous occupations invest into such activities knowing very well that they can transfer the risk to insurance companies. An example will be the mountain biking activities which generate tourism revenue for the country and they have to have a public liability policy against the injuries that might be caused.

Let’s look at the liability insurance policies structure. Liability insurance is very different from the other forms of insurance in the sense that it has a long-tail effect. One of the critical elements of a liability insurance contract is the definition of the insured event, that is the act or situation that triggers the insurer’s liability. Liability risks are not sudden and accident as is the case with other insurable risks. Often liability risks take for many years, even decades to develop and manifest, and this causes unique problems not seen in other risks. Will examine the cover triggers detailed below.

Causation Basis of cover is triggered when the events which cause the loss must take place during the period of insurance. A simple example is, a new road is constructed, and in the process of such construction defective material is used. Some three years after completion, the road cracks. Under the causation basis of liability, the policy that is in place when the defective material was used and the policy must respond to the claim.

Occurrence Basis of cover is triggered when the damage or injury suffered by the third-party, must take place or occur in the period of insurance. In terms of this trigger, it crucial to determine the date of occurrence of the damage suffered by the third party. The occurrence wording also provides coverage even when the cause of the loss is found in an act or event that took place before the inception of the policy or when the eventual claim is only filed after the expiration of the policy term. Occurrence wordings thus provide protection for a run-in period and a run-off period.

Manifestation Basis The manifestation wording deems damage or injury to have occurred when the insured first becomes aware of such damage. Usually, the awareness by the insured coincides with the injured third party’s awareness of injury or damage. In the earlier example of a bridge constructed using defective pillars, the loss will be deemed to have occurred when the bridge collapses because that is the point at which the insured becomes aware of such damage. Coincidentally, the owners of the bridge can only become aware of the damage at that point as well.

Claims Made Basis term response to claims to the insurance in place at the time the third party makes a claim in writing against the insured. Unlike the occurrence wording which seeks to establish the date of occurrence, the claims made wording uses a more straightforward and more objective determinant of liability that is the time of making a claim. The loss is covered only if the third-party files his claim during the insurance contract period. Since such an action forms the tail-piece of the liability claims process, the claims made principle does not provide coverage for any run-off period, and it only covers the run-in component of the claim.

These are some of the technicalities to be considered when buying liability insurance, and for that very reason, particular attention on triggers and wording is required. Consulting your insurance brokers is highly recommended to avoid gaps in cover. In the next issue we will examine the various types of liability insurance covers in the market.

Amon Rupiya is an experienced insurance practitioner qualified with a Masters in Insurance and Risk Management. He writes in his personal capacity and views does not represent the company he is working for. Please note that the content provided in this article is intended as an overview and as general information only. Before making any decisions based on the information provided in this article, please use your discretion and seek advice from an insurance broker or agent. Feedback and questions send email to amonfield@gmail.com