Property and Liability Insurance

This article will provide an overview of property and liability insurance. The article will explain the nature of an insurance contract and important concepts relating to property and liability insurance. These concepts include the coverage commonly provided by homeowner's and business owner's property insurance policies and the basis for the premiums charged by insurers to cover property under an insurance policy. Also, an explanation of liability insurance is provided along with information about the most common type of liability insurance, Commercial General Liability insurance, and exemptions that are typical in these policies. Other issues that frequently arise in conjunction with property and liability insurance are also described, such as subrogation, reinsurance and bad faith causes of action. This article also provides an explanation of some of the factors that affect insurance rates and policies, such as insurance regulation, risk and insurable interests. Finally, the issues that commonly arise relating to the liability of insurers, such as the procedures that policyholders must follow to file claims, the defenses that insurers typically use to dispute claims and the measure of recovery that is used to assess claims and determine the proceeds paid by insurers in response to those claims, is explained.

Keywords Appraisal; Beneficiary; Claims; Estoppel; Insurable Interest; Liability; Premium; Subrogation

Insurance & Risk Management > Property & Liability Insurance

Overview

Insurance is essentially a way to manage risk and protect assets against potential financial loss. In exchange for a fee, known as a premium, risk is transferred from one entity to another. There are many different types of insurance, and each one of these types provides coverage for different assets. For instance, life insurance provides a monetary benefit to a decedent's family upon the death of the insured, automobile insurance covers legal liability claims against a driver and any loss of or damage to the insured's vehicle itself, property insurance provides protection against risks to property arising from natural disasters or criminal activity and liability insurance covers legal claims that are brought by third parties against the insured. Each type of insurance differs in the scope of coverage it provides, the premiums that are charged and the procedures that are required for policyholders to maintain coverage, file claims and receive payments.

Property and liability insurance are both common forms of insurance. Property insurance is often sold by insurers in tandem with other types of insurance. For instance, when people purchase a home, they generally buy a homeowner's insurance policy that covers damage to the home and property and the replacement value of the owner's belongings. The owner or management of a company may purchase a business owners policy that will cover damage or loss to the property. Liability insurance is also routinely purchased by businesses to cover any liability from damages or losses owed to a third party that arise from conduct relating to its business activities or its agents or employees. The following sections provide a more detailed explanation of property and liability insurance policies.

Basic Concepts in Property & Liability Insurance

Insurance is a unique form of contract, known as a policy, between an individual or entity whereby the policyholder pays the insurer regular installments, called premiums, and in return receives financial protection or reimbursement against losses from the insurer. The insurance company pools the premium payments of its policyholders along with other income-generating assets to create a reserve fund from which payments are made. Insurance companies also assess the risks involved in insuring various assets against loss or damage and use this information to determine whether to underwrite insurance policies and to develop appropriate rates for premiums and coverage limits for claims. Property and liability insurance policies are commonly purchased by individuals and businesses to protect their most valuable assets. The following sections provide further detail about these two types of insurance policies.

Nature of Insurance

An insurance policy is generally characterized by three elements: distribution of risk, among a substantial number of members, through an insurer engaged primarily in the business of insurance. Risk distribution acts to mitigate the onus of an individual or business entity single-handedly bearing the full consequences of a misfortune. Most individuals and businesses do not have sufficient cash reserves on hand to cover significant losses to their property or to pay substantial damages in the event of a lawsuit. However, most of these same individuals and business can afford to make reasonable monthly, quarterly or even annual payments to an insurer that will in turn pay these significant costs when they arise.

Insurers use statistics and the law of averages to determine when it is economically feasible to underwrite insurance policies. When insurers underwrite an insurance policy, the insurance company assumes the risks of the occurrence of any of the events it lists in the policy, which is a contract of insurance wherein the term, coverage, premiums and deductibles of the contract are listed in writing. Insurers fix the premium rates that policy members pay by predicting the number and size of losses during the period of the insurance policy and then spreading these costs evenly among its members. Although payments on a claim, or a request for reimbursement from an insurance company when the insured has suffered a loss that is covered under an insurance policy, can be substantial, they may not occur very frequently. Thus, insurance companies are able to build their cash reserves by collecting premium payments by a substantial number of policyholders and only paying claims for losses that are relatively infrequent.

The process whereby insurers allocate prospective risks among many members to minimize the economic liability for any one member is what distinguishes an insurance policy from a traditional contract. In most contracts, one party is only willing to assume the liability of another for some consideration. For instance, a surety (a person or organization that promises in writing to pay the debt of another in the event of default) generally only accepts this responsibility upon receipt of payment or other type of consideration. However, in an insurance contract, the insurer promises to cover an economic loss that falls within the scope of a policy held by any of its policyholders. Thus, the one-to-one nature of the exchange of liability for consideration in traditional contracts is diffused among many members in insurance contracts.

Finally, insurance policies differ from traditional contracts in that they are written by an insurer that is primarily in the business of insurance. There are other types of contracts that have the common elements of distribution of risk among a sizeable group of participants, as in warranty contracts that cover certain types of merchandise such as household appliances. However, these appliance manufacturers are not primarily in the business of insurance and the purpose of the risk distribution in these contracts is merely to obtain an amount of immediate income to defray the potential future expense of rendering services on the appliances.

Property Insurance

Property insurance provides protection against most risks to property, such as damages resulting from fire, theft or weather events. Specialized forms of property insurance may be sold to cover specific types of damage, such as fire insurance, flood insurance or earthquake insurance. Property insurance is often packaged with other types of insurance and sold as homeowner's insurance or a business owner's policy.

Homeowner's Insurance

Homeowner's insurance typically includes a number of sections. These sections define the terms and scope of insurance coverage relating to different assets. For instance, a homeowner's insurance policy may include sections that specify the policy's coverage for the main dwelling, other structures on the property, the owner's personal property, the loss of use of the property and any liabilities arising from loss or damage to the property; such as the personal liability of the owner and coverage for medical payments.

The portions of the policy that cover the dwelling and any additional structures on the property state the coverage limits in the case of damage or total loss to these structures. If there is a total loss, the amount paid is based on the policy limit of the insurance contract and the type of coverage provided. For instance, structures other than the main dwelling house, like garages, sheds, or guest houses are usually covered at 10% of the limit set for the main dwelling. In other words, if an insurance contract provides $500,000 coverage for the main dwelling, it will likely provide up to $50,000 coverage for the other structures. If landscaped property that includes trees and other shrubbery is protected against loss or damage by the policy, the coverage is generally about 5% of the dwelling limit. Finally, most property insurance policies also cover personal belongings such as jewelry, artwork, furniture, computers and other similar items, and many include coverage for third party liability, which protects property owners against personal liability if somebody is injured while on their property.

Business Owner's Policy

Insurance companies that sell business insurance typically offer policies that bundle property and liability protections into one package. These packages are known as business owner's policies (BOPs). BOPs include three types of coverage:

Provide property insurance for buildings and contents owned by the company.

Offer business interruption insurance, which covers the loss of income due to any catastrophe that disrupts the operation of the business so as to cause no income.

Any additional expenses that businesses may incur while operating out of a temporary location due to damage or loss of its office space or facilities, until the original property is restored or rebuilt.

Finally, BOP's also generally offer liability protection, which covers legal responsibilities arising from harms that a business or its employees cause to another. These responsibilities can be the result of a business doing something or failing to do something in its business operations that causes bodily injury or property damage to another. For instance, a BOP may provide coverage for liabilities stemming from defective products or faulty services rendered by an employee. It is important to distinguish BOPs from other types of insurance that businesses may purchase to cover specific aspects of their operations. BOPs, for example, do not provide coverage for automobiles, worker's compensation claims or health and disability benefits. These are generally covered through other types of insurance.

Premiums

Insurance companies determine the amount of premiums that they charge policyholders based on the statistical frequency of major risks to a home or business, such as through fire or theft. Property insurance premiums are set by considering several factors such as the type of building structure, the presence or absence of safety measures, and the proximity of the property to potentially dangerous hazards. Once an insurance company has established a baseline premium, the individual policies it offers can be easily adjusted to allow each insurer to purchase additional types of insurance or greater amounts of coverage for additional assets. Some states have set caps on certain types of insurance rates whereby premiums may not be charged above the limits established by state law.

Liability Insurance

One of the most prevalent types of insurance today is third-party liability insurance. Liability insurance differs from first-party insurance, such as life or property insurance, in that liability insurance covers the liability of the insured for damage caused to a third party rather than a loss to the insured's own property. While liability insurance provides important protections, its coverage is not universal. The damages or tort liabilities that it protects against are generally carefully specified in the policy and if liabilities arise from an occurrence or accident that is not covered by the policy, the individual or business charged with causing the damage may be personally responsible for those costs.

Comprehensive General Liability Insurance

The most common type of third-party liability insurance in use today is the Commercial General Liability (CGL) policy, also known as Comprehensive General Liability insurance. The basic CGL insurance policy provides coverage up to the face amount of the policy for bodily injury and property damage that the insured becomes legally obligated to pay, including harm caused to intangible property such as a company's good will or reputation. In addition, many CGL policies provide coverage for damages arising from any personal injury suits filed by a customer or from libel or slander suits filed by a competitor. However, like most forms of liability insurance, to cover legal responsibilities resulting from bodily injury or property damage, most CGL policies require that the injury results from an occurrence or accident that is defined in the policy.

Exclusions

Liability insurance policies, including CGL policies, frequently have exclusions that limit the coverage provided by the policy. Any activities, errors or omissions that the insurance company will not cover or that are beyond the insurer's interest are referred to as exclusions and are specified in a separate section of the policy. Common exclusions include any fraudulent, criminal, malicious or dishonest acts committed by the insured that result in the incurrence of damages or a lawsuit.

In addition, one notable exclusion in CGL policies is the work product exclusion. This exclusion generally precludes coverage for property damage to the insured's products or to a third party's property caused by work done by or on behalf of the insured, or for claims that the insured's product or completed work was not completed according the claimant's expectation. This exclusion has been redefined by the courts and the insurance industry over the years; but in 1973, the insurance industry specified that the work product exclusion would eliminate coverage in any case in which a defective product damages another part of the insured's work, even if the insured's work was performed by a subcontractor or other entity working on behalf of the insured. This revision has since been upheld by the courts and continues to be included in many CGL policies today.

Common Issues in Insurance Law

Insurable Interests

While insurance provides a means of protecting an insured against a financial loss, insurance is not meant to provide an insured with a net profit after she has received a payment for a claim. Insurance companies prevent overpayments by requiring that policyholders have an insurable interest in the asset they are seeking to insure. An insurable interest exists when loss or damage would cause the insured to suffer a measurable financial loss. For example, if a dwelling is damaged by fire, the value of the property has been reduced. A measurable financial loss thus occurs whether the homeowner pays to have the house rebuilt or sells it at a reduced price.

Further, in regards to property insurance, the insurable interest must exist both at the time the insurance is purchased and at the time a loss occurs. Thus, the homeowner must own her home when she buys a homeowner's policy to insure it, and she must also be the owner at the time the home experiences any damage or loss for which she will file a claim against her insurance policy.

Subrogation

Subrogation occurs when one person or business entity assumes the legal rights of a person for whom expenses or a debt has been paid. In the insurance industry, subrogation occurs when an insurance company pays a policyholder for injuries and losses she sustained that are covered by the policy, assumes the policyholder's right to sue for damages and then sues the party that injured the policyholder to collect the damages originally due the policyholder. Subrogated rights arise in the insurer by operation of law, which means they arise regardless of whether or not they are provided for in the insurance contract or in any transactions between the insured and third party. They apply to all causes of action the insured may have against the third party in regard to the loss concerned, whether the cause of action arises from a tort or contract claim.

Because property insurance covers assets whose value is most easily determined, which is generally based upon an assessment of fair market value, subrogation almost always applies in these policies. In terms of liability insurance, insurers are generally able to either assume any rights of the insured against a third party in order to recover any money the insurer has paid to the insured or to seek recovery from the insured of any sums it has to the insured that have resulted in the insured being overcompensated, such as if an insurer paid a claim in full and the insured also recovered damages from the third party for the same injury.

Reinsurance

Insurance policies are essentially a form of risk management. Individuals and businesses buy insurance policies to minimize their exposure to substantial losses, and insurance companies set premiums based on the likelihood of a covered event actually occurring. While insurance companies carefully assess their risks before deciding whether to underwrite policies, insurers sometimes decide to minimize their own exposure to liability on their outstanding policies by taking out liability insurance with another insurance company, called a reinsurer. For instance, if an economic downturn threatens to result in significant business reversals or if the possibility of excessive losses under its existing policies brings its own solvency into question, an insurer may bolster its financial position by insuring its own potential liabilities with another insurance company. This allows an insurer to seek indemnification, or compensation from another for a loss paid, from the reinsurer for some of the money it pays on claims filed by its policy holders.

Reinsurance is an important aspect of the insurance process because it allows insurers greater capacity to underwrite policies and lends a measure of financial stability to the insurance industry by spreading the risks faced by any one insurer over a much larger base. With the exception of mutual insurance companies, which generally do not have the authority to reinsure, any insurer authorized to issue original insurance may also take steps to enter into reinsurance contracts. However, there are some insurers that exclusively underwrite reinsurance policies.

When a reinsurance policy is drafted, it can provide that the reinsurer will indemnify the insurer for the full amount of any liability incurred on a policy up to the limits of the reinsurance contract, or it can provide that the reinsurer will indemnify the insurer for only a specific proportion of any such liability. The amount of indemnification that the insurer may seek depends on any limits or regulations set by state law. In some states, insurers are prohibited from reinsuring their total risk on any policy, and thus must retain some risk on their current liabilities. Today, reinsurance is a global industry.

Factors Affecting Property & Liability Insurance

Insurance companies are in the business of providing financial coverage to policyholders for events that would likely be economically catastrophic without the protections offered by insurance policies. Because the stakes in these claims can be high, the insurance industry is regulated by court decisions and statutes enacted by the state legislatures and administrative agencies. While these regulations serve to ensure that the insurance industry is free from fraudulent or abusive practices, insurers must also protect their financial viability by constantly evaluating whether the assumption of certain risks could expose them to liabilities that could cripple their ability to survive. In order to receive a payment based on the financial coverage provided in an insurance policy, the beneficiaries of the proceeds of an insurance policy must be found to have an insurable interest, or an interest in the property that is insured, in order for a claim to be valid. These factors that affect property and liability insurance policies are explained further in the following sections.

Insurance Regulation

Regulation of the business of insurance emanates from three primary sources-the courts, state legislatures and state regulatory agencies. Courts regulate insurers when they render decisions on the scope of coverage of an individual insurance policy or deliver rulings that define the permissible activities that insurers may take in underwriting policies or investigating claims. State legislatures also regulate the insurance industry, and all states have enacted legislation relating to insurers primarily in three ways. First, many states have set controls on the rates insurers may charge for policies in order to ensure that the rates are not inadequate, excessive or discriminatory. Second, states have enacted legislation to prevent unfair practices by insurance companies toward their insureds and competitive insurance companies. Finally, states have created procedures to aid in the prevention of insolvency of insurers so that the assets of the insured are protected.

At the federal level, Congress passed the McCarran-Ferguson Act of 1945. It mandates that state law governs the regulation of insurance and that no Congressional Act can invalidate any state law, unless the federal law specifically relates to insurance. Thus, a federal law that does not specifically regulate the business of insurance cannot preempt a state law related to insurance regulation. Under the McCarran-Ferguson Act, state departments of insurance are primarily responsible for overseeing the operations of insurance companies and protecting policyholders from insurer insolvency and bad faith on the part of insurers. To accomplish this, state insurance agencies have established policies that regulate the licensure of insurers and their agents, enforcement of state laws regarding the insurance industry and oversight of the professional conduct of insurers.

Risk

Historically, under the American system of jurisprudence, the financial consequences of any economic loss that occurred and that was not covered by insurance would be borne by one of three individuals. First, the person suffering the misfortune may bear the economic loss. Second, under the common law, any person who negligently or deliberately caused the misfortune to occur could be compelled to bear the economic loss. Finally, state or federal statues may require a party to bear the loss; such as an employer under Workmen's Compensation statutes.

While there is no way to reassign the emotional or psychological losses that accompany any misfortune, insurance contracts distribute the risk of economic loss among as many members as possible. By paying a premium into a general fund out of which payment will be made for a defined economic loss, “each member contributes to a small degree toward compensation for the losses suffered by any member of the group. The member has no way of knowing in advance whether he will receive in compensation more than he contributes or whether he will merely be paying for the losses of others in the group; but his primary goal is to exchange the potentially devastating consequences of facing a loss alone for the opportunity to pay a fixed amount into the fund, knowing that that amount is the maximum he will lose on account of the particular type of risk insured against” (Dobbyn, 2003, p. 2-4).

In the context of businesses insuring against losses to merchandise and other property, the premium paid into the fund is considered a cost of doing business, and is computed into the prices charged to the public for their products or services. In this way, the distribution of risk is spread even more widely through the entire community of businesses and consumers.

Bad Faith Causes of Action

In a further effort to protect the interests of insureds in their dealings with insurance companies, the majority of state courts have fashioned a cause of action known as a "bad faith cause of action." The basis of this cause of action is the doctrine of good faith and fair dealing, which holds that all parties to a contract must act in such a way that the other party to the contract is not hindered from reaping the benefits of the contract. Although the doctrine has historically been a central tenet in contract law, in the context of insurance policies, courts have chosen to apply it solely as the foundation for a cause of action by insureds against insurers. The doctrine of good faith and fair dealing exists as a covenant, or a legally binding arrangement between parties, that arises by implication and is enforceable even if it is not reduced to writing in a contract.

Applications

Understanding the Scope of Property & Liability Insurance

Before an insurer is required to pay a claim filed by a policyholder, there must first be a judgment or determination that the claim falls within the coverage provided by the insurance policy and that the insurance policy is valid and binding. Once these questions are resolved and a determination is made that the insurer must pay the claim, the insurance company then becomes liable to the insured for the amount of the claim. To test the merits of any claim, insurance companies require that claims be filed according to specific procedures that enable the insurer to collect the information necessary to determine the scope of the damage or liability and to assess whether the loss falls within the provisions of the insured's policy. If the insurer discovers any information that mitigates or invalidates a claim, the insurer may raise certain defenses to dispute the claim. Also, insurance companies may limit their exposure to certain risks by including limitations or exceptions to the scope of the coverage a policy provides. These issues are discussed in more detail in the following sections.

Procedure for Filing Claims

Insurance policies commonly contain specific provisions requiring the insured to comply with certain requirements as conditions to the payment of proceeds. If a policyholder fails to follow these procedures, the insurer may have a defense against payment of the claim. These procedures allow the insurance company to ensure to collect and document all of the information it will need to test the merits of an individual claim.

One procedure that almost all insurers require is for the insured to provide the insurer with notice of a loss immediately after it occurs. This procedure allows the insurer to gather information while the damage is fresh and to take the necessary steps to prevent further loss to the property. Insurance policies also typically require, as a condition to recovery of proceeds, that within a certain period after the loss, such as thirty to sixty days, the insured file with the insurer a proof of loss, which is a sworn statement that includes a recital of the facts and circumstances surrounding the nature and extent of the loss, and that is put in writing and signed by the insured. Insurance policies also typically include a period of limitation, or a designated period of time within which the insured must notify the insurer of a loss; if the insured does not do so, the insurer will not be required to take action or pay any claim filed after this date.

In property insurance policies, if the insurer and insured cannot agree to the value of the property that has been damaged or lost, these policies generally include procedures that allow each party to select an appraiser to determine the value of the property. These two appraisers will work together to reach an agreed upon value, and if they cannot agree, they may select an umpire who will facilitate the discussions to reach a final determination of the property's value. Finally, property insurance policies commonly exclude payment for any damage to the property that occurs after the initial damage and that is a result of the failure of the insured to take appropriate action to prevent further loss to the property.

Liability insurance policies commonly require that the insured cooperate and assist in the investigation and defense of any claim that is filed against the insured and that is covered under the policy. This cooperation may include such requirements as avoiding engaging in settlements with the third party, attending all court hearings, furnishing all information necessary for drafting legal documents and supplying any additional evidence that may surface during the investigation.

Defenses of Insurer

Insurers are entitled to raise defenses to support their determination that an insured is not entitled to some or all of the value of an insurance policy's coverage. Some of these defenses are related to activities of the insured, such as concealment or misrepresentations regarding the facts or circumstances of any loss or damage to an insured interest. Other defenses stem from the terms of the insurance contract, such as any conditions, warranties or exceptions to coverage that are specified in the policy. The following sections provide further explanations of these defenses.

Concealment

Any individual or business that seeks to purchase an insurance policy is obligated to disclose to the insurer all material facts relating to the interest to be insured. Material facts are facts that would influence the insurer in making a final decision regarding whether to issue an insurance policy or the premium levels that will be set for an individual policy. If the insured provides an answer to the insurer that is misleading and the insurer relies on incorrect information in issuing the policy or setting the premiums, the policy may be avoided on the grounds of concealment. However, any information on the application that is obviously missing or incomplete will not be grounds for voiding a policy. Only if an incomplete answer appears to be complete will it result in voidance.

However, the insured only has a duty to disclose facts that relate to the matter being insured and not merely fears or concerns that the insured may have about the subject matter of the policy. There is also no requirement that the insured disclose facts that the insurer already knows or that relate to a risk excluded from coverage by the policy.

Misrepresentations

A representation is any oral or written statement that is expressly made or implied by the insured to the insurer and that forms at least part of the basis on which the insurer decides to issue an insurance policy. According to Dobbyn (2003), “If a representation of the insured is untrue or misleading, and is material to the risk and is relied upon by the insurer in issuing the policy at the specified premium, the insurer can use this misrepresentation as grounds for avoidance of the policy” or as a defense to payment of proceeds under the policy (p. 188).

Further, a majority of courts have held that if these factors have occurred, the insurer may raise a defense and it is immaterial whether the insured made the misrepresentation innocently, or with no intent to defraud insurer. A minority of courts, however, have held that unless the misrepresentation was made with deliberate intent to deceive the insurer, the insurer may not avoid the contract, even though the representation included material facts that were false.

Warranties & Conditions

In an insurance policy, a warranty is essentially a promise by the insured party that all statements made relevant to the validity of the insurance contract are true. Insurance contracts require the insured to make certain warranties. An insurer is within its rights to cancel a policy and refuse to pay claims if an insured’s warranty is found to be untrue. To qualify as a condition or warranty, the statement must be specifically included in the contract, and the contract must clearly show that the parties intended for the rights of the insured and insurer to depend on the truth of the statement.

As with misrepresentations, the effect of a misstatement of a warranty or condition may depend on the intent of the insured in making the statement. To date, many state legislatures have enacted laws that provide a misrepresented warranty will not result in the cancellation of an insurance policy unless the misrepresentation was fraudulent or increased the risks covered by the policy.

Limitations on Coverage

Insurers frequently include clauses that impose specific exceptions or limitations on the coverage provided by an insurance policy. Such limitations may apply to such terms as the subject matter of the policy, the types of harms the policy will insure, the duration of the policy or the amount of proceeds payable by the insurer.

The major difference between a limitation on coverage and a warranty or condition is that if a warranty or condition is breached, not only does the insurer have a defense against payment of proceeds, but the policy itself is voidable. On the other hand, an occurrence that falls outside of coverage because of a limitation or exception simply means that the insurer is not liable for any loss because of that occurrence, and provides no basis for the insurer to avoid the policy.

Measure of Recovery

Property Insurance

In most cases, an insurance policy includes specific information about both the amount of proceeds that the insurer will pay should a covered event occur and the procedures that the insured must follow to recover the payment. For instance, most property insurance policies provide for payment of an amount up the "actual cash value" of the property at the time of loss. If the property covered by a policy consists of items that are readily replaceable, such as books, furniture or business equipment, the actual cash value is the market value of the property.

If the property is unique and therefore not readily replaceable, such as a home, garage or shed, the measure of recovery for these structures is generally based upon their fair market value. Homeowner's insurance policies also generally cover all of the personal property included in the home. However, most insurance companies now offer guaranteed replacement cost coverage, which pays to repair or replace damaged homes without a deduction for depreciation or a dollar limit. Thus, if an older home is damaged in a fire, replacement coverage will pay the full cost of rebuilding the home and replacing its possessions. Without replacement coverage, the homeowner would only receive the actual cash value of the home, or the replacement cost minus depreciation. Unless a homeowner's policy specifies that property is covered for its replacement value, the coverage is generally only for actual cash value. Replacement coverage generally raises the rates of a homeowner's premium from 10 to 15 percent.

Liability Insurance

Liability insurance was originated to protect the insured against liability claims brought by third-parties. In particular, liability insurance was founded to protect employers against losses stemming from liability to employees for work-related injuries. However, because the original purpose of these policies was to indemnify employers, or compensate them for their costs paid to injured employees, a third-party who also sustained an injury could not bring a direct action against the insurer to sue for damages, even after obtaining a judgment against the employer. In the years that followed, states enacted legislation that allowed injured third-parties with a cause of action against the insured the statues of a type of third-party beneficiary of the liability policy. Today, the scope of coverage and the measure of recovery of many types of liability policies continues to be reshaped as courts and legislatures examine reform measures that will affect the damages that injured parties may collect from the insured as well as the insurer's liabilities to both the insured and injured third-parties.

Tort Immunity

Finally, one area that has come under increased scrutiny by consumers, legislatures and insurers is the area of tort immunity. When a tortfeasor, or a person who either intentionally or through negligence commits a tort or a civil wrong, is immune from suit, a liability insurance policy may address the issue in one of three ways. First, a policy may be silent on the issue of tort immunity. In this case, it is generally left to the insurance company to decide whether to attempt to exercise this immunity. Second, the policy might reserve to the insured the right to determine whether tort immunity will be exercised. This type of clause has been criticized on the ground that it gives the insured unrestrained ability to favor certain interests and because it seems to invite fraud. Third, the policy may totally forbid the insurance company from exercising a right to tort immunity. This type of provision has generally been held valid by courts. Thus, a person who is injured by a tortfeasor immune from suit must look to the terms of the governing liability insurance policy for the possibility of recovery.

Conclusion

Insurance offers important protections for both individuals and businesses. While people cannot predict the advent or nature of misfortunes, unfortunate events do occur. Whether caused by an accident, economic downturn or a third party's intentional act, situations can arise that, without some form of protection, would financially devastate an individual or business enterprise. Insurance serves to fill that gap. Insurance companies collect premiums, regular payments from individuals and businesses, and in return provide financial assistance to policyholders in the event that a covered event occurs. Thus, in the business world, insurance provides a measure of security and business efficiency in that it eliminates a great deal of risk and uncertainty.

Some forms of insurance, such as property insurance, can even serve as a basis for credit in that businesses are not likely to be able to obtain loans from lenders if the property will not be insured against loss. Also, insurance enables businesses and individuals to save money for future investments that will enhance their net worth or profit margin because insurance policies protect them against many types of losses. For instance, property insurance protects homes and business offices from loss or damage while liability insurance provides coverage for any liability that may arise due to damage to a third party. Without these forms of insurance, many homeowners and businesses would be at risk of facing bankruptcy in the event of any significant claim against them.

However, an insurance policy is a form of a contract, and thus to be binding, certain procedures must be followed in the creation of the policy that protect the interests of both the insurer and the insured. Even after a policy is signed, disputes may arise about the interests that are insured, the events that are covered and the extent of the coverage that is provided. Policyholders are able to raise disputes to challenge an insurer's denial of a claim or the sufficiency of any payments or settlements. Insurers may also raise defenses to support its payments or denials of claims. Out of these competing interests, an entire body of insurance law has developed to help insurers and policyholders settle or resolve their disputes and that continues to be shaped by courts and legislatures today.

Terms & Concepts

Absolute Assignment: An irrevocable transfer of all ownership rights under an insurance policy from the owner to another person.

Chose in Action: A right of action for the possession of personal property that may be assigned from one insured to another.

Claimant: A person who claims or asserts a right or interest.

Common Disaster: A disaster in which more than one person loses his or her life.

Counterclaim: A claim presented by the defendant in an action and growing out of the transaction or contract on which the plaintiff's action is based.

Defendant: The person against whom an action or suit is brought.

Disclaimer: The refusal or renunciation of an interest, right, claim or power. Also, the document in which the renunciation is expressed.

Grace Period: A period provided by an insurer of usually 31 days after the premium due date, during which a premium still may be paid, without jeopardizing the policy coverage.

Insured: The person on whose life an insurance policy is issued.

Lapsed Policy: A policy terminated because of nonpayment of premiums.

Policy: The printed document issued to the insured by the insurer detailing the terms of the contract.

Premium: The payment due, usually monthly or annually, for an insurance policy.

Rider: A special policy provision or group of provisions that are added to a policy to expand or reduce the benefits payable.

Warranty: A statement or condition relating to a fact or action to be taken in relation to a contract, which must be true or which action must be taken in exactly the manner stated or the contract will be void.

Bibliography

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Dodell, L. (2006). Occurrence form gives eternity of coverage. National Underwriter / Property & Casualty Risk & Benefits Management, 110, 14. Retrieved June 2, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=23180683&site=ehost-live

Glick, P. (2012). Protecting your business. Smart Business Philadelphia, 6, 12. Retrieved November 15, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=77232800&site=ehost-live

Glick, R. (2006). GE cannot group asbestos claims to increase insurers' liability. Insurance Advocate, 118, 10-11. Retrieved June 2, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=24336285&site=ehost-live

Grace, M.F., & Leverty, J. (2010). Political cost incentives for managing the property-liability insurer loss reserve. Journal of Accounting Research, 48, 21-49. Retrieved November 15, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=47582319&site=ehost-live

Guthrie, C. & Rachlinski, J. (2006). Insurers, illusions of judgment & litigation. Vanderbilt Law Review, 59, 2016-2049.

Klinedinst, T. (2007). Private business owners: Why an outside board, why D&O insurance? Production Machining, 7, 24-26. Retrieved June 7, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=25028007&site=ehost-live

McGreevy, S. (2007). Why insurers aren't paying, and you are. Contractor Magazine, 54, 44-57. Retrieved June 2, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=24477718&site=ehost-live

Nelson, L., Morrisey, M. & Kilgore, M. (2007). Damages caps in medical malpractice cases. Milbank Quarterly, 85, 259-286.

Schmautz, M., & Lampenius, N. (2013). Deriving the minimal amount of risk capital for property-liability insurance companies utilizing asset liability management. Journal of Risk, 15, 35-55. Retrieved November 15, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=89000090&site=ehost-live

Suggested Reading

Hood, J. & Acc-Nikmehr, N. (2006). Local authorities and the financing of the employers' liability risk. Public Money & Management, 26, 243-250.

McCoy, J. (2006). You, your lawyer and the insurer. LP/Gas, 66, 14. Retrieved June 2, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=23856711&site=ehost-live

O'Connor, N. (2007). Discharging static. Insurance & Technology, 32, 20.