Liability Coverage Conditions

As with property coverages, there is a group of conditions applicable to the liability coverage of the homeowners policy. A significant portion of the policy conditions has to do with what the insured must do in the event of a claim or suit. The liability conditions of the ISO HO 2 and HO 3 homeowners policies appear in the policy as follows. LIMIT OF LIABILITY This condition provides that the liability coverage limit shown in the policy’s declarations is the insurer’s total limit for damages in any one occurrence, regardless of the number of: insureds, claims made, or persons insured. This condition further provides that all bodily injury and property damage resulting from one accident or from exposure to the same continuous or repeated conditions will be deemed a single occurrence. Finally, the limit of liability condition provides that the medical payments limit shown in the declarations is the insurer’s maximum liability for medical expense for bodily injury for any one person as the result of any one accident. Chapter 11 Liability Coverage Conditions 132 The Complete Book of Insurance SEVERABILITY OF INSURANCE This condition provides that the liability insurance afforded by the policy applies separately as to each insured, but that this condition will not increase the insurer’s limit of liability for any one occurrence. This condition says that the policy must be interpreted separately for each insured against whom a claim is made or a suit may be brought. For example, two persons qualifying as insureds may be named as defendants in a suit seeking bodily injury damages. The event giving rise to the suit may not constitute an accident as to one insured, whereas it does as to the other insured named as a defendant. A common example is when one insured is sued for an assault or battery and another insured is sued on a vicarious liability theory for the other insured’s alleged assault or battery. The conduct on which the suit is based may not be an accident as to the insured committing the assault or battery but may prove to be an accident as to the person sued on a vicarious liability theory. The severability of insurance provision mandates that the insurer evaluate coverage separately for each of the insureds who are sued. In that same example, there may be conflicts of interest between the two defendant insureds that might require that each be represented by separate defense counsel. In short, this condition means that as to the liability coverage, the availability of liability coverage to an insured and duties owed by and to any insured are independent of the coverage available to and duties owed by and to any other insured. DUTIES AFTER OCCURRENCE This condition comprises six subparagraphs. First, the duties after occurrence condition has an introductory paragraph that states that in case of an occurrence, an insured will perform all the duties that apply, and that the insurer will have no obligation to provide coverage if the failure of an insured to perform a required duty prejudices the insurer. (Similar provisions are contained in the liability conditions of personal auto policies and business owners liability coverages.) Notice Requirement This duty requires the insured to give written notice to the insurer or the insurer’s agent as soon as is practicable after an occurrence. This written notice must include: ◆ the identity of the policy (the policy number) and the named insured shown on the declaration; ◆ reasonably available information as to the time, place and circumstances of the occurrence; and, ◆ the names and addresses of the claimant and witnesses. Late notice by an insured can be a basis for a denial of coverage. Under the law of most states, an insurer must show that it was prejudiced before it may permissibly deny coverage based on late notice. Usually, this means that the insurer must show that it could have successfully defended against an adverse judgment or could have settled the case for a lesser amount had the insured given timely notice. This is a very high standard to satisfy. Also, many states hold that an insurer cannot assert late notice if the insurer denies coverage on other grounds. The rationale for this latter position is that by denying coverage on other grounds, the insurer has shown that timely notice would not have made a difference in its coverage position. Cooperation Requirement This duty requires the insured to cooperate with the insurer in the investigation, settlement, or defense of any claim or suit. This can mean a host of things, depending on the circumstances of a particular case. It includes providing the insurer (and the lawyer hired) with all information and documents in the insured’s possession that may be relevant to the defense of the case. It also means assisting counsel in the preparation of and during the lawsuit. This duty of cooperation means the insured must attend depositions, court hearings, settlement conferences, and trial when requested to do so. It also Liability Coverage Conditions 133 means giving truthful testimony. One of the important purposes of the cooperation clause is to prevent collusion between the claimant and the insured to the detriment of the insurer. An insured’s breach of his or her duty of cooperation may afford the insurer a basis for denial of coverage. The same high prejudice standard must be satisfied by the insurer before the denial of coverage based on an insured’s failure to cooperate will be upheld. Provide Insurer with All Suit Papers This duty requires the insured to promptly forward to the insurer every notice, demand, summons, or other process relating to the occurrence. If a lawsuit has not been filed yet, prompt forwarding of a demand may enable the insurer to step in and settle the claim quickly and for much less than might be the case once the litigation has begun. If a lawsuit has been served on you, there is usually a fairly short time before you must enter an appearance in response to service of the lawsuit. Your insurer needs this time to open a claim file, review the complaint, collect pertinent facts, confirm the existence of coverage, reserve rights (if necessary, and inform you of the same), and hire a lawyer to represent you. If you receive any kind of communication from someone who is claiming damages from you or if you are served with a complaint, call your agent or insurer if it has provided you with a toll-free claim reporting telephone number. Get a copy of any and all documents you receive into your insurer’s hands without delay. Insured’s Assistance This duty specifies some of the things an insured must do to assist in the defense of claims and lawsuits. Think of this condition as an applied example of the duty of cooperation. These duties are: ◆ to assist in settling the case (this includes attending mediation and settlement conferences, and executing settlement agreements and other documents necessary to resolve the case); 134 The Complete Book of Insurance Liability Coverage Conditions 135 ◆ to assist the insurer in enforcing any right you may have against another person or entity for contribution or indemnity; ◆ to assist in the conduct of suits, including attending hearings and trials; and, ◆ to assist in securing and giving evidence and in obtaining the attendance of witnesses. Proof of Loss Requirement This condition relates to the additional coverage for damage to property of others and requires the insured to provide the insurer with a sworn statement of loss within sixty days after the loss. You may also have to show the damaged property to the insurer if the property is in your custody or control. Voluntary Payment Condition This is a highly important condition! It provides that the insured may not voluntarily make any payment, assume any obligation, or incur any expense (other than for first aid at the time of bodily injury) on a matter covered by the policy. This condition is designed to protect the insurer’s contractual right to control the defense and settlement of claims and lawsuits. For example, if after being served with a lawsuit, you go out and hire your own lawyer before you tender the defense of the lawsuit to your insurer, the insurer may have no obligation to reimburse you for fees you pay to your lawyer. The same comments apply to cases in which you are sued, hire a lawyer, and defend the case for a period of time before you tender the defense of the lawsuit to your insurer. This could occur if you or your lawyer are acting under a mistake or misapprehension that no coverage would exist or for any other reason.

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