Liability Coverages

The overall intent of the liability coverages of homeowners policies is to insure for liability to third parties arising out of the ownership, use, and occupancy of insured premises. The liability coverages of homeowners policies are not general liability coverages. Other liability exposures generally need to be insured separately. This can include the liability arising from business pursuits or from ownership and use of automobiles, watercraft, aircraft, and other vehicles (motorcycles, all terrain vehicles, snowmobiles, etc.). The physical organization of the liability coverages of homeowners policies is essentially the same as that of the property coverages. The policy’s declarations will specify the liability policy limits. If the policy’s definitions appear at the beginning, rather than at the end of the policy, they follow the declarations and contain the definitions of terms pertinent to the liability coverages. The liability insuring agreement (or coverage grant) generally appears in the policy as the next section following the conditions applicable to the property coverages. The liability exclusions follow next, followed in turn by the liability additional coverages. The liability conditions appear next. The basic homeowners policy concludes with the conditions that apply to both the property and the liability coverages. Endorsements that modify the property and liability coverages are attached at the end of the policy after the basic policy form ends. Chapter 9 Liability Coverages INSURED CAPACITY ISSUES As with the discussion of the property portion of the policies, the liability provisions will be examined based on the ISO HO 3 policy, and who is an insured and who is not marks the first step of analysis. Generally, resident relatives are insureds, as are resident nonrelatives under the age of 21 in the care of a named insured or a resident relative of the named insured. Unlike the case with property coverages of homeowners policies, there typically are no additional insured interests with respect to the liability coverages of homeowners policies. Correctly designating the named insureds under the liability coverages of homeowners policies where property that is the subject of the policy is owned by a trust is important. It is becoming increasingly common for persons to create trusts for estate planning and other purposes and to transfer titles to various kinds of property, including their personal residence, to the trust. If you have done this, you need to consult with your agent in order to assure that all persons are properly designated in the policy as insureds for purposes of the liability coverages. In most cases, all the following need to be designated as named insured: ◆ the trust itself; ◆ the trustees of the trust, designated by name and described as the trustees of the trust; and, ◆ (assuming the same individuals are the de facto owners and occupants of the premises) these individuals in their individual capacities. INSURED LOCATIONS The concept of insured location for purposes of the liability coverages of homeowners policies begins with the same definition as applicable to the property coverages (see p.43). Insured location includes the residence premises as that term is separately defined and then extends to various other locations. 100 The Complete Book of Insurance The policy then limits that rather broad scope of insured location for purposes of the liability coverages by means of an exclusion that precludes coverage for liability arising out of premises: ◆ owned by an insured; ◆ rented to an insured; or, ◆ rented to others by an insured that is not an insured location. Functionally, liability coverages are less location-specific than they are activity-specific. Thus, the geographic scope of coverage is controlled more by the nature of the liability-producing conduct than where the conduct takes place. INSURING AGREEMENT The liability coverage-insuring agreement of the homeowners policy establishes two basic duties on the insurer’s part to the insured: the duty to defend and the duty to indemnify. In contrast to the property coverages of the homeowners policy, the insuring agreement coverage grant of homeowners policies is relatively simple and can be summarized as follows. The insurer will pay damages that an insured becomes legally obligated (or liable) to pay because of bodily injury or property damage caused by an occurrence. The insurer will also defend the insured in suits seeking such damages by counsel chosen and paid for by the insurer. The bodily injury or property damage must occur during the policy period. The insurer generally has the right to settle any claims or suit against the insured at its discretion. The insurer’s duty to defend terminates upon payment of the full liability policy limits. Thus, the meanings of bodily injury, property damage, and occurrence are crucial to an understanding of how liability coverages work. Occurrence is the most central concept applicable to liability insurance. The definition of occurrence in the ISO HO 3 homeowners policy states: Occurrence means an accident, including continuous or repeated exposure to substantially the same general harmful conditions, which result during the policy period in: (a) bodily injury; or, (b) property damage. Liability Coverages 101 The concept of coverage for liability arising from accidents is how the fortuity element essential to insurance is incorporated into liability coverages. An accident is an unintentional, unexpected, chance occurrence or event. The occurrence is the causal event and the bodily injury or property damage is the result or consequence of the occurrence. It is the liability-producing act or conduct that must be an accident, not the resulting bodily injury or property damage. Bodily injury or property damage that is unintended or unexpected by an insured is not covered if it is the product of intentional, nonaccidental conduct. Coverage turns on the insured’s intent to commit the act in question, not on his or her state of mind in performing the act. Therefore, it does not matter whether the insured expected or intended his or her conduct to cause harm. An accident can result from a deliberate act, but only when some additional, unexpected, independent, and unforeseen event happens that causes the injury or damage in question. PERSONAL INJURY This is a good time to discuss the personal injury coverage that is included in some homeowners policies, or that is an optional coverage to be added by an endorsement to others (such as the ISO HO 3 policy). As noted, while there are some variations from insurer to insurer, personal injury liability coverage extends to five basic categories of acts or conduct. These include: 1. false arrest, detention, or imprisonment; 2. libel, slander, defamation, or product disparagement; 3. malicious prosecution (which may include abuse of process); 4. wrongful eviction, wrongful entry, or violation of right of private occupancy; and, 5. invasion of or violation or of right of privacy. None of these categories of conduct can be an accident. As a result, most homeowners liability coverages refer to the covered events as offenses, rather than attempting to subject them to the policy’s occurrence/accident require102 The Complete Book of Insurance ment. There is a temporal difference between the accident-based bodily injury and property damage coverage and the offense-based personal injury coverage. Coverage applies to bodily injury and property damage that occurs during the policy period, regardless of when the occurrence that causes the bodily injury or property damage takes place. In contrast, the offense-based personal injury coverage applies to offenses that the injured commits during the policy period. As noted, the personal injury offenses involve intentional conduct. There are, however, limitations on the scope of coverage for these categories of intentional acts. (These are discussed in the context of exclusions that apply to the personal injury coverages.)

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