Coverage, Investigation, and Defenses for Liability Insurance Claims: Practice Questions and Solutions

This section of the study guide is intended to provide practice problems and solutions to accompany the pages of Insurance Operations, Regulation, and Statutory Accounting, cited below. Students are encouraged to read these pages before attempting the problems. This study guide is entirely an independent effort by Mr. Stolyarov and is not affiliated with any organization(s) to whose textbooks it refers, nor does it represent such organization(s).

Some of the questions here ask for short written answers based on the reading. This is meant to give the student practice in answering questions of the format that will appear on Exam 5. Students are encouraged to type their own answers first and then to compare these answers with the solutions given here. Please note that the solutions provided here are not necessarily the only possible ones.

Source:

Myhr, A.E.; and Markham, J.J. Insurance Operations, Regulation, and Statutory Accounting (Second Edition). American Institute for Chartered Property Casualty Underwriters. 2004. Chapter 10, pp. 10.8-10.14.

Original Problems and Solutions from The Actuary's Free Study Guide

Problem S5-68-1.

(a) Provide examples of three kinds of situations in which liability insurers might end up having to provide coverage for actions pertaining to breaches of contractual obligations.

(b) Do typical liability insurance policies provide coverage for "property damage to another's property that has been damaged while in the insured's care, custody, or control or while the insured was working on it" (Myhr and Markham, p. 10.8)?

(c) Do typical liability insurance policies provide coverage for "property damage to the insured's work itself, or to property that the insured has sold or given away" (Myhr and Markham, p. 10.9)?

(d) Do typical liability insurance policies provide coverage for "consequential bodily injury and damage to another's property" (Myhr and Markham, p. 10.9)?

Solution S5-68-1.

(a) Myhr and Markham, p. 10.8, discuss the following examples of situations in which liability insurers might end up having to provide coverage for actions pertaining to breaches of contractual obligations:

1. Even if the breach of contract itself is not covered, the consequences of said breach might be covered.

2. Some insurance policies may explicitly insure for certain kinds of breach of contract, either via a statement to this effect or via an exception to the contractual exclusion.

3. Claims of negligence or strict liability might be combined with claims of contractual breach; in that case, the insurer is often obligated to defend the insured against the entire claim.

(b) Typical liability insurance policies do not provide coverage for "property damage to another's property that has been damaged while in the insured's care, custody, or control or while the insured was working on it" (Myhr and Markham, p. 10.8).

(c) Typical liability insurance policies do not provide coverage for "property damage to the insured's work itself, or to property that the insured has sold or given away" (Myhr and Markham, p. 10.9).

(d) Typical liability insurance policies do indeed provide coverage for "consequential bodily injury and damage to another's property" (Myhr and Markham, p. 10.9).

Problem S5-68-2. List six items of information that a claim adjuster should obtain when they are relevant to investigating a liability claim.

Solution S5-68-2. The following items relevant to a liability claim adjuster's investigation are discussed by Myhr and Markham, pp. 10.9-10.10:

1. The potential claimants' names;

2. The potential claimants' addresses;

3. The potential claimants' telephone numbers;

4. A statement of each claimant's account of the accident;

5. A statement of the insured's account of the accident;

6. Statements from witnesses;

7. Police reports;

8. Photographs of accident scenes;

9. Diagrams of accident scenes;

10. Products or objects involved in claims.

Any six of the above suffice as an answer. Other valid answers may also be possible.

Problem S5-68-3. Which of the following statements are true? More than one answer may be correct.

(a) Convicted criminals are an exception to the requirement in liability insurance policies that anyone seeking coverage for a claim must cooperate with the insurer.

(b) The desire to protect their Fifth Amendment rights often prevents individuals accused of crimes from fully cooperating with an insurer.

(c) Criminal cases typically take much less time to move through the court system than civil cases.

(d) In cases of possible criminal liability, the adjuster should never wait until the conclusion of the criminal case; he should attempt to obtain the cooperation of the insured(s) and claimant(s) as soon as possible, or else the insurer would waive the right to receive such cooperation.

(e) When there is an alleged breach of contract, the liability claim adjuster needs only to review the provisions of the insurance policy which explicitly mention breach of contract and any relevant exclusions or exceptions.

(f) One potential defense against a breach of contract claim is that the precondition for the insured's contractual obligations did not occur.

(g) One potential defense against a breach of contract claim is that the claimant breached the contract first.

(h) When hold-harmless agreements are not particularly specific, courts have tended to interpret them broadly as possible, transferring as much liability as could be consistent with the letter of the agreements.

(i) Courts have sometimes invalidated hold-harmless agreements that contain ambiguous language.

Solution S5-68-3. This question is based on the discussion of criminal liability and contractual liability by Myhr and Markham, p. 10.12. The following answers are correct:
(b) The desire to protect their Fifth Amendment rights often prevents individuals accused of crimes from fully cooperating with an insurer.

(c) Criminal cases typically take much less time to move through the court system than civil cases.

(f) One potential defense against a breach of contract claim is that the precondition for the insured's contractual obligations did not occur.

(g) One potential defense against a breach of contract claim is that the claimant breached the contract first.

(i) Courts have sometimes invalidated hold-harmless agreements that contain ambiguous language.

Choice (a) is not correct; convicted criminals are also required to cooperate with the insurer in order to receive coverage.

Choice (d) is not correct; the adjuster can often fruitfully wait until the conclusion of a criminal case before requiring that the insured cooperate. This can be done to prevent the insured's cooperation from infringing on the insured's desire for Fifth Amendment protections.

Choice (e) is not correct; when there is an alleged breach of contract, the liability claim adjuster needs to review the entire applicable policy. Allegations of breach of contract could be coupled with allegations of negligence or statutory liability that may be covered under the policy.

Choice (h) is not correct; when hold-harmless agreements are not particularly specific, courts have tended to interpret them quite narrowly.

Problem S5-68-4.

(a) Name one kind of statutory violation that causes bodily injury and property damage and for which coverage is excluded from the typical liability insurance policy.

(b) Regarding vicarious liability, what is the most important issue for liability claim adjusters to address?

Solution S5-68-4.

(a) One kind of statutory violation that causes bodily injury and property damage and for which coverage is excluded from the typical liability insurance policy is mentioned by Myhr and Markham, p. 10.13. It is intentional dumping of pollutants. Other valid answers may also be possible.

(b) Regarding vicarious liability, is the most important issue for liability claim adjusters to address is "the scope of employment or agency" (Myhr and Markham, p. 10.13). The principal or employer is only liable for the actions of the agent or employee to the extent that those actions were performed within the scope of the relevant agency or employment relationship.

Problem S5-68-5. Briefly discuss three possible defenses to liability claims.

Solution S5-68-5. The following possible defenses to liability claims are mentioned by Myhr and Markham, pp. 10.13-10.14:

1. Absence of Negligence: The claimant's failure to prove that negligence on the insured's part occurred.

2. Comparative or contributory negligence: Some aspect of the claimant's fault contributing to the claimant's bodily injury.

3. Assumption of risk: The claimant's voluntary assumption of a risk when the claimant had adequate knowledge of that risk's existence.

4. Statute of limitations: The expiration of the time limit within which the claimant could have legitimately filed a lawsuit.

Any three of the above suffice as an answer. Other valid answers may also be possible.

See other sections of The Actuary's Free Study Guide for Exam 5.