Damages and Settlements in 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. 10.15-10.21.

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

Problem S5-69-1.

(a) Name three outside parties on which liability claim adjusters might rely to receive information that would be of use in estimating damages.

(b) Name two kinds of documents that are often used in proving damages in bodily injury liability claims.

(c) Name two kinds of documents that are often used in proving damages in property damage liability claims.

(d) What unscientific approach is often used by liability claim adjusters to estimate general damages (i.e., damages for pain and suffering, loss of consortium, disfigurement, etc., which are difficult to precisely measure).

Solution S5-69-1. This question is based on the discussion of damages in liability claims by Myhr and Markham, p. 10.15.

(a) The following outside parties are mentioned by Myhr and Markham, p. 10.15:

For bodily injury estimates:
1. Doctors

For property damage estimates:
2. Appraisers
3. Contractors
4. Repairers

For financial factors:
5. Accountants
6. Economists

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

(b) The following documents, often used in proving damages in bodily injury liability claims, are mentioned by Myhr and Markham, p. 10.15:

1. Medical reports and bills;
2. Hospital records;
3. Employer information.

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

(c) The following documents, often used in proving damages in property damage liability claims, are mentioned by Myhr and Markham, p. 10.15:

1. Repair estimates;
2. Actual bills for repair and rental.

Other valid answers may be possible.

(d) The "multiple-of-specials" approach is often used by liability claim adjusters to estimate general damages. Either the entire likely amount of special damages or just the medical special damages would be multiplied by some factor to arrive at the general damages. This factor is often considerably greater than 1 (Myhr and Markham, p. 10.15).

Problem S5-69-2.

(a) What are future damages?

(b) Person Z has lost a spouse in a car accident for which someone else is liable. Should Person Z pursue a survival action or a wrongful death action?

(c) Person Q was hurt in a car accident for which someone else is liable. Subsequently, Person Q incurred considerable medical costs to receive treatment as a result of the accident. Then Person Q died of a cause unrelated to the accident. Person Q's son, Q II, wishes to recover Q's medical expenses from the liable party. Should Q II pursue a survival action or a wrongful death action?

(d) What condition allows for the largest amount of recovery in wrongful death actions?

Solution S5-69-2.

(a) Future damages are "damages that can be expected to continue into the future", "such as future medical expenses, future lost earnings, and future pain and suffering" (Myhr and Markham, p. 10.18).

For (b), (c), and (d), the questions are based on the following definitions expressed in Myhr and Markham, p. 10.18:
A survival action is a "legal cause of action that existed for the deceased before his or her death."

A wrongful death action is a "legal cause of action that exists for the survivor of the deceased."

(b) Person Z should pursue a wrongful death action for loss of companionship; if Person Z had any manner of financial dependency on the deceased spouse, this would increase the amount Z could recover.

(c) Q II should pursue a survival action, since Q II is only seeking to recover medical expenses that Q would have been able to recover had Q still lived.

(d) The wrongful death actions that tend to receive the largest recoveries apply to situations where financial dependency on the deceased individual was present - as, for instance, in cases where children depended on their parents or one spouse depended on another (Myhr and Markham, p. 10.19).

Problem S5-69-3. Which of the following considerations are relevant in settling third-party property damage liability claims? More than one answer may be correct.
(a) Coinsurance
(b) Depreciation
(c) Possible legal expenses
(d) Arbitration possibilities
(e) Special sublimits
(f) The property owner's own negligence
(g) Deductibles

Solution S5-69-3. The following considerations are relevant in settling third-party property damage liability claims, according to Myhr and Markham, pp. 10.19-10.20:

(b) Depreciation
(c) Possible legal expenses
(d) Arbitration possibilities
(f) The property owner's own negligence

Problem S5-69-4.

(a) What purpose does the insurer's right to litigate serve?

(b) Why is settling a liability claim often in the insured's best interest?

(c) Why does the insurer have a duty to settle the claim when its value approaches or exceeds the insured's policy limit?

(d) What might a court do if an insurer unreasonably rejected a settlement which was at or close to the applicable policy limit?

Solution S5-69-4.

(a) The insurer's right to litigate serves the purpose of protecting the insurer "against frivolous, fraudulent, or unfounded claims" (Myhr and Markham, p. 10.20).

(b) It is often in the insured's best interest to settle a liability claim, because even successful trials are stressful to the parties involved. A settlement prevents the insured from being sued and protects the insured against the vicissitudes of a trial (Myhr and Markham, p. 10.20).

(c) When the value of a claim approaches or exceeds the insured's policy limit, the insurer has the duty to settle a claim because of the potential conflict of interest that arises in this situation. The insured would be liable for any damages in excess of the policy limit. If the insurer chooses to litigate the case, then the insurer has little to lose beyond the policy limit but has much to gain in terms of reducing the insurer's own payment. The insured would, in any case, need to pay damages that exceed the policy limit (Myhr and Markham, pp. 10.20-10.21).

(d) If an insurer unreasonably rejected a settlement which was at or close to the applicable policy limit, the court might require the insurer to pay any damages in excess of the policy limit for which a verdict has been rendered (Myhr and Markham, p. 10.21).

Problem S5-69-5. Which of the following statements about negotiations of liability claims are true? More than one answer may be correct.

(a) Insurers typically feel the pressure to negotiate liability claims more strongly than do claimants.
(b) Claimants who are extremely likely to win at trial will typically prefer to litigate rather than to settle.
(c) Most claimants greatly overestimate what they could recover from a trial verdict.
(d) The attorneys of most claimants make more money per unit of time by settling claims instead of litigating them.
(e) Insurers stand to lose much more from an adverse verdict than most claimants, because the insurer's reputation would be tarnished by a trial that generated a lot of negative publicity for the insurer.
(f) Court cases can frequently make or break the professional reputations of the attorneys involved in them.
(g) Insurers monitor the number of claims that go to litigation and reward adjusters for having a higher number of such claims.

Solution S5-69-5. This question is based on the discussion of pressures to negotiate liability claims by Myhr and Markham, p. 10.21. The following answers are correct:

(a) Insurers typically feel the pressure to negotiate liability claims more strongly than do claimants.
(d) The attorneys of most claimants make more money per unit of time by settling claims instead of litigating them.
(f) Court cases can frequently make or break the professional reputations of the attorneys involved in them.

Choice (b) is not correct; even claimants who are likely to win at trial will often prefer to settle.

Choice (c) is not correct; most claimants underestimate the damages they could recover.

Choice (e) is not correct; claimants typically have many fewer financial resources than do insurers and can also be emotionally devastated by an adverse verdict in court. For insurers, most individual adverse verdicts can be absorbed without substantial damage.

Choice (g) is not correct; insurers reward adjusters for having fewer claims go into litigation.

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