What Liability Insurance Is Not

By Andrew Bristow

Let’s face it – most people don’t understand insurance.  And to many of those who do, liability insurance is still a bit of a mystery.  So when we speak to insureds about their liability claims, we often have to explain how liability insurance works.

The principle is deceptively simple.  You take out a policy which protects you against your legal liability to others, so if you get sued, there is an insurer behind you to settle the claim or defend it as required.  But many insureds have no real understanding of what their policy covers – and, often more importantly, what it does not.  So – let’s identify and clarify a few common misconceptions, by setting out some things that a liability policy is NOT:

It is not a guarantee of your performance or products

If you don’t do your job properly, or if your product doesn’t work, your liability policy will not help you unless property damage or personal injury results.  A painter whose work is uneven or unsightly will have to bear the cost of correcting the defect.  However, if other property is damaged, say by overspray onto other surfaces, the policy will respond in relation to cleaning and restoring the damaged property.  Similarly, if an appliance fails to work and needs replacement, that is a problem for the supplier or manufacturer, not the liability insurer.  If the appliance injures someone because of a fault, the liability policy will come into play.

It is not a Public Relations fund

There has to be a legal liability, or a reasonable expectation of one, before settlement can be considered.  If you are not liable, your insurer will not settle the matter just to maintain your good relationship with the aggrieved party. While insurers do make “commercial settlements” in some situations, these are still founded on the prospect of the Insured being found liable, even if liability is debatable.

It is not a license to break the law

If your actions are illegal, you may be in breach of your policy conditions.  If you are fined or otherwise penalised by a government authority, the policy can’t help you.

It is not an excuse for reckless behaviour

Strangely enough, even though a liability policy covers negligence, most include some form of condition requiring the insured to take reasonable care to prevent damage or injury.  While in theory this seems incongruous, in practice it means that you need to show that you did not act recklessly or deliberately cause the damage or injury.  For example, policies often require appropriate enquiries as to the presence or location of underground services to be made before excavation commences, or specific safety and fire protection measures to be in place before welding or other hot works.

It is not a debt collection mechanism

Contractors who have lodged a liability claim often face the problem of progress payments being withheld by their principal until the claim is resolved.  Insurers are usually mindful of this, but will not compromise their investigation and assessment of the liability claim in order to protect your cash flow.

Insureds often learn these lessons the hard way – when they have a claim against them and are being pressured by various parties.  Liability adjusters therefore have to be mindful of these issues and clarify them early in the piece in order to manage expectations and achieve an appropriate resolution of the claim.