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					Insurance and Risk Management
           Lecture 4 :
 Liability Risk and Insurance

 • The Liability Risk

 • Corporate Liability Insurance
           Rejda (2008)
     Ch. 19: The Liability Risk
• Ray, age 28, owns three large Rottweiler dogs in Miami,
  Florida. He was fined earlier by the city because the
  dogs often ran free without a lease and frightened the
  neighbours. One afternoon, the dogs escaped from a
  fenced yard because Ray carelessly left the gate open.
  Without provocation, the dogs viciously attacked a six-
  year-old girl, who later died from the mauling. The
  parents of the deceased child sued Ray for a wrongful
  death and were awarded damages of $300,000. Ray
  could not pay and was forced to declare bankruptcy.

   The Liability Risk: Introduction
• Ray experienced the legal effects of being negligent in a
  financially painful manner. Like Ray, other people often
  face similar liability situations. Drivers are sued for the
  negligent operation of their vehicles; business firms are
  sued because of defective products that injure others;
  physicians, attorneys, accountants, engineers, teachers,
  and other professionals are sued for malpractice,
  negligence, and incompetence. Even government and
  charitable institutions are often sued today because they
  no longer enjoy complete immunity from lawsuits.
  Thus, the liability risk is extremely important to people
  who whish to avoid or minimize potential losses.

Liability Exposures: McDonald’s
         Hot Coffee Case
           A Common Understanding

  • A woman purchased hot coffee at the drive-
  through window of a McDonald’s Restaurant.
  • She spilled the coffee on herself while driving
  and was burned.
  • She sued McDonald’s for compensation for her
  injuries (about $11,000) and was awarded nearly
  $3 million.
Liability Exposures: McDonald’s
         Hot Coffee Case
     A Complete Account of the Facts

          • See the handout.
       Liability Exposures

• Exposures
  – Expenditure of TIME and MONEY
  – Investigate, Negotiate, Defense,

• Peril?

• Hazard?
          Property Losses v.
           Liability Losses

•   Parties Involved
•   Measurement of Exposure
•   Changing Environment
•   Tail

Insurance Tails:

Types of Legal Liability

Types of Legal Liability

Types of Legal Liability


• Wrongful Act or Omission
• Independent of Contract
• Legal Remedy: DAMAGES


• Compensatory Damages
  – Special Damages
  – General Damages
• Punitive Damages

     Examples of the Liability Potential

• Arising from Ownership, Use, and Possession of Land
• Arising from Maintaining a Public or Private Nuisance
• Arising from the Sale, Manufacture, and Distribution of
  Products or Services (CGL insurance)
• Arising from Fiduciary Relationships (D&O insurance)
• Professional Liability (errors and omissions insurance)
• Agency and Vicarious Liability
• Employment Liability
• Work-Related Injury
• Motor Vehicle Liability

  Failure to act as a “reasonably prudent person,” and as a result, causing
  harm to some other person / entity.
                • Acts of Omission
                • Acts of Commission
• What is reasonableness? According to Judge Hand’s Rule:
  (economic justification based on MC and MB)
  If P(loss) * value of loss > cost to prevent loss, and didn't do
  so, then unreasonable.

               Safety Expenditure Example
Suppose there are 7 kinds of design for riding lawnmowers that has the potential
      of causing injuries to customers and that the loss suffered is $10,000
      Safety     Prob.      Expected       Marginal          Marginal
  Expenditure of loss       Loss           Benefit           Cost
(1)    $0        0.07
(2)    45        0.06
(3)   130        0.05
(4)   225        0.04
(5)   400        0.03
(6)   590        0.02
(7)   900        0.01

                        Optimal Safety Expenditure =
    Elements of a Negligent Act

• Existence of a legal duty to
  use reasonable care
• Failure to perform the duty
• Damages or injury to the
• Proximate cause relationship
  between the negligent act
  and the infliction of damages
          McDonald’s Revisited
    Does Mrs. Liebeck’s case meet the
    requirements of negligence?
•   Existence of a legal duty:
•   Failure to exercise that duty:
•   Damages or injury:
•   Proximate cause relationship:
    – “but for” test
    – “foreseeability” test

        Defenses to Negligence

• Contributory or Comparative Negligence
  – Pure
  – 49 percent rule
  – 50 percent rule
• Last Clear Chance Rule
  – e.g., a jaywalker
• Assumption of Risk

 Relaxation of Burden of Proof

• Strict Liability
       • Products Liability
       • Ultra-hazardous Activities
       • Worker’s Compensation
• Res ipsa loquitur (The thing speaks for itself)
   (e.g., a ceiling falls; a scalpel in the patient)
• Joint and Several Liability
   – Hazardous waste
• Imputed Negligence
                       Imputed Negligence

• Meaning: Under certain conditions, the negligence
    of one person can be attributed to another
•   Employer-employee relationship
•   Vicarious Liability
•   Family purpose doctrine
•   Joint business venture
•   Dram shop law

   Special Tort Liability Problems

• Products liability

• Professional liability
  –   Medical Malpractice
  –   Errors and Omissions by Attorneys
  –   Liability of Architects and Engineers
  –   Directors and Officiers

     Products Liability Heats Up Again

• The New York Times reported that products-liability
  awards have increased significantly in the last six years
  after several years of relative quiet.     (Greg Winter,
  “Jury Awards Soar as Lawsuits Decline on Defective Goods,”
  New York Times, A1, col.4, Jan. 30, 2001)

• The higher cost and higher quality hypothesis:
   – Min. cost of bringing a defective-product action: $100,000
   – Median award: $500,300 (1993)  $1.8million (1999)
   – # cases filed in federal court drops: 32,856 (1997)  14,428
   – Success rate rises: 39% (1993)  46% (1999)

Civil Justice System: Tort Goals

              • Goals
                – Compensate
                – Deter

   Defects in the Civil Justice System

• High Costs and Inefficiency
• Uncertainty of legal outcomes
• Increased compensation awards
• Long delay in settling lawsuits

                           Tort Reform Proposals

• Why? Reduce liability loss; Reduce uncertainty; Fair for
• Proposals
   – Regulation of attorney fees
   – Limits on the maximum amounts paid as damages
   – Penalties to deter frivolous suits
   – Limiting or not allowing punitive damage awards
   – Placing a cap on noneconomic damages, such as pain and suffering
   – Modifying the collateral source rule
   – Modifying the joint and several liability rule

Corporate Liability Insurance
       Chapter 26, Rejda (2008)

• CGL Policy
      General Liability Loss Exposure
• Professional Liability Insurance (D&O, ...)
• PL, MPL, D&O (EPL) Policies @ CUHK
• Liability Insurance, BOP
      Special Tort Liability (Ch. 19)

• Liabilityto
  –   Customers (E.g., Products Liability)
  –   Third Parties (E.g., Environmental Liability)
  –   Clients (Medical Malpractice Insurance)
  –   Shareholders (E.g., D&O Liability)
  –   Employees (E.g., EPL or WC)

General Liability Loss Exposures
• Premises and Operations
      • liability arising out of the ownership and maintenance of
        the premises where the firm does business
• Products Liability

• Completed Operations
      • liability arising out of faulty work or performed away
        from premises after the work or operation is completed
• Contractual Liability

• Contingent Liability
     Products Liability Heats Up Again

• The New York Times reported that products-liability
  awards have increased significantly in the last six years
  after several years of relative quiet.     (Greg Winter,
  “Jury Awards Soar as Lawsuits Decline on Defective Goods,”
  New York Times, A1, col.4, Jan. 30, 2001)

• The higher cost and higher quality hypothesis:
   – Min. cost of bringing a defective-product action: $100,000
   – Median award: $500,300 (1993)  $1.8million (1999)
   – # cases filed in federal court drops: 32,856 (1997)  14,428
   – Success rate rises: 39% (1993)  46% (1999)

   Products Liability - Legal background

• Prior to 1916 - privity limitation (under
  contract law)
• MacPherson v. Buick, 1916
  – victims can recover under tort law
  – negligence standard
• Escola v. Coca-Cola Bottling Company, 1944
  – strict liability
  – Judge Traynor’s opinion

   Products Liability - Legal background

• Quotes from Traynor’s opinion
      I believe the manufacturer’s negligence should no longer be
 singled out as the basis of a plaintiff’s right to recover in cases like the
 present one. In my opinion it should now be recognized that a
 manufacturer incurs an absolute liability when an article that he has
 placed on the market, knowing that it is to be used without inspection,
 proves to have a defect that causes injury to human beings.
      Those who suffer injury from defective products are unprepared
 to meet its consequences. The cost of an injury and the loss of time or
 health may be an overwhelming misfortune to the person injured and a
 needless one, for the risk of injury can be insured by the manufacturer
 and distributed among the public as a cost of doing business. …
 Against such a risk there should be general and constant protection and
 the manufacturer is best suited to afford such protection.
   Products Liability - Legal background

• Second Restatement of Torts, 1965
     • Strict liability for unreasonably dangerous and
       defective products
     • Comparative negligence replaced contributory
       negligence as a defense

             Products Liability - Legal basis

• Strict liability for manufacturing defects
   – Manufacturing defects exist if
      • Product was not manufactured as intended
      • Harm occurred
• Negligence for design & warning defects
  – Design and warning defects:
      • Examine manufacturer’s knowledge and behavior
      • Effectively a negligence standard
• Breach of Warranty
                    Examples of Design Defects

• Examples of design defects that have led to large
  liability awards include:
   – Liability of a manufacturer of three-wheel. All terrain
     vehicles for injuries to children harmed when the
     vehicle overturn
   – Liability of an auto manufacturer for failing to install a
     rollbar to minimize injury if the vehicle overturns.
   – Liability of a pick-up truck manufacturer for injuries
     caused by the explosion of a side-mounted fuel tank.

                 Examples of Warning Defects

• Examples of warning defects that have led to large
  liability awards include:
   – Liability of a crane manufacturer for an inadequate
     warning that the operator could be harmed if the crane
     contacted electrical wires.

   – Liability of a refinishing fluid manufacturer for injuries
     caused by combustion of the fluid when used to close to
     an open flame.
   – Liability of a manufacturer of a nonstick cooking spray
     for deaths to teenagers who deliberately inhaled the
                                   Breach of Warranty

• Firms also can be held liable under contract law
  for violating
   – Express warranty
      • Ex: Jason buys a step-ladder that has a sticker
        stating that it will safely support a person
        weighing up to 300 pounds. If Jason is injured
        when the ladder breaks under his weight, he
        can sue the manufacturer on the grounds that
        the ladder did not perform as the company
        expressly said it would.
   – Implied warranty
       • Implicit performance guarantee that the product will be
         reasonably fit for its intended use.
       Products Liability Insurance

• Coverage under CGL Policy (Commercial
  General Liability Policy)
• Basis of coverage
  – Occurrence coverage
     • insurer pays claims if the loss occurred during the policy
       period, regardless of when the claim is filed.
  – Claims-made coverage (To avoid long-tail claims)
     • insurer pays claims if the claim is filed during the policy
       period, provided that the loss occurred after the
       retroactive (inception) date of the policy.

  Commercial General Liability (CGL)
     Policy: Basis of Coverage

• Two forms: occurrence policy and claims-
  made policy.
• Compare risk bearing effects of a series of
  occurrence policies with a series of claims-
  made policies over 1999-2002 period

     1999                    2002

     Claims-Made versus Occurrence Policies

• Assume a building contractor replaces an
  occurrence policy with a claims-made policy.
• The contractor is sued because of a defect in a
  building constructed five years earlier.
• The occurrence policy would defend the claim.
• However, assuming no retroactive coverage, the
  claims-made policy would not cover the loss
  because it occurred before the inception date of
  the policy.

               CGL Occurrence Policy
• Section I – Coverage
    – Coverage A: BI & PD Liability
    – Coverage B: PI & AI Liability
    – Coverage C: Medical payments
•   Section II – Declaration (Who is Insured?)
•   Section III – Limits
•   Section IV – Conditions
•   Section V - Definitions
What Are Covered? What Are Not? How much?

• Coverages:
   – Coverage A: Bodily Injury and Property Damage liability
   – Coverage B: Personal Injury and Advertising Injury
   – Coverage C: Medical payments (regardless of fault)
• Limits: 2 aggregate limits; 1 per occurrence limit;
  and 3 sublimits.
• Legal defense costs are paid in addition to the
  policy limits
• Exclusions:

              Definitions of CGL Terms
• Bodily Injury: any physical injury to a person,
  including sickness, disease, and death.
• Property Damage: physical injury to, destruction of, or
  loss of use of tangible property.
• Personal Injury: injury, other than bodily injury,
  arising from intentional torts such as libel, slander, or
  invasion of privacy.
   – Ex: a customer is falsely arrested for shoplifting, the
     firm is covered if the customer sues.
• Advertising Injury:
   – Ex: a retail furniture store uses copyrighted material in
     an ad without permission and is sued.                       43
Exhibit 14.1 Illustration of the CGL
         Limits of Insurance

              Example of CGL 6 Limits
• Sharon operates a sporting goods store in a rented
  location at a shopping mall. She is insured under a
  CGL policy with the following limits:
   – General aggregate limit            $1,000,000
   – Products-completed operations aggregate limit
   – Personal and advertising limit      $250,000
     (Coverage B)
   – Each-occurrence limit                $300,000
     (Coverage A and C)
   – Fire damage limit (any one fire)    $100,000
   – Medical expense limit (any one person) $5,000
     CGL Example: Sharon’s Sports Store

•    The propane tank that Sharon kept in the store exploded.
     Indicate the dollar amount, if any, that Sharon’s CGL
     insurer will pay for each of the following losses:
a.   Three customers were injured by flying debris with
     medical expenses of $6,000, $7,500, and $5,000,
b.   A fire resulted from the explosion. Property damages are
c.   The store had to suspend operations for three months.
     Sharon’s lost profits are estimated to total $20,000. She
     had continuing expenses of $10,000 during the period of
           Answers to Previous Slides
• a. If Sharon is legally liable for the explosion, the
  medical expenses of the customers would be
  covered in full under bodily injury liability. If she is
  not legally liable for the loss, the policy would pay a
  maximum of $5000 to each injured customer under
  medical payments coverage.
• b. The loss is covered as a fire legal liability loss.
  However, if the building where Sharon operates her
  business is owned by Sharon, the loss would not be
• c. Business income losses are not covered under the
  commercial general liability policy.
              Major CGL Exclusions

• Basics: A lengthy list; Covered elsewhere; …
• Examples:
   – Liquor liability exclusion: applies to only alcohol-related co.
   – Workers compensation
   – Employers liability
   – Pollution exclusion
   – Auto exclusion
   – Mobile equipment: if being transported by an auto…
   – Damage to property exclusion: property loaned or in
     the insured’s care. Custody, or control.
   – ……
                      Example of CGL: QE
•   Quality Electric (QE) is an electrical contractor that is
    insured under a CGL policy. Explain whether each of
    the following losses would by covered under its CGL.
1. A QE employee, while driving a piece of mobile equipment
   to a job site, negligently damaged a traffic light. The city
   made claim against QE for the cost of repairs.
2. QE brought a fuel tank, containing 200 gallons of gas, to the
   job site. The tank, which was corroded, ruptured and spilled
   its contents. QE was liable for cleanup costs.
3. An employee of QE was injured on the job and collected
   workers compensation benefits. The employee’s spouse
   then made claim against for loss of consortium.
      Answers to the Previous Slide
• 1. Covered. QE’s operation of mobile equipment is
  covered under almost any circumstances, including
  these. (It’s not covered when the equipment is (a)
  being transported by an auto or (b) used in or in
  preparation for any racing, speed, or demolition
  contest, or in any stunting activity.
• 2. Not covered. The CGL pollution exclusion applies
  to the circumstances described.
• 3. Not covered. The employers liability exclusion of
  the CGL coverage form eliminates coverage for the
  claim, which could be covered under QE’s employers
  liability coverage.
                        Example of CGL: S&S
•    Seafood & Spirits (S&S) is a bar and grill insured under
     a CGL policy. Explain whether each of the following
     losses would by covered under its CGL.
1.   S&S provides its customers with valet parking in a lot on S&S’s
     premises. While one of S&S’s employees was parking a
     customer’s car, he negligently struck and injured a pedestrian.
     Claims were made against S&S by the following persons.
        •   The pedestrian, for bodily injury (P.307)
        •   The customer, for damage to her car (P.307)
        •   The employee, for injuries he sustained in the accident
2.   An S&S’s bartender served liquor to a person who was obviously
     intoxicated. After the patron left S&S, he attempted to drive home
     and injured another driver, who sued S&S.

        Answers to the Previous Slide
• 1. (a) Covered. The aircraft, auto or watercraft exclusion in the
  CGL specifically does not apply to the parking of autos on the
  named insured’s premises.
  (b) Not covered. The part of the damage to property exclusion
  that pertains to property in the care, custody, or control of the
  insured would eliminate coverage for damage to the customer’s
  car. (Garagekeepers coverage is needed for this exposure.)
  (c) Not covered. The employee’s claim would be excluded by
  either the workers compensation exclusion or the employers
  liability exclusion, or perhaps by both (depending on whether the
  employee was entitled to receive workers compensation
• 2. Not covered. The liquor liability exclusion applies, since S&S
  is in the business of selling alcoholic beverages.

      Claims-Made Coverage Form

•   Meaning of “Claims Made”
•   Rationale for Claims-Made Policies
•   Retroactive Date
•   Section V - Extended Reporting Periods
    – Basic extended reporting periods (w/o charges)
       • Two “tails”
    – Supplemental extended reporting period

                                           Two Tails
• 5-year (if reported within policy period)
• 60-day
• Example: A customer in a supermarket slips &
  falls on a wet floor during the policy period.
   – (A) The insured reports the occurrence promptly to the
     insurer, but no actual claim is made against the insured
     during the policy period.
   – (B) The insured was unaware that the customer fell, so the
     incident was not reported to the insurer. A claim is made
     against the insured after the policy expires.
Employment Practices Liability
 (EPL) Insurance (P. 311 of Rejda, 2005)

              • Wrongful termination,
                discrimination, sexual
                harassment, failure to promote,
                and other employment-related
                liability that are not covered
                under CGL.
              • Insuring agreement
              • Co-payment
              • Legal defense
              • Exclusions
 Ex-Insight 14.2
• Insurance Covers Harassment
  Claims: As Settlement Rise, Firms
  Buy Policies.
• The number of sexual harassment
  charges with with the EEOC rose
  from 6,883 in 1991 to 15,889 in
  1997. While the monetary
  settlements paid to victims leaped
  from $7.1 million to $49.5 million
  during the same period.
• Companies pay up to $500,000 for
  $25 million in coverage.
EXHIBIT 14.2 Median Compensatory Award for
            Employment-Practice Liability Cases

             Commercial Umbrella Policy
                (Excess Liability Policy)

• Coverage above limits on other primary policies covering
  multiple exposures.
• Example: (Fred Inc. has the following set of policies:)
   – An auto liability policy providing $1 million excess
     coverage above a $100,000 SIR per occurrence. (Insurer A)
   – A products liability policy providing $10 million excess
     coverage above a $1 million SIR per occurrence. (Insurer B)
   – An umbrella policy providing $20 million of coverage per
     occurrence, excess of liability limits on the other two
     primary policies. (Insurer C)

         Commercial Umbrella Policy
• Suppose Fred Inc. incurs a $10.1 million auto liability loss
  and a $15 million products liability loss during coverage
  period. How would those four firms apportion the losses?

                       Amount                     Insurer
                       of loss    Fred Inc.   A      B      C
• Auto liability
• Products liability
• Total loss

         Coverage for the World Trade Center
• The World Trade Center was bombed by a terrorists, causing
  property, liability, and business income losses of approximately
  $1 billion in February 1993.
• It has a multiple layers of insurance as shown below:

•   Retention    $100,000 per claim
•   1st Layer    $10 million from Am Home Assurance and Home Indemnity
•   2nd Layer    $290 million from 11 companies
•   3rd Layer    $100 million from 5 companies
•   4th Layer    $100 million from 68 syndicates at Lloyd’s of London
•   5th Layer    $100 million from 65 syndicates at Lloyd’s of London

(Source: Business Insurance, March 8, 1993)

       Professional Liability Insurance
     • Physicians Liability Insurance (P.323)
     • Errors and Omissions Insurance (E&O)
     • Accountants Professional Liability
       Insurance (or under E&O Form)
     • Directors and Officers Insurance (D&O)
•   《上海證券報 》2007-03-22 <本報訊>工
    元保額的董事責任保險。(謝曉冬)                            61
 Physicians Liability Insurance
• 1. Broad coverage          • 5. Not a substitute for
• 2. Liability not             general liability insurance
  restricted to accidental   • 6. Current forms permit
  acts of the physician        the insurer to settle
• 3. Protection against        without the insured's
  claims arising out of        consent.
  negligent acts of          • 7. Extended
  employees                    reporting period
• 4. Maximum limit             can be added.
  per medical incident
  and an aggregate limit
  for each coverage
       D & O Liability - Legal Background

• Liability to shareholders under incorporation laws
  – Duty of care
     • Make informed decisions
     • Business judgment rule - courts will not second guess
       informed managerial decisions
  – Duty of loyalty
     • Ensure decisions are in the best interests of shareholders
       when a conflict of interest exists

      D & O Liability - Legal Background

• Liability to shareholders under securities laws
   – disclose material information in a timely
• Types of suits
   – derivative - on behalf of corporation
   – direct actions - on plaintiffs’ behalf
      • Individual action
      • Class action

       D & O Insurance & Indemnification

• Indemnification - D&Os reimbursed by corporations for
  legal costs, settlements, judgments, and fines
   Type of Action              Corp. Can Indemnify
   Derivative                  Litigation expenses
   Direct                      + settlements, judgments & fines
• D&O Insurance (usually copayment)
   – To D&O: Losses not indemnified by Corp.
   – To Corp.: Indemnification costs
   – Common exclusions: (against public policy)
      • illegal personal profit (insider trading, etc…)
      • willful misconduct (fraud, misrepresentation, etc…)
      • Bodily injury and property damage                     65
Who is Under Fire Recently?

       •   新浪(Nasdaq: SINA):2005-02-16
       •   中航油(CAOLF.PK):2005-01-12
       •   UT斯达康(Nasdaq: UTSI):2004-11-09
       •   中国人寿(NYSE: LFC):2004-03-16
       •   网易(Nasdaq: NTES):2001-10-23
       •   中华网(Nasdaq: CHINA):2001-06-29

            Who is Under Fire Recently?
•   财华社深圳新闻中心 (2007 / 06 / 05 Tue. )
           美国律师事务所Lerach Coughlin Stoia Geller Rudman & Robbins已经向纽约
    布什(Fredy Bush)出售了150万股美国存托凭证。
    书中,并未披露与当时的CFO谢利﹒辛格哈尔(Shelly Singhal)相关的特定事实,
    Coughlin Stoia Geller Rudman & Robbins相似。不过,新华财经媒体否认了对其
                             Enron …
                   D&O 保險合約 (2002/02/22)


H.E.W & M主管保險行業案件的喬伊斯認為,保險公司不容易說服法官判它們得直。

                  D & O Liability Policy Issues
• Incentives to settle securities class actions
   – D&Os:
      • Fight the class action in court (low chance of losing, but high
        damages if lose), or
      • Settle out of court (immediate losses fixed, relatively small).
   – Insurers:
      • Settlement costs are lower than the expected legal fees.
      • Insurers are not given control of D&O’s defense.
      • May be fearful of bad-faith suit against itself.

                       D & O Liability Policy Issues

• Merit of securities class actions (strike suits..)
    – Critics:
        •   Little merit
        •   To coerce a settlement
        •   Large costs are imposed on corp. defending these suits
        •   Less reluctant to make forward-looking statement
    – Plaintiff attorneys:
        • Encourage timely release of accurate information so as to reduce
          information asymmetries and lower the costs of capital
        • Since plaintiff have incentives to identify disclosure violations,
          taxpayers are not burdened with enforcement costs
• 1995 Securities Litigation Reform Act
    (Safe-harbor provision for making forward-looking statements)

Directors & Officers Liability Survey
     Full D&O Limits Capacity (Millions)

Quarterly D&O Pricing Index

                   AON Risk Services

Correlation of the D&O Premium
            to the Market Indices

The Breakdown of AON Premium Index into
    Financial Sector and Other S&P Sectors

Recent Related Regulations:
 US, UK, China and Hong Kong

             Liability Policies @ CUHK
• Public Liability Insurance
   – HK$20,000,000 per occurrence / unlimited in aggregate
• Medical Malpractice Liability Insurance
   – HK$40M per occurrence / HK$80M in aggregate
• Directors & Officers Liability
   – HK$20,000,000 any on loss and in the aggregate
• Employees’ Compensation (HK$200M); Professional
  Indemnity; Motor Vehicle Third Party Liability, Marine
  Liability, Boiler Explosion Liability; Excess Liability
  (HK$363M)                                               76
        Liability Insurance, BOP

• BOP discussed in previous chapter also
  contains a business liability coverage form
  that provides general liability insurance to
  small- and mid-sized business firms.
• Basic coverage
• Amount of insurance
• Legal defense
• Exclusions
Example: Angela’s BOP
•    Angela owns and operates a small retail food
     store in Shatin shopping center. The store is
     insured for liability coverage under a BOP
     policy. Indicate whether the following situations
     are covered under Angela’s BOP.
a.   A clerk accidentally injures a customer with a shopping
     cart. Both Angela and the clerk are sued.

b.   A customer slips on a wet floor and breaks a leg.

                Example: Angela’s BOP
c.   Angela has a customer arrested for shoplifting. The
     customer is innocent and sues for damages.

d.   A woman returns a spoiled package of gourmet cheese
     and demands her money back.

e.   Angela has a Christmas party for her employees after
     the store closes. One employee gets drunk and injures
     another driver while driving home. The injured sues
     both Angela and the employee.

                    Answers to Angela’s BOP
•   a.     Both Angela and the employee are covered for the bodily injury to the
    customer. Under the Businessowners Policy, the definition of the insured also
    includes employees while acting within the scope of their duties.
•   b.     Covered. The policy covers bodily injuries to customers arising out of
    defects in the premises.
•   c.     Covered. Personal injury is covered under the Businessowners Policy,
    which includes defamation of character and false arrest.
•   d.     Not covered. Although the policy provides products liability coverage,
    damage or loss to the product itself is not covered.
•   e.     Covered. Under the Businessowners Policy, there is an exception to the
    usual liquor liability (dram shop law) exclusion. Host liquor liability coverage
    is provided if alcohol is served at functions incidental to the insured's business.
    Angela is covered for the suit. Although the definition of insured includes
    employees who are acting within the scope of their duties, the intoxicated
    employee is not covered since he or she is on the way home and is not acting
    on the employer's behalf.