Liability Insurance 101

You or your company got sued? Don’t let your personal assets be wiped out. Here’s a quick primer on this much misunderstood type of insurance
By J. Randell Tiongson, RFP®

Big companies get sued all the time. Take the case of Sulpicio Lines with the MV Princess of the Stars disaster. Imagine the cost of paying all the claims filed against that company. Without liability insurance, can you imagine how Sulpicio can ever recover from this unfortunate mishap?

If you think you or your small business is immune from legal claims, think again. Common folks are often confused or worse, disinterested in understanding the different kinds of insurance products. One of the most widely used insurance is also one of the most misunderstood, if not unknown. Tort, although civil in nature, can become very costly for a business or an individual.

What’s liability insurance?
Just what exactly is liability insurance? Is liability insurance created for the protection of the business or created for the protection of the public? What sort of liabilities does this insurance cover? Is it compulsory or not? These are some of the basic questions we have to answer to understand the concept of liability insurance. It is unfortunate that we often disregard things, items, and persons that are utterly important to us, e.g. (in the order of most forgotten or neglected), God, prayers, spouse, and our insurance policy. We remember them only when the situation calls for it.

When we talk about liability, we talk about legal claims of third persons for bodily injuries and or property damage. The most common and familiar probably is TPL (third party liability) for car insurance. Does this sum up about everything we need to know about liability insurance? Well, I hope not. CTPL for car insurance has its own specific provisions under the insurance code.

Basically, liability insurance is designed to protect the assets (business as well as personal) of a person or entity whether big or small from claims of their customers or even the general public that may suffer injuries or damages. There must be a causal relation (proximate cause) between the injury and the business. Liability insurers are not insurers of the body or property of third persons. Otherwise, no insurance company would cover such a peril or even engage in such business.

Who is really being protected?
According to Atty. Carlo Cariño, “Liability insurance for the protection of the business is not always the case. The Supreme Court looks at liability insurance in a slightly different way. This is important to know because interpretations made by the Supreme Court become part of the law of the land. Supreme Court has held time and again that liability insurance is designed for the protection of the public. This is why payment is made to the party injured and not to the insured. Moreover, the Supreme Court held that a ‘No Action’ provision in the liability insurance policy is null and void. A ‘No Action’ clause in liability insurance provides that the insured must first be sued and a final judgment obtained before liability attaches to the insurer.”

What is and isn’t covered?
Atty. Carlo says that liability insurance covers almost all sorts of liability incurred by the person insured. However, he points out, liability must not be the product of gross negligence on the part of either party. He says, “Gross negligence means that the acts attending the injury is characterized by a wanton disregard to safety, common sense of decency, diligence, contrary to public policy and good custom and thus amounting to fraud. The insurer cannot be held liable for a fraudulent act of the insured or of third persons. The policy does not contemplate to cover such a situation. No one should profit from any act of willful disregard to safety and common decency.”

Payment of liability by the insurance company is limited to actual losses for the injuries sustained. Unfortunately, different people are entitled to different claims. This is why insurance companies put up a ceiling. Any amount above the ceiling would have to be shouldered by the insured.

If a company or a person could face bankruptcy when faced against a liability claim, why would anybody want to take this business? Again, liability will not be shouldered by the insurance company alone. The risk of paying for a liability will be distributed to a “group.” This kind of insurance is a risk distributing device. This is also known as risk-pooling. This is a method used by all insurance companies.

How much to insure?
Moreover, insurance companies are allowed to limit the perils it will insure against. The insurance company also puts a ceiling as to the amount it would pay and would put clauses which would delimit its exposure to the risk. Some pertinent underwriting guidelines will also be applied in assessing the risk. Often, heavy equipment and machinery companies are hit hard. But that, notwithstanding, any type of business should get a substantial coverage.

Liability insurance is somewhat designed for the protection of the public as has been projected. Hence, this is the reason why some businesses are not permitted to operate unless the proprietor or the corporation is sufficiently covered by liability insurance. This is true with regard to businesses engaged in the transport of persons in contrast with a company engaged in the transport of cargos. The question is how substantial is substantial coverage? Determining this amount is quite tricky.

Liability varies depending on the circumstances of the case. For example, if the injured party is a lawyer or an executive with a top position, or when the company is engaged in exposing plenty of people to perils and hazards or when the business is engaged in the manufacture of hazardous materials or chemicals, the probability of injury becomes high or in the case of the persons who are exposed, the amount of compensation in case of an injury is quite substantial.

Is this a good excuse for negligence?
Another question comes to the fore. Given that liability insurance is present and sometimes compulsory, would it not promote recklessness instead of safety? In other words, is liability insurance really for the promotion of the public’s welfare? The answer to that is quite simple.

First, liability insurance is not the final answer to liability claims. Remember, it does not answer for all kinds of liability. Also, the Supreme Court has held many cases sustaining the refusal by the insurance company to pay (existence of fraud or by reason of estoppel). Second, the insured person or entity would not be able to get coverage the next time due to what is known as moral hazard. Third, moral and exemplary damages (awarded if proven that there is gross negligence) are not covered by liability insurance. These claims could also be in an amount as much or even more than the actual damages claimed. Finally, settlement of civil liability does not extinguish criminal liability (criminal negligence may be present). Besides, the idea that anyone who would want to expose himself to unnecessary risk just because he has some form of insurance coverage is just absurd.

Indeed, liability insurance promotes safety and commerce. The intangible consolation for those with business is that it is comforting to know that you do not have to worry so much about liability and thus concentrate on the sound operation of the business. Moreover, compared to the cost of insurance than saving a hefty amount to cover liability claims, the former is cheaper. You do not have to infuse into the price of your product a substantial amount to cover liability claims in the future. Your goods become competitive. Operating expenses are simpler and relatively efficient. Some comprehensive fire insurance has (limited) liability coverage. Review your insurance policy and make sure everything is clear.

J. Randell Tiongson is a training specialist, personal finance educator, coach, and a director of the Registered Financial Planning Institute. He has been engaged in the various facets of the financial services industry for nearly two decades. He is also the co-founder of www.income-tacts.com with Efren Ll. Cruz, an interactive site dedicated in the financial literacy of every Pinoy. For inquiries, you may send an e-mail to randellt@gmail.com.

Atty. Carlo Cariño is a lawyer and a legal expert on the area of Financial Services. To get in touch with him, you may send an e-mail to carmalaw@gmail.com. J. Randell Tiongson and Carlo Cariño are part of the Personal Finance Advisors Philippines Corp. which is engaged in the conduct of public talks, training, and consultancy services.