Understanding the Liability of Insurance

Insurance is a means of protecting individuals, businesses, and other entities from financial loss. It is a contract between the insurer and the insured, where the insurer agrees to compensate for the loss suffered by the insured in return for the payment of a premium. However, in some cases, the liability of the insurer may be disputed, leading to litigation. This article discusses the different types of insurance liability and how they are interpreted in law.

Types of Insurance Liability

There are two types of liability in insurance – primary and excess. Primary liability refers to the responsibility of the insurer to pay for the insured’s losses up to the policy limit. Excess liability, on the other hand, is the responsibility of the insurer to pay for losses that exceed the policy limit.

Primary liability is common in most insurance policies, such as auto insurance, homeowner’s insurance, and general liability insurance. For example, if a homeowner’s insurance policy has a limit of $200,000, and a fire causes damage worth $150,000, the insurer has to pay the entire amount. However, if the damage caused is worth $300,000, the insurer is liable for only $200,000, and the homeowner is responsible for the remaining $100,000.

Excess liability is mostly applicable in commercial insurance policies, where the insured has several primary policies to cover their losses. For example, if a business has a general liability policy with a limit of $1 million and a specific policy covering product liability with a limit of $500,000, and a customer sues the business for $1.5 million in damages, the general liability policy will pay for the first $1 million, and the product liability policy will pay for the excess $500,000.

Interpretation of Insurance Liability in Law

Insurance liability is interpreted based on the terms of the policy and the law applicable to the jurisdiction. The terms of the policy outline the risks covered, the exclusions, and the limits of liability, among other things. The law applicable to the jurisdiction outlines the legal requirements for insurance policies, such as minimum coverage requirements for auto insurance.

When interpreting insurance liability in law, the courts apply the principle of good faith and fair dealing. It means that the insurer and the insured must act in good faith towards each other while fulfilling their obligations under the insurance contract. If either party fails to act in good faith, the other party may have grounds to sue for breach of contract.

The courts also consider the principle of proximate cause when interpreting insurance liability. It means that the insurer is responsible for the loss caused by the event that was the proximate cause of the loss. For example, if a person gets into a car accident and suffers a broken arm, the insurer is responsible for covering the medical expenses related to the broken arm, but not for the loss of income due to the inability to work.

Frequently Asked Questions

Conclusion

Insurance liability is a complex matter, and its interpretation may vary depending on the terms of the policy and the jurisdiction. Understanding the different types of insurance liability and their interpretation in law is essential in making an informed decision while purchasing insurance and while litigating insurance claims. By acting in good faith towards each other under the insurance contract, the insurer and the insured can ensure that the insurance process remains smooth and streamlined.