The overall intent of the liability coverages of homeowners policies is to insure for liability to third parties arising out of the ownership, use, and occupancy of insured premises. The liability coverages of homeowners policies are not general liability coverages. Other liability exposures generally need to be insured separately. This can include the liability arising from business pursuits or from ownership and use of automobiles, watercraft, aircraft, and other vehicles (motorcycles, all terrain vehicles, snowmobiles, etc.).
The physical organization of the liability coverages of homeowners policies is essentially the same as that of the property coverages. The policy’s declarationswill specify the liability policy limits. If the policy’s definitionsappear at the beginning, rather than at the end of the policy, they follow the declarations and contain the definitions of terms pertinent to the liability coverages.
The liability insuring agreement(or coverage grant) generally appears in the policy as the next section following the conditionsapplicable to the property coverages. The liability exclusionsfollow next, followed in turn by the liability additional coverages.The liability conditionsappear next. The basic homeowners policy concludes with the conditionsthat apply to both the property and the liability coverages. Endorsementsthat modify the property and liability coverages are attached at the end of the policy after the basic policy form ends.
INSURED CAPACITY ISSUES
As with the discussion of the property portion of the policies, the liability provisions will be examined based on the ISO HO 3 policy, and who is an insured and who is not marks the first step of analysis. Generally, resident relatives are insureds, as are resident nonrelatives under the age of 21 in the care of a named insured or a resident relative of the named insured. Unlike the case with property coverages of homeowners policies, there typically are no additional insured interests with respect to the liability coverages of homeowners policies. Correctly designating the named insureds under the liability coverages of homeowners policies where property that is the subject of the policy is owned by a trust is important. It is becoming increasingly common for persons to create trusts for estate planning and other purposes and to transfer titles to various kinds of property, including their personal residence, to the trust. If you have done this, you need to consult with your agent in order to assure that all persons are properly designated in the policy as insureds for purposes of the liability coverages. In most cases, allthe following need to be designated as named insured:
the trust itself;
the trustees of the trust, designated by name and described as the trustees of the trust; and,
(assuming the same individuals are the de factoowners and occupants of the premises) these individuals in their individual capacities.
The concept of insured locationfor purposes of the liability coverages of homeowners policies begins with the same definition as applicable to the property coverages (see p.43). Insured location includes the residence premises as that term is separately defined and then extends to various other locations.
The policy then limits that rather broad scope of insured location for purposes of the liability coverages by means of an exclusion that precludes coverage for liability arising out of premises:
owned by an insured;
rented to an insured; or,
rented to others by an insured that is not an insured location.
Functionally, liability coverages are less location-specific than they are activity-specific. Thus, the geographic scope of coverage is controlled more by the nature of the liability-producing conduct than where the conduct takes place.
The liability coverage-insuring agreement of the homeowners policy establishes two basic duties on the insurer’s part to the insured: the duty to defend and the duty to indemnify.
In contrast to the property coverages of the homeowners policy, the insuring agreement coverage grant of homeowners policies is relatively simple and can be summarized as follows. The insurer will pay damages that an insured becomes legally obligated (or liable) to pay because of bodily injuryor propertydamagecaused by an occurrence. The insurer will also defend the insured in suits seeking such damages by counsel chosen and paid for by the insurer.
The bodily injury or property damage must occur during the policy period. The insurer generally has the right to settle any claims or suit against the insured at its discretion. The insurer’s duty to defend terminates upon payment of the full liability policy limits.
Thus, the meanings of bodily injury, property damage, and occurrenceare crucial to an understanding of how liability coverages work. Occurrence is the most central concept applicable to liability insurance. The definition of occurrence in the ISO HO 3 homeowners policy states:
Occurrence means an accident, including continuous or repeated exposureto substantially the same general harmful conditions, which result duringthe policy period in: (a) bodily injury; or, (b) property damage.
The concept of coverage for liability arising from accidents is how the fortuity element essential to insurance is incorporated into liability coverages. An accidentis an unintentional, unexpected, chance occurrence or event. The occurrenceis the causal event and the bodily injury or property damage is the result or consequence of the occurrence.
It is the liability-producing act or conduct that must be an accident, not the resulting bodily injury or property damage. Bodily injury or property damage that is unintended or unexpected by an insured is not covered if it is the product of intentional, nonaccidental conduct. Coverage turns on the insured’s intent to commit the act in question, not on his or her state of mind in performing the act. Therefore, it does not matter whether the insured expected or intended his or her conduct to cause harm. An accident can result from a deliberate act, but only when some additional, unexpected, independent, and unforeseen event happens that causes the injury or damage in question.
This is a good time to discuss the personal injury coverage that is included in some homeowners policies, or that is an optional coverage to be added by an endorsement to others (such as the ISO HO 3 policy). As noted, while there are some variations from insurer to insurer, personal injury liability coverage extends to five basic categories of acts or conduct. These include:
- false arrest, detention, or imprisonment;
- libel, slander, defamation, or product disparagement;
- malicious prosecution (which may include abuse of process);
- wrongful eviction, wrongful entry, or violation of right of private occupancy; and,
- invasion of or violation or of right of privacy.
None of these categories of conduct can be an accident. As a result, most homeowners liability coverages refer to the covered events as offenses, rather than attempting to subject them to the policy’s occurrence/accident require ment. There is a temporal difference between the accident-based bodily injury and property damage coverage and the offense-based personal injury coverage. Coverage applies to bodily injury and property damage that occurs during the policy period, regardless of when the occurrence that causes the bodily injury or property damage takes place.
In contrast, the offense-based personal injury coverage applies to offenses that the injured commits during the policy period. As noted, the personal injury offenses involve intentional conduct. There are, however, limitations on the scope of coverage for these categories of intentional acts. (These are discussed in the context of exclusions that apply to the personal injury coverages.)
Personal Injury Additional Coverages
There is a single additional coverage under the ISO personal injury endorsement—for loss assessments up to $1,000 each assessment for the insured’s share of loss assessments made as the result of covered personal injury.This provision is substantially similar to the bodily injury and property and additional damage for loss assessments.
Bodily injurymeans bodily harm, sickness, or disease, including required care, loss of services, and death that results. There really are not any hidden concepts here. Everyone can readily appreciate that if someone is hurt as the result of an accident for which you may be held liable, that person’s damages include many things, such as:
his or her medical and hospital bills;
past and future wage loss or earning capacity;
costs of ongoing care; and,
damages for his or her inability to enjoy the activities enjoyed prior to the injury.
What can be an issue is whether mental or emotional distress constitutes bodily injury in the absence of physical injury. A growing trend in the law is the view that emotional distress that is the product of noncovered conduct does not constitute bodily injury within the meaning of standard liability policy definitions of bodily injury. For example, emotional distress that is the product of economic loss, such as the loss in value of an investment or savings, does not constitute bodily injury under this view.
The standard ISO HO 3 homeowners policy contains the following definition of property damage.
Property damage means physical injury to, destruction of, or loss ofuse of tangible property.
The concept of physical injuryto tangible property is central to an understanding of the property damage coverage of liability policies. This physical injury to tangible property requirement has the effect of excluding coverage for damages claims based on injury to nontangible property interests. Even the loss of useportion of the property damage definition is tied to tangible property.
Tangible propertymeans property having physical substance, apparent to the senses. Examples of intangible property are things such as easements, leasehold interests, licenses, patents, copyrights, lost profits, loss of goodwill, loss of the expected benefit of a bargain, and loss of value of an investment. Diminution in value of an investment constitutes economic loss, not property damage. However, diminution in value of tangible property as the result of physical injury can be used as a measure of damages resulting from physical injury to tangible property.
EXAMPLE:Let’s say an adjoining landowner has an easement across your property for access to the street or highway. You build a fence across your property, including across the easement, that prevents access.
The adjoining landowner sues you. His lawsuit would not constitute a covered property damage claim. Your interference with his easement is interference with intangible property rights. The physical injury element is also missing.
Another example of a noncovered economic loss claim would be a suit against you arising out of your sale to another person of a car or motorcycle that breaks down and requires expensive repairs shortly after the sale. There is no property damage here. Rather, the essence of the claim is an economic loss—loss of the buyer’s expected benefit of the bargain. The buyer paid a certain amount for the car or motorcycle on the expectation that it was in good working order, when, had its true condition been known, the fair purchase price would have been much less.
Similar comments would apply to a suit against you by a buyer of a house for alleged nondisclosure or concealment of defects in or damage to the house, such as nonpermitted alterations or remodeling.
What about loss of use property damage claims? An example of a covered loss of use claim is as follows. Your residence is situated upslope from one of your neighbors. The hillside, on your property, becomes unstable, causing the local authorities to order your neighbor and his family out of their home until the hillside can be stabilized. Your neighbor has lost use of tangible property, his house and premises, during the period required to stabilize the hillside. He would have a loss of use property damage claim against you. Some homeowners policies’ property damage definitions only extend loss of use coverage to tangible property that has been physically injured. Thus, assuming the same facts as the preceeding example, under a policy whose property damage definition only extends to loss of use of tangible property that has been physically injured, your neighbor’s suit against you would not constitute a covered property damage lawsuit.
DUTY TO DEFEND AND RELATED ISSUES
As noted, the liability coverage of a homeowners policy includes two primary promises by the insurer—the duty to defend (to provide you with a legal defense to lawsuits seeking covered damages) and the duty to indemnify (to pay covered judgments or settlements on your behalf). These two related duties are governed by different standards in a number of respects.
The existence of the duty to defend is determined at the outset of the lawsuit against you and depends on whether there is a potential for an award of damages against you that would be covered by the policy. Under the ISO HO 3 homeowners policy, the insurer is expressly obligated to provide you with a defense to lawsuits that are groundless, false, or fraudulent, as well as lawsuits that have some actual or potential merit.
In some jurisdictions, whether a duty to defend a suit exists is determined solely by comparing the allegations of the complaint in the lawsuit against you with the terms of the policy. This is done without regard to any facts known at the time of the lawsuit that are extrinsic to (that is, not alleged or stated in) the complaint. This approach can cut both ways. In some cases, the insured may be aware of and communicate facts to his or her insurer that are extrinsic to the complaint and that suggest that coverage exists. However, the insurer need not consider them and can deny a duty to defend if the allegations of the complaint do not bring the lawsuit within coverage. On the other hand, there may be a situation in which the complaint alleges facts that trigger a duty to defend and the insurer knows of facts extrinsic to the complaint that would otherwise negate a duty to defend. In this case, the insurer cannot consider those facts and must provide a defense solely on the basis of the complaint’s allegations.
In a growing number of jurisdictions, facts extrinsic to the third-party claimant’s complaint that are known at the outset of the lawsuit can be considered by the insurer in determining whether a defense is owed.
The costs of defense are covered in addition to the policy limit, meaning that the insurer pays for the fees and costs incurred by the lawyer who defends you in the lawsuit as well as a resulting judgment or settlement. These costs can include filing fees for motions, photocopying charges, costs of obtaining evidence with which to defend the lawsuit, court reporter and deposition costs, etc.
Because legal fees and costs can be prohibitively high for most persons, the law in most states requires that the duty to defend be construed broadly and that the insurer makes its coverage decision promptly. Generally, any doubt as to whether a duty to defend exists is resolved in the insured’s favor.
Sometimes the facts alleged in the third-party claimants complaint suggest the possibility of liability on the insured’s part both for damages that would be covered and damages that would not be covered. Under most states’ laws, the insurer is obligated to defend the entire lawsuit, not just the claims that are potentially covered. A common example is a bodily injury suit based on a physical altercation in which the claimant alleges that the defendant’s conduct was either accidental orintentional. Another common example is a libel or slander suit that suggest that the defendant uttered the libel or slander with knowledge of the falsity of his or her statements.
In such cases, the insurer will generally defend a subject to a reservation ofrights. In a reservation of rights letter, the insurer informs the insured that it will be providing a defense, and points out the factual and legal grounds as to why coverage may not exist. It then reserves the right to refuse to pay a judgment or settlement if the facts adjudicated in the lawsuit establish one or more grounds under the policy for denying coverage. Sometimes, insurers also reserve the right to withdraw from the defense of a lawsuit if facts become known before the lawsuit is concluded that establish that no coverage exists.
In many states, when an insurer issues a reservation of rights that creates a conflict of interest between the insured and the insurer, the insured may be entitled to be defended, at the insurer’s expense, by counsel of the insured’s own choosing, rather than by counsel hired by the insurer. The insurer may also be required to relinquish control over the defense and settlement of the suit to the insured and the insured’s selected counsel.
If you find yourself in a situation in which your insurer has issued a reservation of rights with respect to a lawsuit against you, consult an attorney. You must find one at your own expense to advise you whether, under your state’s local law, you are entitled to a defense by counsel of your own choosing. Next, you must determine whether you should exercise that right.
Some homeowners policies’ liability insuring agreements state that the insurer has no obligation to pay for a defense by counsel selected by the insured due to a coverage dispute between the insurer and the insured. Such provisions are likely to be held unenforceable. What may be permissible is for the insurer to include a provision that permits the insured to select his or her defense counsel from a list of law firms supplied by the insurer in the event the insurer issues a qualifying reservation of rights.
While an insurer has the right to investigate and settle claims, it only has an obligation to defend suits—that is, formal court proceedings. As a practical matter, many, if not most, insurers will hire defense counsel if a claim is made that shows serious potential to evolve into a suit.
Second, a duty to defend arises upon notice by the insurer to the insurer of the suit. Such notice is also referred to as tenderof the defense of the lawsuit to the insurer.
Termination of the duty to defend can be a more complex issue. First, the policy expressly provides that the duty to defend ends when the insurer has paid the full liability policy limits and settlement of the suit or in satisfaction of the judgment entered in the lawsuit. Full payment of the policy limit is also termed exhaustionof the limits of the policy.
The duty to defend also terminates if the suit is concluded and no damages are awarded against the insured, unless the claimant takes an appeal. In this case, the duty to defend continues and requires the insurer to defend on appeal too.
Finally, insurers sometimes unilaterally withdraw a defense upon learning facts that, in their view, negate coverage. This is a permissible action under the law of most jurisdictions. If the insurer is mistaken, however, the consequences of an erroneous unilateral withdrawal of a defense can be substantially the same as those consequences of an erroneous denial of a defense at the outset of the lawsuit against the insured. For this reason, insurers often will withdraw a defense only after a court has ruled that no coverage exists in a declaratory relief action. When there is a coverage dispute between the insured and the insurer, either may institute a declaratory judgment lawsuit in order to have the coverage issues decided by a judge.
DUTY TO INDEMNIFY
The existence of a duty to indemnify is determined at the end of the third-party claimant’s lawsuit against the insured based on the facts as adjudicated in that lawsuit. If the insurer has made a decision to settle the case and not let it go to trial, its payment of the settlement is covered under the policy’s indemnity coverage. Virtually all settlements include denials of liability, even if one of the reasons for the insurer’s decision to settle may have been that the case was one of probable liability. Insurers settle cases brought against insureds for a lot of reasons, including a weighing of whether the costs of defense and the risks of an adverse justify proceeding with trial. Insurers have to be coolheaded and practical. The more money they can save through judicious settlements, the lower their costs of doing business are and, ultimately, the lower the costs of insurance for all their policyholders will be.
Unlike the potential for coveragestandard for deciding whether a duty to defend exists, a duty to indemnify is determined by an actual coveragestandard. Often, this is clear—when the jury rules for the plaintiff in the lawsuit against the insured, it is implicit from the jury’s decision that they have decided that the facts determine the coverage issues and thus the insurer’s obligation to pay.
insurer is mistaken, however, the consequences of an erroneous unilateral withdrawal of a defense can be substantially the same as those consequences of an erroneous denial of a defense at the outset of the lawsuit against the insured. For this reason, insurers often will withdraw a defense only after a court has ruled that no coverage exists in a declaratory relief action. When there is a coverage dispute between the insured and the insurer, either may institute a declaratory judgment lawsuit in order to have the coverage issues decided by a judge.
DUTY TO INDEMNIFY
The existence of a duty to indemnify is determined at the end of the third-party claimant’s lawsuit against the insured based on the facts as adjudicated in that lawsuit. If the insurer has made a decision to settle the case and not let it go to trial, its payment of the settlement is covered under the policy’s indemnity coverage. Virtually all settlements include denials of liability, even if one of the reasons for the insurer’s decision to settle may have been that the case was one of probable liability. Insurers settle cases brought against insureds for a lot of reasons, including a weighing of whether the costs of defense and the risks of an adverse justify proceeding with trial. Insurers have to be coolheaded and practical. The more money they can save through judicious settlements, the lower their costs of doing business are and, ultimately, the lower the costs of insurance for all their policyholders will be. Unlike the potential for coveragestandard for deciding whether a duty to defend exists, a duty to indemnify is determined by an actual coveragestandard. Often, this is clear—when the jury rules for the plaintiff in the lawsuit against the insured, it is implicit from the jury’s decision that they have decided that the facts determine the coverage issues and thus the insurer’s obligation to pay.
Sometimes, however, the facts as adjudicated in the action against the insured leave the coverage issues unclear. Any number of things can happen. The insurer can simply agree to pay the judgment to conclude the lawsuit. Or, the insurer will sometimes pay the judgment subject to a reservation of rights to litigate the coverage issues in a separate lawsuit called a declaratoryrelief action. A declaratory relief action is a lawsuit by an insured or an insurer in which the court is asked to review the facts and the policy and to decide whether the claim is or is not covered.
When a homeowners policy provides personal injury coverage, the same issues relating to the existence of a duty to defend and duty to indemnify exist as is with the bodily injury and property damage coverage. The only real difference is the nature of the insured’s conduct and resulting injury for which the claimant is suing the insured for damages.
MEDICAL PAYMENTS COVERAGE
Medical payments coverage is essentially a low-limit, no-fault coverage intended to deal with low-value bodily injury claims on a quick and informal basis. Typical medical payments limits of liability range between $1,000 and $10,000 per person, per accident. The medical payments coverage of homeowners policies is generally included as part of the basic policy premium without any separate or additional premium.
The insuring agreement of the medical payments coverage of the ISO HO 3 homeowners policy provides that the insurer will pay necessary medical expenses that are incurred or are medically ascertained within three years from the date of an accident that causes bodily injury.Medical expenses are defined as reasonable charges for medical, surgical, X-ray, dental, ambulance, hospital, professional nursing, prosthetic devices, and funeral expenses. The medical payments coverage does not apply to persons insured under the policy.
For medical payments coverage to apply, the person seeking payment must have been on an insured location with the permission of an insured. The medical payments coverage also applies to a person off an insured location if the bodily injury in question:
arises out of conditions on the insured location or on the ways immediately adjoining (i.e.,streets, roads, sidewalks, etc.,); and,
is caused by the activities of an insured; or
is caused by a residence employee (housekeeper, gardener, nanny, etc.) in the course of the residence employee’s employment by an insured; or,
is caused by an animal owned or in the care of an insured.
Medical payments coverage usually does not vary greatly from one insurer to another due to the relatively low exposure to loss that such provisions present to insurers. Nonetheless, the medical payments coverages present a valuable resource in the event of a minor injury occurring to someone on your premises that comes within the scope of that coverage. Often, in such cases, prompt payment by your insurer under the medical payments coverages may help to avoid a later lawsuit. The prompt attention to the situation and prompt payment of the injured party’s medical bills can take some of the sting out of an accident, leaving the injured parties less disposed to sue.
The medical payments coverage is limited by exclusions and will be reviewed in the discussion of all the exclusions that apply to a homeowner’s liability coverages in Chapter 10.
Liability coverages also have some additional coverages. Some of these additional coverages can be significant in their impact.
The first category listed under additional coverages is claims expenses.These are items that relate primarily to the defense of lawsuits. There are four subcategories of claims expenses that are covered.
First, they include expenses the insurer incurs (this includes the fees and expenses of defense counsel plus costs taxed against the insured such as:
costs of service of process;
transcripts of court proceedings;
photocopying costs; and,
Second, the liability additional coverages include coverage for premiums for bonds required in suits that the insured appeals. The most likely application of this provision is if there is an adverse judgment against the insured and a decision is made to appeal the judgment. Universally, in order to prevent the winning party from collecting on his or her judgment while the case is on appeal, the losing party must post an appeal bond. If an appeal bond is posted, the winning party cannot engage in collection efforts until the appeal has been decided.
Appeal bonds are not cheap. An appeal bond usually must be posted in an amount ranging from 150% to 200% of the amount of the judgment. This is to cover the judgment as well as the interest accruing on the judgment while the appeal remains pending. Further, an insurer is required only to pay for the premium for an appeal bond, not to provide the collateral for the 150% to 200% bond amount. If the amount of the judgment against the insured exceeds the liability policy limit, the insurer is only required to pay that portion of the premium for the appeal bond that is in proportion to the amount of the judgment within policy limits.
As a practical matter, the fact that an insurer has no obligation to collateralize an appeal bond is a reason why many adverse judgments against insureds are paid, no appeal is taken, and the case ends. A great many insureds are simply unable, or unwilling, to post collateral for an appeal bond, particularly when there is a substantial risk that the insured could become liable on the bond and forfeit the collateral.
Third, claim expenses coverage includes reasonable expenses incurred by an insured at the insurer’s request. This includes actual loss of earnings, up to $250 per day, for assisting the insurer (and hired defense counsel) in the investigation or defense of a suit.
Fourth, the liability additional coverages include postjudgment interest that accrues prior to the time the insurer either pays the judgment or pays a court that portion of the judgment for which the insurer does not contest coverage.
First Aid Expenses
The next category of liability additional coverages is for first aid expenses incurred by an insured for covered bodily injury. This coverage excludes first aid expenses for bodily injury to an insured, and is in addition to both the personal liability limit as well as the separate limit applicable to the medical payments coverage. First aidis not defined in the policy and should be interpreted according to its ordinary meaning.
Damage to Property of Others
This additional coverage extends coverage on a replacement cost basis, up to $1,000 per occurrence for property damage to property of others caused by an insured. There are some exclusions to this coverage. This additional coverage does not apply to any loss to the extent it is payable under the first-party property coverages of the policy, nor to loss to property owned by an insured. Property damage that is caused intentionally by an insured over the age of thirteen is also not covered. This additional coverage also excludes coverage for property damage to property owned by or rented to a tenant of an insured or resident of the named insured’s household.
The damage to property of others coverage does not apply to loss arising out of an insured’s business, out of premises owned, granted, or controlled by an insured other than the insured location, or out of the ownership, maintenance, occupancy, operation, use, loading or unloading of aircraft, watercraft, hovercraft, or motor vehicles.
The loss assessment additional coverage provides for up to $1,000 for the named insured’s share of a loss assessment charged against the named insured as owner or tenant of the residence premises by a condominium, homeowners, or cooperative association. This covers situations when the assessment is the result of covered bodily injury, property damage, or liability for a director, officer, or trustee while acting in that capacity. The person must have been elected by the association’s members and services without pay.
This additional coverage has some qualifications and limitations. The policy period condition does not apply—loss assessments imposed on members by homeowners associations virtually always occur long after the event that ultimately gives rise to the assessment takes place. The policy makes clear that the $1,000 limit applies to all loss arising out of any one accident or covered act of a board member, regardless of the number of assessments imposed.
EXAMPLE:If a board were to impose a $100 a month assessment arising out of one accident for a period of 15 months, the maximum amount recoverable by the insured would be $1,000. If the board were to impose a $100 per month assessment for a period of five months, and then six months later, impose a $100 per month assessment for a period of ten months arising out of a second and separate accident, the amount recoverable would be $1,500.
This additional coverage expressly excludes coverage for assessments charged against the named insured or the homeowners association by any governmental body. Thus, if your city imposes an improvement assessment for street repaving or some other project, no coverage exists under this provision.