Legal Foundations of Liability

Underwriting 1
Legal Liability: Torts, Contracts, and
Statutes
Every person and all organizations are exposed to liability loss. The possibility
of a liability loss is a liability loss exposure. To be able to identify, analyze, and Liability loss
properly handle an organization’s liability loss exposures, one must under- Any loss that a person or
stand the concept of legal liability and the common sources of liability loss an organization sustains
exposures. as a result of a claim or
suit against that person or
Anyone who wishes to evaluate an organization’s liability loss exposures must organization by someone
understand the various ways in which the organization may become legally seeking damages or some
other remedy permitted
liable. Legal liability imposed by civil law can be based on torts, contracts, or
by law.
statutes.
Legal liability
A liability insurance policy typically obligates the insurer to defend the The legally enforceable
insured against allegations that, if true, would be covered under the policy. obligation of a person or an
Therefore, an organization can experience a liability loss even as a result of organization to pay a sum
of money (called damages)
a suit in which it is not legally held liable. In addition, the policy obligates
to another person or
the insurer to pay damages for which the insured is legally liable. In most organization.
liability claims in which the insurer believes that its insured is legally liable, it
attempts to settle the claim (by offering to pay a certain amount of damages to
the claimant) in order to avoid the additional expense of a court proceeding.

Civil Law and Criminal Law

Legal liability can be imposed by civil law, criminal law, or both. Liability Civil law
insurance responds to liability imposed by civil law. Insurance for criminal A classification of law that
liability is prohibited by law. applies to legal matters not
governed by criminal law
In some instances, a single act can constitute both a civil wrong and a crime. and that protects rights
For example, if a driver causes the death of a pedestrian, law enforcement and provides remedies for
authorities may charge the driver with vehicular homicide, a criminal act. breaches of duties owed to
others.
The driver may also be subject to a civil action by the estate of the deceased
pedestrian for medical bills, funeral expenses, loss of support, and other Criminal law
damages that the law allows. Insurance coverage would not respond to the The branch of the law
that imposes penalties for
criminal charges. It could, however, provide payment for the civil claims.
wrongs against society.
Civil liability can be based on torts, contracts, or statutes. See the exhibit
“Bases for Legal Liability.”

1.3
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1.4 Underwriting Commercial Liability

Bases for Legal Liability

Legal Liability

Torts Contracts Statutes

• Negligence • Hold-harmless or • Workers
• Intentional torts indemnity agree- compensation
ments • Other statutes that
• Strict liability torts
• Breach of contract define legal duties
and standards of
care

[DA02515]

Legal Liability Based on Torts

Tort Torts may be civil wrongs or private wrongs. Most of the claims covered by
A wrongful act or an liability insurance are based on tort law, which protects the rights of individu-
omission, other than a crime als. These rights originally included the rights to security of person, property,
or a breach of contract, that and reputation. Over the years, legal changes have established other rights
invades a legally protected
of individuals, such as the right to privacy. Where a right exists, others have
right.
a corresponding duty to respect it and to refrain from any act or omission
that would impair or damage it. Any wrongful invasion of legally protected
rights entitles the injured party to bring an action against the wrongdoer for
damages.
Underwriting Tip—Tort law varies by state. Liability underwriters should know tort law in
general and the specifics of tort law in states in which they underwrite. To properly evaluate
applicants for liability insurance, underwriters should also monitor related developments in
state courts.

The numerous types of torts fall into three broad categories:

• Negligence
Negligence • Intentional torts
The failure to exercise • Strict liability torts
the degree of care that
a reasonable person in Negligence is based on four elements:
a similar situation would
exercise to avoid harming
• A duty owed to another person
others. • A breach of that duty

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 Legal Foundations of Liability Underwriting 1.5

• A close causal connection between the negligent act (breach of duty) and
the resulting harm
• The occurrence of actual loss or damage of a type recognized by law and
measurable in monetary terms
For example, a motorist who drives at an unsafe and excessive speed and, as
a result, causes an accident that injures another motorist has committed the
tort of negligence.
A negligent act does not in and of itself qualify as the basis for a negligence
tort. All four elements of negligence must be present. For example, a motorist
who is driving at an unsafe speed and who narrowly misses another vehicle
has not committed the tort of negligence, although the act is negligent. The
motorist who is driving negligently may receive a ticket, but the motorist
whose vehicle was narrowly missed does not have the basis for a tort of negli-
gence because he or she did not experience actual loss or damage.
An intentional tort is a tort committed by a person who foresees (or should be Intentional tort
able to foresee) that his or her act will harm another person. The act does not A tort committed by a
necessarily have to be performed with malicious or hostile intent. An example person who foresees (or
of an intentional tort is libel, the publication of a false statement that dam- should be able to foresee)
that his or her act will harm
ages a person’s reputation.
another person.
Strict liability (or absolute liability) is liability that is imposed even though Strict liability
the defendant acted neither negligently nor with intent to cause harm. (absolute liability)
Common examples of strict liability include liability for abnormally danger- Liability imposed by a
ous instrumentalities (such as wild animals), ultrahazardous activities (such as court or by a statute
in the absence of fault
blasting), and dangerously defective products (such as malfunctioning smoke
when harm results from
detectors). activities or conditions that
are extremely dangerous,
Strict liability is also used to describe liability imposed by certain statutes,
unnatural, ultrahazardous,
such as workers compensation laws. extraordinary, abnormal, or
inappropriate.

Legal Liability Based on Contracts

In addition to torts, contracts also impose legal liability. If one party fails Contract
to honor the promise, the other may go to court to enforce the contract. A legally enforceable
Liability based on contracts can arise out of either a breach of contract or an agreement between two or
agreement one party has made to assume the liability of another party. more parties in which each
party makes some promise
Breach of contract is a failure to fulfill one’s contractual promise. A common to the other.
type of breach of contract involves the promise (called a warranty) made by Breach of contract
a seller regarding its product. If the product fails to fulfill its promise, the war- The failure, without
ranty has been breached, and the buyer can make claim against the seller. The legal excuse, to fulfill a
warranty may be either expressly stated or implied by law. For example, the contractual promise.
law implies a warranty that every product is fit for the particular purpose for
which it is sold. If the product is unfit for its intended purpose and the buyer is
injured as a result, the seller may be held legally liable for damages.

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