Author: Nancy Germond

What does it mean when an adjuster reports that your insured is not “legally liable," so the carrier will deny the claim. This article explains the basics of legal liability so that you can explain it to your clients.

Legal Liability

We all have an obligation to act responsibly to avoid injuring others or damaging their property. The term “legal liability" describes a duty, enforceable by law in many cases, a person has toward others and their property. While there can be criminal codes that enforce conduct, this article will focus on liability that can have civil consequences. Negligence, a failure to act responsibly or a failure to act, can create legal liability.

Torts and Civil Liability

Torts are the basis of liability. A tort is a wrongful act against another, or an infringement of his or her rights. These torts can lead to civil liability.

Here are some examples of torts.

• Your insured runs a red light, and another vehicle strikes your insured's vehicle.
• Your insured's dog jumps up on an older woman at the local dog park and knocks her down. She breaks her hip.
• Your insured's tenant stopped paying rent and locked your insured out of the rental unit. Your insured hires a locksmith without providing notice to the tenant, breaks in, removes the tenant's possessions and locks out the tenant.
• Your insured loses his temper with a customer and pushes him out of his store. The customer falls and alleges an injury and emotional distress.
• Your insured's child goes wild on social media, posting inappropriate rumors about a schoolmate.

This chart may help.

There are torts that occur that include criminal liability. These can include driving under the influence or an assault allegation. These types of incidents may mean the adjuster must await some legal reckoning on the criminal aspect of the case before determining if the carrier has a duty to continue to defend and/or indemnify. In sexual abuse allegations, this is particularly true.

Contractual Disputes

In many instances, your insureds sign contracts that transfer liability with other entities or persons. These can include leases, sales contracts, service contracts and employment contracts, to list a few.

Your insureds may create situations that are not civil torts but arise out of contractual obligations. These can arise when your insured allegedly breaches a contract, for example, not delivering supplies or labor on time, or engaging in a dispute with a property owner over tenancy.

The general liability policy has exclusions for most breaches of contract, and the insured may well have to hire legal counsel to sort through those contractual issues. Click for an in-depth article on contractual liability.

For this article, we will focus on torts that a general liability, auto, or homeowner's policy would normally cover.

The Four-Pronged Test for Determining Liability

In any insurance textbook describing legal liability, you will read about the four-pronged test used to determine liability. For any adjuster, this test is second nature.

Here are the questions the adjuster will investigate to determine legal liability.

1.     Did your insured owe the other party a legally protected right or duty?

Did your insured owe the other party any duty, for example, to drive safely or to keep a reasonably safe and hazard-free premises? Or did your insured owe no duty, for example, being a bystander after a traffic accident should not create a duty to act for your insured.

2.     Did your insured breach the legally protected right or duty?

Did your insured act or fail to act, which created the accident or incident? For example, if your insured forgets to set the parking brake and her vehicle rolls downhill into a neighbor's house, that is a breach of duty.

3.     Did your insured's actions or failure to act create the damages?

The damages arising from the incident must be a direct result of your insured's breach. There are times when an intervening cause means that your insured is not responsible. An intervening cause is an occurrence that breaks the chain between the action that occurred and the harm to the victim. For example, if your insured caused an accident, and a passerby slowed down to view the wrecked cars and was rearended by another motorist, that second incident breaks that chain of legal liability.

4.     Did damage arise from your insured's negligence?

Suppose your insured ran a stop sign and another driver braked hard to avoid hitting her. The other party was uninjured but reports a claim anyway. In this case, there are no damages other than an upset other driver. Damages can include both economic and non-economic losses, such as loss of future earnings, disfigurement and pain and suffering.

The chart below may help explain the process to determine liability.

These are the four elements of legal liability. They are questions investigated by the adjuster on any liability claim. Often, the answers to the questions are clear, for example when your insured rearends another vehicle. In other cases, such as in a major snow event when a customer slips on ice and breaks a leg, the answer is not clear. In this instance, while your client, a convenience store owner, owes a duty to his or her customers to create a safe environment in which to shop, did they breach that duty given the extreme weather conditions?

Only a “yes" answer to all four of those questions creates liability.

Now, here is a big “however." There are times when liability is unclear or nonexistent, and yet the adjuster may pay the claim. This will upset your client, especially when that payment creates a rate increase. It will upset you when it impacts your agency's profitability.

The adjuster may refer to these as “nuisance settlements" or “cost-of-defense settlements," in larger cases. Explaining these decisions to your insureds is never easy, but you can refer your clients to the adjusters, who may be able to help assist your insureds in understanding why the adjuster paid the claim. You can also refer them to appropriate language in the policy allowing the carrier the discretion to settle the claim. Some professional liability policies may have a consent to settle clause which provides the insured with a voice in whether to settle; general liability and homeowners policies do not.

Other Negligence Theories

The above explains only the basic theory of liability. You may hear other liability theories and liability defenses from your adjusters, such as “attractive nuisance," “comparative negligence," “strict liability," “assumption of risk," or “res ipsa loquitor (it speaks for itself)."

If you have questions, a Google search or a search on the Big I website may help explain these more advanced theories of liability.

First published: October 14, 2022