PUBLIC LIABILITY INSURANCE

Introduction

Individuals and organizations purchase liability insurance because they are exposed to the
risk of legal liability claims being made against them by third parties. Various liability
policies exist to protect the insured from this risk e.g. -employer's liability, professional
indemnity, products liability and others. In dealing with liability insurance generally, it
should be noted that two relationships are involved;

a) The relationship between the insured and the third party which forms the basis of
the claim. This relationship is governed by the law of obligations, in most cases the Jaw
of delict.

b) The relationship between the insured and the insurer. This is governed by a
combination of the law of contract and insurance law.

The first relationship forms the source of liability of the insured to the third party and the
law of delict plays a key role. However the basis of liability is by no means confined to
the law of delict alone. The other sources of liability like breach of statutory duty and
contract are also relevant. Liability sources continue to widen in terms of their scope and
this trend is set to continue. The second relationship forms the basis of liability insurance
as an area of study. The two relationships are so inter-linked that one cannot be divorced
from the other. Thus one cannot understand public liability insurance in particular
without a good understanding of the law of delict. Likewise, most of the defences that
can be raised in the face of liability claims tend to be legally rooted.

Scope of cover

Public liability insurance covers the insured for legal liability claims by third parties
arising as a result of the insured's business or other activities. A typical operative clause
of a public liability policy may read;

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The insurer will indemnify the insured against damages which the insured shall become
legally liable to pay consequent upon accidental death of or bodily injury to or illness of
any person or accidental loss of or physical damage to tangible property occurring
within the territorial limits during the period of insurance in the course of or in
connection with the business.

From the operative clause, it is clear that a public liability policy is all indemnity policy
to which all the principles of indemnity apply. The policy only pays where the insured is
legally liable to compensate the injured third party. This phrase is usually not defined in
the policy itself. However, the insured is legally liable if it is clear that at-law a
competent court will rule that the insured should compensate the third party. The policy
does not specify the basis of liability hence the insured will be legally liable if the courts
rule him to be so. However, any defence that absolves the insured from liability
automatically extinguishes the legal liability of the insurer as well. It is therefore not
possible for the insurer to be liable for a claim in the absence of the insured's legal
liability.

The policy covers bodily injury claims and not other forms of personal injury like
defamation and injuria. In addition, only accidental Joss or damage to property is
covered. Pure financial losses are excluded. The word 'accident' in the operative clause
underscores the fact that the event that causes the loss must be unplanned and unexpected
at least from the insured's point of view.

The operative clause also uses the word "occurring" and this means the insurer will
indemnify the insured for all claims that occur within the period of insurance. Thus the
insurer is exposed to claims that are made years after the policy was issued as long as
their date of occurrence can be traced to the period of insurance when the insurer
provided cover. This long-tail can be worsened by gradually-occurring loss-causing
events like pollution and occupational diseases. American courts have introduced the
notion of a multiple trigger (or continuous trigger) which accepts that liability policies

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may be triggered by more than one event. Consider a case of pollution. The pollution
may occur gradually over a long period of time and the consequences only become
manifest after several years or decades. The issue then becomes when did the loss occur
for purposes of identifying the policy that should be liable for the loss. Some may argue
that the loss occurs when the results of the pollution start to show because prior to that
there is no way of telling whether pollution has indeed taken place or not. A counter
argument maybe that the loss occurs when the polluting substances were first released
regardless of when the consequences become manifest. The California Appellate court
ruled that in situations such as this, the policyholder can tap all of its public liability
policies that were in place from the time the pollution first began until the pollution is
known (Gordon, 1991 "Court broadens pollution cover trigger"). Clearly this approach is
very liberal and in a way it does appear that the courts in America are placing less
emphasis on the issue of occurrence to determine liability exposures. Thus all the insurers
who were on risk at some point leading to the discovery of the pollution may be called
upon to participate in the claim based on the ruling made in California. This approach is
also known as "stacking of limits". Attempts by insurers to avoid the problems of the
occurrence wording by using claims-made policies have largely been unsuccessful and in
some countries like France and Belgium courts have actually ruled that claims-made
wordings are unlawful! Claims-made wordings are however used in employers' liability
policies and professional indemnity. A fuller discussion of the occurrence wording and
other liability insurance wordings forms part of the syllabus for Property-Liability II.

Liability claims are based on the common law which does not impose a limit of liability.
The open-ended nature of liability claims in general leaves insurers heavily exposed. To
overcome this problem, insurers impose limits of indemnity to their policies. The limit of
indemnity mayor may not include legal costs. The challenge for any person facing a
potential public liability claim is to determine the appropriate level of insurance to buy.
Monitoring legal trends especially the level of damages awarded by the courts in different
jurisdictions may assist in that regard.

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Specific exceptions

The following are usually excluded under public liability policies:

a) Liability to persons employed by the insured. These are excluded because they
could be covered by employer's liability insurance or under workmen's compensation
schemes. In any event, general liability or public liability insurance covers claims by 3rd
parties and to the extent that employees call create vicarious liability for their employer,
it can be argued that they are not 3rd parties in the true sense of the term.

b) Goods in the care, custody and control of the insured. Such goods are usually more
specifically insured under an assets policy.

c) Liability for professional advice. This type of liability is insured under

professional indemnity policies. Furthermore, liability for professional advice results in
pure financial losses which are not covered in terms of a typical public liability policy.

d) Liability arising out of the operation or use of mechanically propelled vehicles.

This type of liability generally falls under the scope of motor insurance. However, if
liability arises from the operation of a mechanically propelled vehicle that is used as a
tool of trade e.g. a forklift; such a claim may well be covered by public liability
insurance.

e) Liability arising from the use or consumption of a defective product. Generally

public liability policies exclude products related liability but policies may be extended to
cover it in some cases.

f) Liability assumed by contract is excluded unless such liability would have

attached to the insured notwithstanding that agreement. Public liability insurers are happy
to cover liability claims founded in delict simply because the standard care imposed by
delict is uniform and applies to everyone equally. Contractual liability is too personal and

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hence the obligations that are imposed by contract can vary widely from one contract to
another such that the insurer has no way of limiting its exposure at all.

g) Pollution liability unless it is sudden and accidental. Pollution can result in very
expensive claims and because of that it tends to be treated as a separate type of liability
business although strictly speaking it fits the definition of a public liability claim.

The necessity of public liability insurance

The degree of liability exposure faced by an entity depends among other factors on the
business activities of that entity and the legal environment in which it operates. For
example in Japan parties are hesitant to resort to litigation generally whereas in the US
the population is highly litigious. The following is a summary of the liability risks faced
by various trades and occupations:

Local authorities. Local authorities provide a range of services to the people living in
their areas of jurisdiction. The services include maintenance of roads, provision of water,
running recreational centers and parks as well as provision of schools among others.
Failure to maintain these facilities in a safe state may result in members of the public
being injured and the local authority will in most cases be legally liable.

Tour guides and safari operators. These deal mainly with foreign tourists and this
makes their potential liability more risky. If a tourist is injured or killed as a result of the
tour company's negligence, the potential claim can be very high. Foreign tourists tend to
claim using standards applicable in their home countries where living standards ru-e
usually high.

Hoteliers. Hotels like tour operators usually deal with foreign guests. A modern five star
hotel is likely to offer a range of facilities to its occupants like hair saloon services,
gymnasium, swimming pool and massage and beauty parlors. All these services while
valued by guests may be a source of liability to the hotel if proper safety and maintenance
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procedures are not observed. Further, a fire may break out on the premises killing or
injuring some of the patrons.

Security firms. Security companies use firearms and vicious dogs to do their work.
However these tools of trade can be a source of grave danger to the public at large if the
users are not adequately trained. In Longueira v Securitas of South Africa (Pry) Ltd 1998
(4) SA 258 the plaintiff's vehicle was stolen while parked at the defendant's premises.
The defendant provided security services at the premises which included responsibility
for the safety of vehicles lawfully on the premises. A man entered the premises, opened
the car, started it and drove away. It was held that the defendant was under a legal duty to
the plaintiff to minimize the risk of loss of his vehicle. The security guard on duty had
acted negligently by failing to verify that the person who was driving the vehicle had
authority to remove it. Accordingly the security firm was found liable.

Landlords. In Faiga v Body Corporate of Dunbarton Oaks & Another 1997 (2) SA 651
a 63 year old plaintiff was seriously injured when she fell headlong from a lift which did
not stop level with the landing. She sued the company in charge of the block of flats and
the elevator maintenance company alleging failure to maintain the lift and to warn the
public of the defect. There was no evidence that the lift had not been properly maintained
but both defendants knew of the tendency of the lift not to stop in line with the landings.
The claim against the maintenance company was dismissed but the court found the
company in charge of the flats liable. It held that a reasonable person in the position of
the company would have taken steps to guard against the danger of the occasional
malfunctioning of the lift. Failure to warn of this danger amounted to breach of the duty
of care. The public are entitled to assume the lift is safe and proceed accordingly unless
specifically warned to the contrary.

The necessity of public liability insurance is even greater nowadays because of the
increasing tendency by the courts to broaden the scope of liability. In Durban's Water

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Wonderland (Pty) Ltd v Botha 1997 (3) SA 245 the respondent and her minor daughter
were injured whilst fare-paying passengers on one of the rides at the funfair operated by
the appellant as a result of a hydraulic failure on the machine in question. In response to
the claim, the appellants relied on a notice (disclaimer/exemption clause) which stated
that the amenities provided had been:

designed -and constructed to the best of our ability for your enjoyment and safety … ...
nevertheless we regret that management, its servants and agents MUST stipulate that
they are absolutely unable to accept liability or responsibility for injury or damage of any
nature whatsoever whether arising from negligence or any other cause howsoever.

The court held that when interpreting an exemption clause, regard must be put to its
wording and context. The court found the appellant negligent in not taking precautions
against foreseeable harm and held them liable for the injuries suffered by the respondents
notwithstanding that the exemption clause purported to exclude liability for negligence!
In the face of such a judgment it is even doubtful if an attempt to exempt oneself from
consequences of negligent conduct is a sustainable risk management strategy at all.

Underwriting and rating considerations

The underwriting of public liability insurance requires one to be familiar with basic
principles of law in general and the law of delict in particular. An insight into legal trends
worldwide is also important. Some of the main underwriting factors for this type of
insurance include the following:

a) The insured's business activities. Some business undertakings present a greater

danger to the public than others. A company that deals in explosives presents a higher
risk to the public than one involved in the sale and distribution of stationery. Most

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liabilities to the public arise from the insured's business activities hence underwriters will
need a full description of the insured business.

b) The nature of the insured's premises and the degree of public access. Old and
poorly maintained structures are major contributors of public liability claims in general.
The ceiling may collapse injuring people inside a building or the floor maybe defective
leading to the so-called slip and fall cases. On the other hand the insured's business
activities may be dangerous to the public but at the same lime the degree of public access
maybe low. As a general rule, the higher the degree of danger posed by the insured's
business activities, the higher the precautions that the insured must take.

c) The insured's annual turnover. The turnover of a business gives an indication of

the degree of activity within the insured's business. Usually insurers use turnover as a
rating base for public liability insurance whereby a rate is applied to the turnover of the
business. The other rating method is the per-capita method where the insurer charges
premium on each distinct unit of the insured risk e.g. the premium charged on a hotel can
be based on the number of rooms available for occupation. Thus the per-capita rating
method is for cases where the risk is compartmentalized. Simple risks can be rated on a
flat premium basis.

d) The proximity of third party property to the insured's business premises. Public
liability insurance covers liability for bodily injury, death as well as damage to third party
property. Depending on the nature of the insured's business activities, adjoining
properties may be at a higher or lesser risk of damage.

e) The insured's loss history.

f) The legal and social environment. Liability insurance ill general is sensitive to
legal and social developments. Consequently, underwriters must keep abreast of these
when writing this class of business. For example, trends in the award of damages by the
courts should be analyzed in order for one to be in a position to forecast the size of
potential future liability. We have already seen how a change in the law can narrow or
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widen the scope of liability for insurers. Thus liability insurers need to be up to date with
the current thinking in judicial and legislative circles.

Of all liability policies sold by insurers, the public liability policy offers the broadest
scope of cover. In a way nus potentially wide scope of cover is reflected in the
underwriting factors some of which have been commented on above. As far as premium
rating is concerned, public liability insurance can be rated using one of three main
methods, Firstly, one can use the flat rate method. This works well for small risks whose
features are, not complex. Secondly, premium may be computed using the insured's
turnover as a rating base. This is a popular method because turnover is regarded as a
reliable indicator of the activities that the insured is engaged in hence a good measure of
risk. Lastly, premium may also be derived using the per capita method for those risks that
are structurally compartmentalized like hotels, theatres, restaurants etc. For such risks the
insurer can charge premium based on the capacity of the theatre or restaurant e.g. the
insurer may decide to charge a premium of x per head or per seat.

Claims

Public liability claims like all liability claims can take many years to finalize. The
occurrence wording used in liability policies is based on the assumption that it is possible
in all cases to pinpoint the exact date when a particular loss occurred. Given the latent
nature of some liability claims, the insurer may be called upon to settle a claim that is
made many years after they came off cover as long as its occurrence can be traced to the
period that the insurer was on risk. Public liability claims are therefore susceptible to the
effects of inflation. In addition, because liability insurance deals with the insurance of
obligations, the common law defenses open to the insured are also available to the insurer
should the defense of the claim be necessary. In dealing with liability claims, one should
always bear in mind the inherent possibility that the law of delict or tort law may vary
internationally. Strict liability is widespread in the US and the concept is spreading fast in

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the EU as well. If the business activities of the insured are deemed to be ultra-hazardous,
chances are high that strict liability may be imposed sooner or later.

As international interdependency grows, legal concepts based on different cultural,

economic and political systems will continue to grow (Skipper, 1998). For example class
actions are now a common feature of the US legal environment. A class action is a
procedure enacted to provide a means for a large group of injured persons to sue
wrongdoers without every member of the group in the lawsuit. This technique is a very
unwelcome development for liability insurers as the potential for massive damage awards
becomes more realistic.

Liability claims also pose other complications for insurers. It is often very difficult to
provide and reserve for outstanding claims particularly the incurred but not reported
claims. The fact that these claims can take years to become manifest in itself is a major
problem. For example, how does one measure the profits of the insurer against a
background of claims that may come to light years after the financial year has been
closed? The mere fact that the policy period has expired is no guarantee that the insurer's
liability has ceased. Where the claim relates to bodily injury, the involvement of lawyers
often complicates the problem. Lawyers are usually reluctant to agree to speedy
settlements from insurers before they are absolutely sure of the full extent of the injury to
their clients. If they agree to settle quickly before the full extent of the injury is known,
the client (third party) may be prejudiced when the injury turns out to be much worse
than was originally thought. In the UK they have now introduced a system of provisional
damages whereby the injured third party may be paid provisional damages and should
their condition deteriorate, another application can be made to court for the damages to
be .increased. While this approach may be good news to lawyers and their clients, it
certainly makes the odds against the insurers worse. When a claim is lodged, insurers
want to bring finality to the proceedings once they offer a settlement and certainly the
system of provisional damages does not help matters at all.

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