5 Basics of Casualty

Insurance

5.1 INTRODUCTION
Casualty insurance is mainly liability coverage of an individual or organization for negligent acts
or omissions. It’s that part of a policy that’s “for others.” If a driver slides on an icy highway and
unintentionally runs into another car and injures its occupant, the driver is negligent and responsible
for the damage he caused. e bodily injury and property damage liability coverage in an auto policy is
available for this occurrence.

In this unit, you will learn the language of liability coverage and how it works within an insurance policy.

5.2 LEARNING OBJECTIVES

Afer successfully completing this unit, you should be able to:

Ȏ define liability loss, negligence, and tort;

Ȏ describe the four factors used to establish negligence;
Ȏ compare the five common defenses against negligence;

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114 Property and Casualty License Exam Manual, 1st Edition

Ȏ explain how legal liability may be imposed under absolute/strict liability and vicarious liability;
Ȏ compare compensatory (special and general) and punitive damages;
Ȏ describe how bodily injury, property damage, and personal injury are usually defined in a liability
insurance policy;
Ȏ identify the four limits of liability limits;
Ȏ describe restoration of limits and nonreduction of limits;
Ȏ identify the supplementary payments that may be paid in addition to the policy’s limits of liability;
Ȏ list the insured’s duties af er a loss; and
Ȏ list common liability policy exclusions.

5.3 C ASUALTY INSURANCE PRINCIPLES AND CONCEPTS

Property insurance provides protection against most risks to property, such as fire, thef t, nd some
weather damage. Casualty insurance is the general term that encompasses many different types of
liability coverages, such as Auto Liability, Commercial General Liability, Umbrella Liability, and
Commercial Crime policies. Liability insurance covers the insured for losses that cause injury or
property damage to another person and in which the insured is found to be legally responsible.

Property vs. Casualty Insurance Property—covers personal belongings

and real property

Me • Example: If my house burns down,

insurance pays me to rebuild.
Casualty—pays the “other guy”

vs. • Example: If the mailman gets

bit by my dog, my insurance

The Other Guy

company pays the mailman to pay
for his medical claims due to my
negligence.

© Kaplan, Inc. 3

5.3.1 Third-Party Losses

A third-party loss is a situation that involves a person other than the insurer and the insured.

ird-party losses occur when a person claims to have been injured by an insured, or when a person’s
property has been damaged by the insured’s actions.
 Unit 5 Basics of Casualty Insurance 115

Third-Party Losses

• e first party is the insured.

• e second party is the insurance
company legally representing or
defending the insured.
• e third party is the “other guy.”

© Kaplan, Inc. 4

5.3.2 Negligence
A tort is a civil wrong that unfairly causes someone else to suffer loss or harm resulting in legal liability
for the person who commits the tortious act. Liability insurance provides coverage for unintentional
torts involving negligence. Negligence is failure to exercise the care that a reasonable person would
exercise in like circumstances. It is failure to do (or not do) something that ordinarily should be (or not
be) done that results in a loss.

Unlike a crime, in which the government prosecutes the wrongdoer, torts are a part of civil law and are
concerned with the private relationships between people and businesses. If an insured robs a bank, the
insured can possibly go to jail. But if an insured is guilty of a tort, the insured can only be made liable
to pay money.

Tort and Negligence

Liability insurance covers
unintentional torts.
• Tort—civil wrong that causes
someone else to suffer loss
• Negligence—failure to act or not
act reasonably

© Kaplan, Inc. 5

5.3.2.1 Establishing Negligence

To establish negligence, all of the following four factors must be involved:

1. Legal duty owed

116 Property and Casualty License Exam Manual, 1st Edition

2. Breach of legal duty owed

3. Proximate cause
4. Damages

EXAMPLE
Suppose the insured is driving to work on the highway. The insured receives
a phone call on her mobile phone and reaches down to the floor of the car to
find it. While reaching for the phone, the insured takes her eyes off the road and
swerves into the next lane, hitting the car beside her. We can establish negligence
with the following:
1. The insured has a legal duty owed to the other drivers on the highway to
drive safely and responsibly.

2. The insured breached her legal duty because she was distracted by the
phone call and hit the car next to her.

3. The proximate cause of the damage to the other person’s car was the
insured by swerving into the next lane. The loss would not have occurred if
the insured would have stayed in her lane.

4. Lastly, the other person suffered damages—the cost to repair the car.

Establishing Negligence Elements of Negligence

• Owe a duty
• Breach the duty
• Be the proximate cause
• Damages
• A drunk driver is guilty of
a crime but is not guilty of
negligence unless it causes
harm to another

© Kaplan, Inc. 6

5.3.3 Defenses Against Negligence

When the other party claims the insured is liable to them for damages, there are several arguments the
insured and the insurance company can use to claim no money, or not all of it, is owed.

5.3.3.1 Contributory and Comparative Negligence

A contributory negligence doctrine says that if a person contributed to his/her own damages in any
way, another party cannot be held liable for the damages. To establish liability, an individual must show
that the other party was negligent and that the individual did not contribute to the loss through any
negligence on his own part. Some states retain this system, ruling out liability when there has been
contributory negligence. As an example, the insured (Jake) pulls out in front of another car and an
 Unit 5 Basics of Casualty Insurance 117

accident occurs. e driver of the other car (Linda) wants to be paid for medical bills and damages to
her car. Jake argues that the accident was partly caused by the bald tires on Linda’s car which caused
her to not stop quickly enough. e judge agrees and finds Linda 30% at fault. Using the argument
of contributory negligence, Jake owes Linda nothing because Linda contributed to the cause of the
accident.

Comparative negligence laws allow a finding of liability to be made even when both parties have
contributed to the loss, with an award based on the extent of each party’s negligence. Using the previous
example, comparative negligence says that Linda would be responsible for 30% of her damages and Jake
must pay the other 70%.

5.3.3.2 Other Defenses Against Negligence

Assumption ofrisk bars or reduces the right of recovery against a negligent third party when he
voluntarily and knowingly participated in the dangerous activity that caused his own injury. is
doctrine is frequently associated with injuries incurred during sporting events. e quarterback of a
football team can’t expect to be paid for his own injuries caused by a player from the other team who
hits him and breaks his arm. e quarterback assumed responsibility by playing in the game.

Intervening cause is when an independent event affects the chain of events. It may also serve as a
defense against liability. If an insured suffers a heart attack while driving and it causes an accident
that seriously injures another person, the insured could argue that the heart attack was an unexpected
intervening cause and that he has no liability.

Statutes oflimitations laws provide that certain types of lawsuits must be filed within a specified time
of the occurrence to be valid under the law. Don’t wait too long to sue if you think someone else is at
fault.

e last clear chance is a doctrine that is employed in contributory negligence jurisdictions. Under this
doctrine, a partially negligent person can, nonetheless, recover if he is able to show that the defendant
had the last opportunity to avoid the accident.

Defenses Against Negligence Defenses Against a Claim of

Negligence by Another
• Contributory
• Comparative
• Assumption of risk
• Intervening cause
• Statute of limitations
• Last clear chance

© Kaplan, Inc. 7
118 Property and Casualty License Exam Manual, 1st Edition

QUICK QUIZ 5.A

1. Which of the following is an example of a liability loss?

A. A home is damaged in a tornado.
B. An insured leaves her car unlocked and her purse is stolen.
C. An insured’s dog runs away and attacks and injures a neighbor boy.
D. A farm house is damaged in a fire.

2. A civil wrong that causes damage to another person or business is known as

A. a tort
B. a negligence
C. a liability
D. a legal duty owned

3. Which of the following is NOT a common defense against negligence?

A. Contributory negligence
B. Comparative negligence
C. Compulsory negligence
D. Intervening clause

Answers can be found at the end of Unit 5.

5.3.4 Absolute/Strict Liability

Earlier, we said that negligence had to be present to hold someone legally liable for an action. ere are
some exceptions. Absolute liability is imposed by law on those participating in certain activities that
are considered especially hazardous. Individuals involved in such operations may be held liable for the
damages of another, even though the individual tried to be as careful as possible. Absolute liability is
most frequently applied to activities involving dangerous materials, hazardous operations, or dangerous
animals

Suppose Larry keeps seven boa constrictors in a trailer for use in his nightclub act. Despite precautions,
one of the reptiles escapes and seriously injures a child. Larry may not have been negligent, but he
could still be held responsible by virtue of absolute liability (owning the snakes).

Another term that is sometimes used for absolute liability is strict liability. Strict liability is usually
used in reference to products liability. e injured party does not have to prove negligence when suing
a tire manufacturer. e only proof necessary is that the tires were defective and caused the accident.
 Unit 5 Basics of Casualty Insurance 119

Absolute/Strict Liability

Absolute/strict—liability without
negligence

© Kaplan, Inc. 11

5.3.5 Vicarious Liability

Vicarious liability is when a person may be held responsible for the negligent acts of another person
who has direct liability.

A very common form of vicarious liability involves the relationship between an employer and an employee.
Of en, the negligence of an employee can be imputed (charged) to an employer because the employer has
control over the employee. For example, a lumber delivery driver may negligently cause an accident that
injures two pedestrians. e delivery driver has direct liability, and the employer also becomes responsible
for the negligence because the employee was driving a company vehicle and the accident occurred on
company time. Parents also have vicarious liability for the activities of their underage children. General
contractors, many times, have vicarious liability for the negligent acts of a subcontractor.

Vicarious Liability

Vicarious liability—liability for the

actions of another

© Kaplan, Inc. 12

5.3.6 Damages Payable: Compensatory and Punitive

e financial consequences of a liability loss can be devastating. If an individual is liable for the loss of
another, the courts may require the individual to pay damages (monetary compensation) to the injured
party.
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Compensatory damages reimburse the injured party only for losses that were actually sustained. ere
are two types of compensatory damages: special and general.
■ Special damages include all direct and specific expenses involved in a particular loss, such
as medical expenses, lost wages, funeral expenses, and the cost to repair or replace damaged
property.
■ General damages compensate for things such as pain and suffering and mental anguish.
Punitive damages are intended to reform or deter the defendant and others from engaging in conduct
similar to that which formed the basis of the lawsuit. An individual suffered burn injuries when his
car burst into flames during a rearend collision. At the trial, the evidence showed that the vehicle
manufacturer had known the probability of such fires from its own previous testing, and an inexpensive
design change could have been made to prevent fuel tank fires. e court held that the evidence
supported a finding of malice, justifying an award of punitive damages.

Damages Payable
Types of Damages
• Compensatory
• Special—provable monetary
losses
• General—nonmonetary losses
• Punitive—gross negligence

© Kaplan, Inc. 13

QUICK QUIZ 5.B

1. Kathleen was driving too fast on an icy highway, caused a head on collision, and totaled
William’s car. William suffered from a broken neck and lost wages af er missing four weeks
of work. ese direct and specific damages are considered to be
A. special compensatory damages
B. general compensatory damages
C. punitive damages
D. exemplary damages

2. Absolute liability is imposed by law on those participating in hazardous activities or

occupations. Another name for absolute liability is
A. vicarious liability
B. imputed liability
C. third party liability
D. strict liability
Answers can be found at the end of Unit 5.
 Unit 5 Basics of Casualty Insurance 121

5.3.7 Purpose of Liability Insurance

Liability insurance protects an insured from financial losses arising out of liability claims by
transferring the burden of the loss from the insured to insurer (insurance company). e insurer pays
up to the limit of liability, for which the insured becomes legally liable to pay because of bodily injury
and property damage.

■ Bodily injury (BI) means injury, sickness, disease, and death arising out of injury, sickness, or disease.
■ Property damage (PD)means damage to or destruction of property, including loss of use of the
property.
■ Personal injury (PI) includes slander, libel, false arrest, and invasion of privacy. (In the insurance
business, “bodily injury” and “personal injury” have different meanings.) Personal injury causes
“hurt feelings” but does not cause bodily injury. Most liability policies don’t cover “personal
injury” because personal injury is considered to be an intentional act.

Liability Insurance Liability

• Bodily injury—injury to the body
• Medical bills, lost wages, pain
and suffering, and death
• Property damage—injury to
property
• Cars, buildings, etc.
• Personal injury—hurt feelings of a
person or business

© Kaplan, Inc. 16

5.3.8 Limits of Liability (Dollar Amounts of Coverage)

e policy limit for liability insurance may be issued in several different formats.

■ Split limit liability policies have separate limits for bodily injury (BI) per person and per accident,
and property damage (PD) has a separate limit per accident. Example: 100/300/50 means a
$100,000 limit per person, $300,000 limit for all persons in an accident, and $50,000 for the total
property damage per accident.
■ Single or combined single limit policies have one limit that applies to both BI and PD. Example:
300,000 means a total of $300,000 in coverage for all bodily injury and property damage per accident.
■ A per person limit states how much will be paid for injury to any one person in an occurrence or
accident.
e three limits above apply per occurrence. e word occurrence can mean either an accident, such
as a car wreck, or a loss that occurs over time, such as living in an old home with lead paint (multiple
exposures). Policies usually have no limit on the number of occurrences that can happen.

■ An aggregate limit, however, is a limit that applies to all losses occurring within any one policy
period. If the policy is renewed, the aggregate is renewed. For example, a business has a liability
policy with a limit of $100,000 per occurrence and a $1 million aggregate. e policy has a term
of one year. e most that will be paid out for a single claim is $100,000, and the total or aggregate
of the claims cannot exceed $1 million. If the business has five $100,000 liability claims made
122 Property and Casualty License Exam Manual, 1st Edition

during the first three months of the policy, only $500,000 of the aggregate remains for the rest
of the year. However, if, at the end of the year, the policy renews for an additional year, the
$1 million aggregate starts over.

Limits of Liability
Limits of Liability
• Split
• Bodily injury
• Property damage
• Combined single
• Per person
• Aggregate

© Kaplan, Inc. 17

5.3.8.1 Restoration of Limits/Non-Reduction of Limits

With the exception of the aggregate limit, most policy limits are restored af er payment of a loss.
Suppose the insured’s liability policy has a $50,000 aggregate limit and a $1,000 per occurrence limit.
If the insured has a $500 covered loss, it will be subtracted from the aggregate limit. However, the
full $1,000 per occurrence limit will be available for other covered losses that occur during the policy
period as long as the aggregate limit has not been exhausted.

Restoration of Limits
Non-Reduction of Limits Restoration of Limits/Non-Reduction
of Limits
• Policy limit restored af er loss
• Payment of loss reduces aggregate
limit
• Aggregate limit is restored upon
renewal

© Kaplan, Inc. 18

5.3.9 Liability Insurance Policy Provisions

5.3.9.1 Supplementary Payments
Liability policies also provide certain supplementary payments that are paid in addition to the policy’s
maximum limit of liability and do not cost extra to have on the policy. ese coverages vary from one
 Unit 5 Basics of Casualty Insurance 123

type of liability policy to another, but in general they include the following (remember the acronym
BAILED):
■ Bonds—Premiums for certain types of bonds, such as bail bonds, appeal bonds, and release of
attachment bonds
■ Aid (first aid)—First aid to others at the time of an accident
■ Interest—Prejudgment interest is the interest on court-ordered payments, and postjudgment
interest is the interest accruing on the judgment af er an award has been made but before payment
is made by the insurance company. Prejudgment interest is frequently paid as part of an award for
damages, while postjudgment interest is typically covered as a supplementary payment.
■ Loss of earnings—Loss of earnings for the insured (such as when the insured is required to miss
work for court appearances)
■ Expenses—Expenses incurred in the investigation of a claim, including claims adjuster costs,
expert witness fees, et cetera; reasonable expenses incurred by the insured at the company’s
request in the investigation or defense of a claim
■ Defense costs—e cost of hiring an attorney to defend the insured if sued, even if the insured is
not liable, paid in addition to the per occurrence or policy aggregate limits
Suppose James has a liability policy with a $100,000 policy limit and a supplementary payments section
that covers up to $250 for lost wages. A neighbor is injured because of James’s negligence and files a
lawsuit against him. e neighbor wins the suit, and a $100,000 judgment is awarded against James.
In addition, James loses $250 in wages when he missed work to appear in court for the lawsuit. Also,
the lawyer who defended James charged $15,000. Supplementary payments are paid in addition to the
policy’s limit of liability, so the company will pay the $100,000 judgment for the neighbor’s injury, the
$15,000 lawyer bill, and the $250 for James’s lost wages.

• Bonds
• Paid in addition to policy limits
• Aid (First Aid)
• Provided at no additional charge
• Interest
• Remember BAILED
• Loss of Earnings
• Expenses
• Defense Costs
© Kaplan, Inc. 20

5.3.9.2 Duties After Loss

e duties af er loss condition in liability policies state that the insured must:
■ notify the insurance company in writing of all losses;
■ forward all applicable demands, notices, or summonses;
■ give any necessary assistance to the case, such as testifying as required; and
■ not voluntarily assume any liability or make any restitution to another party without the
knowledge and consent of the insurer.
124 Property and Casualty License Exam Manual, 1st Edition

Duties After Loss

Duties Af er a Loss
• Notify company promptly
• Forward notices
• Assist the company
• Don’t assume liability

© Kaplan, Inc. 21

5.3.10 Liability Policy Exclusions

All liability policies contain certain exclusions. We’ll examine these in detail when we look at specific
policies, but we’ll mention some common exclusions here. In general, there is no coverage for:

■ damage to property owned by the insured;

■ damage to property in the insured’s care, custody, or control;
■ bodily injury to an insured;
■ losses covered under workers’ compensation laws;
■ losses covered under nuclear energy liability policies; and
■ injuries or damages caused intentionally by the insured.

Liability Policy Exclusions

Exclusions
• Damage to property of an insured
• Bodily injury to an insured
• Bodily injury to an employee
• Nuclear energy liability
• Intentional damage caused by an
insured

© Kaplan, Inc. 22
 Unit 5 Basics of Casualty Insurance 125

QUICK QUIZ 5.C

1. Which of the following is an example of personal injury?

A. A businessowner makes false statements about his competition all over social media.
B. Mary’s cat claws a child and the child has to get stitches.
C. A customer gets food poisoning af er eating at a seafood restaurant.
D. A car veers off the road and damages 3 mailboxes.

2. In general, liability policies do NOT cover damage caused to

A. property
B. the insured
C. the third party
D. the injured party

3. Split limit, single limit, and per person limits in a liability policy apply per
A. policy period
B. lifetime of the insured
C. fiscal year
D. occurrence

4. Payments that are made in addition to the policy’s regular limit of liability are known as
A. supplementary payments
B. aggregate payments
C. restoration of limits
D. nonreduction of limits

5. When the payment of a claim does not reduce the amount available to pay future
occurrences, this is known as
A. restoration of limits
B. aggregate limit
C. split limit
D. future occurrence limit

6. Which of the following is not a common liability policy exclusion?

A. Damage to property owned by the insured
B. Bodily injury to the insured
C. Losses covered under workers’ compensation laws
D. Notify the insurance company in writing of all losses

Answers can be found at the end of Unit 5.

126 Property and Casualty License Exam Manual, 1st Edition

UNIT 5 CRAM SHEET

Property—covers personal belongings and buildings

■ Example: If my house burns down, insurance pays me to rebuild.

Casualty—pays the “other guy”

■ Example: If the mailman gets bit by my dog, my insurance company will pay the mailman to pay
for his medical claims due to my negligence.
ird-Party Losses

■ e first party is the insured.

■ e second party is the insurance company legally representing or defending the insured.
■ e third party is the “other guy.”
Liability insurance covers unintentional torts.

■ Tort—civil wrong that causes someone else to suffer loss

■ Negligence—failure to act or not act reasonably
Elements of Negligence

■ Owe a duty
■ Breach the duty
■ Be the proximate cause
■ Damages
– A drunk driver is guilty of a crime but is not guilty of negligence unless he causes harm to
another.
Defenses Against a Claim of Negligence by Another
■ Contributory
■ Comparative
■ Assumption of risk
■ Intervening cause
■ Statute of limitations
■ Last clear chance
Absolute/Strict—liability without negligence

Vicarious Liability—liability for the actions of another

Types of Damages

■ Compensatory
– Special—provable monetary losses
– General—nonmonetary losses
■ Punitive—gross negligence
 Unit 5 Basics of Casualty Insurance 127

Liability

■ Bodily injury—injury to the body

– Medical bills, lost wages, pain and suffering, and death
■ Property damage—injury to property
– Cars, buildings, etc.
■ Personal injury—hurt feelings of a person or business
Limits of Liability

■ Split
– Bodily injury
– Property damage
■ Combined single
■ Per person
■ Aggregate
Restoration of Limits/Non-Reduction of Limits

■ Policy limit restored af er loss.

■ Payment of loss reduces the aggregate limit.
■ Aggregate limit is restored upon renewal.
Duties Af er a Loss

■ Notify company promptly

■ Forward notices
■ Assist the company
■ Don’t assume liability
Exclusions

■ Damage to property of an insured

■ Bodily injury to an insured
■ Bodily injury to an employee
■ Nuclear energy liability
■ Intentional damage caused by an insured
128 Property and Casualty License Exam Manual, 1st Edition

UNIT 5 QUIZ

In order to measure your success, we recommend that you answer the following 10 questions. For more Unit 5
practice questions, please refer to the InsurancePro QBank in your online tools.

1. An aggregate limit is the most a company will 5. Lee sues Matthew for injuries that she sustained
pay for in an automobile accident. During the trial, it is
A. any one person or item of property determined that Lee’s negligence contributed to
B. any one event 25% of the loss. Under comparative negligence
C. over the policy period laws,
D. an event in the lifetime of the contract A. Lee cannot recover any damages from
Matthew
B. Lee’s award will be reduced by 75% of the
2. Failure to use care that is required to protect
loss
another person or property from harm is
C. Lee can recover the full amount of the loss
A. negligence
from Matthew
B. tort
D. Lee’s award will be reduced by 25% of the
C. assumption of risk
loss
D. moral hazard

6. Which of the following would NOT be included

3. Liability that is imposed as a matter of law
as a supplementary payment in a liability
without any regards to negligence is
policy?
A. vicarious liability
A. First aid costs
B. absolute liability
B. Premium for a bail
C. imputed liability
C. Investigation expenses
D. prejudgment liability
D. Judgment against the insured for bodily
injury liability
4. Ray’s auto policy has a $50,000 bodily injury
limit and a $25,000 property damage limit. is 7. Morgan, who has a liability policy with ABC
is an example of Insurance, is playing golf with his daughter and
A. a split limit policy
hits a drive through the bedroom window of a
B. a single limit policy neighbor, Tom. In this example, the first party to
C. a per accident policy the loss is
D. a preoccurrence policy A. Morgan
B. ABC Insurance
C. Tom
D. the window
 Unit 5 Basics of Casualty Insurance 129

8. A liability insurance policy pays 10. Which of the following is NOT one of the duties
A. the first party af er a loss in a liability policy?
B. the second party A. Notify the insurance company in writing of
C. the third party the loss.

D. the insured B. Notify the third party’s insurance company

of the loss.
C. Forward all demands, notices, or
9. If the courts feel that an individual acted
summonses about the case.
willfully in causing an injured party’s damages,
D. Be of assistance as needed during the case.
it may award
A. punitive damages to the injured party
B. punitive damages to the defendant
C. general damages to injured party
D. compensatory damages to the defendant
130 Property and Casualty License Exam Manual, 1st Edition

ANSWER KEY

QUICK QUIZZES 3. B. Absolute liability, also known as strict

liability, is imposed by law on those
participating in certain hazardous activities
QUICK QUIZ 5.A or occupations.

4. A. A split limit policy has separate limits for

1. C. An insured’s dog runs away and attacks and
bodily injury and property damage.
injures a neighbor boy.
5. D. Lee will have to pay for 25% of his injury
2. A. a tort
because he was determined to be 25% at
3. C. Compulsory negligence fault.

QUICK QUIZ 5.B 6. D. A judgment against the insured for bodily

injury liability would be covered under the
policy’s liability coverage.
1. A. special compensatory damages
7. A. e first party is the insured, the second
2. D. strict liability
party is the insurance company, and the
QUICK QUIZ 5.C third party is the person or business who
suffered the damage.

1. A. A businessowner makes false statements 8. C. A liability policy always pays the third party.
about his competition all over social media.
9. A. Punitive damages are intended to punish the
2. B. the insured defendant and make an example out of him
to discourage others from behaving in the
3. D. occurrence same way. Punitive damages are also known
as exemplary damages.
4. A. supplementary payments
10. B. e insured is not required to have any
5. A. restoration of limits contact with the third party’s insurance
company.
6. D. Notify the insurance company in writing of
all losses

UNIT 5 QUIZ

1. C. An aggregate limit is a limit that applies to

all losses occurring within any one policy
period. An aggregate limit is not restored
af er a payment of a loss, but is restored at
the policy renewal.

2. A. Negligence is the lack of reasonable care

that is required to protect others from the
unreasonable chance of harm.