Risk Management and Insurance

Part-II
CHAPTER-NINE
PROPERTY AND LIABILITY INSURANCE

Chapter learning objectives:

Dear learners! After studying this chapter you should be able to:

 Analyze the events covered under the standard fire policy.

 Explain the principal features of business interruption
insurance, and extra expense insurance.
 Distinguish between ocean marine insurance and inland marine
insurance.
 Explain the function of liability insurance.
 Explain how organizations insure their general liability
exposures.
 Briefly discuss the ways in which an organization can insure
against theft and employee dishonesty losses.

9.1. FIRE INSURANCE

Fire insurance is designed to indemnify the insured for loss of,
or damage to, buildings, furniture, fixtures, or other personal
property as a result of fire, lightning, windstorm, hail,
explosion, and a long list of other perils. There are two basic
approaches with respect to the perils for which coverage is
provided. Under the first approach, called “named-peril”
coverage, the specific perils against which protection is
provided are listed in the policy, and coverage applies only for
damage arising out of the listed perils. Under the second
approach, called “open-peril coverage”, the policy lists the
perils for which coverage is not provided, and loss from any
peril not excluded is covered. In fire insurance coverage may be

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provided for both direct loss (i.e., the actual loss represented
by the destruction of the asset) and indirect loss (i.e., the
loss of income and/or the extra expense that is the result of the
loss of the use of the asset protected).

The Standard Fire Policy

Most of the first page of the standard fire policy is a
declarations section in which is printed such information as the
insured’s name and mailing address, the policy inception and
expiration dates, the description and location of the property
covered, the perils the forms and endorsements that are attached.
The first page describes such matters as perils not included,
uninsurable and excepted property, cancellation, mortgage
interests and obligations, and requirements in case a loss
occurs.
Perils: The standard fire policy covers losses caused by fire,
lighting, and removal from the premises endangered by fire. Not
all fires are covered under the fire insurance contract, but the
exclusions are few:
 fires caused by “war,”
 fires intentionally set by public authorities (except to
prevent the spread of fire), and,
 Fires set intentionally by the insured.

Property: the declaration section of the policy identifies

briefly the insured property. The policy also states that money,
securities, bills, deeds, evidences of debt, and other numismatic
property are never to be covered under the fire insurance
contract. The reason for this exclusion is that the losses with
respect to some of these properties such as deeds are difficult
to value, while the losses of others, such as money would be

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difficult to prove and could easily be exaggerated. Such losses

are covered, however, under other contracts. Bullion and
manuscripts are insured only if they are specifically mentioned
in the form added to the policy.

Persons: The policy covers the named insured’s legal

representatives. Legal representatives could include a guardian,
if any; the executor of the named insured’s estate; an agent; or
some similar party.
Losses: The policy covers direct property losses, not indirect or
net income losses. To avoid any doubt on this score, the policy
specifically states that it does not cover (1) any increased cost
of repair or reconstruction or (2) any loss resulting from
interruption of business.

Location: The policy specifies that, with one exception, the

property must be situated at the location named in the contract.
The exception covers the enforced removal of the property from
that location because it is endangered by fire. In this instance
the coverage is continued for five days at the new location or
locations in order to give the insured time to arrange new
insurance.

Cancellation: The policy term is usually one year or three years,

but it may be some fraction of a year or some other multiple of a
year. Both the insured and the insurer, however, have the right
to cancel the contract prior to the expiration date. Neither
need give any reason for requesting the cancellation. If the
insurer cancels the contract, the cancellation is effective five
days after the insurer notifies the insured, and the insurer must
return a prorate portion of the premium to the insured. If the
insured cancels the contract, the cancellation is effective as
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soon as he or she notifies the insurer. The insurer must return

a short-rate portion of the premium.

Other Conditions suspending or terminating the Coverage: The

policy describes two conditions that suspend the coverage while
they exist. This are:
i. When there is an increase in the hazard within the knowledge
or control of the insured. E.g. change in occupancy from a
retail store to paper manufacturing without notification to
the insurer.
ii. If the property has been vacant or unoccupied for more than
60 consecutive days. A property is considered vacant if it
contains no people or things; it is considered unoccupied if
it contains no people. In order to break a spell of
consecutive days of vacancy or unoccupancy, the insured must
reoccupy the property and use it for the purpose for which
it was intended; it is not enough to make a token return or
to have a watch person occupy the premises.
Other policy conditions that would enable the insurer to void the
contract are failure of the insured to exercise due care to save
the property during and after a loss or when neighboring property
is endangered by fire, or an attempt by the insured in some way
to defeat the subrogation rights of the insurer.

Amount of recovery: The insurer promises to pay the insured the

actual cash value of the loss but never more than the cost of
repair or replacement with material of like kind and quality.
The insurer will pay no more than the face value of the policy
which may be less than the actual case value. Its obligation is
also limited to the insurable interest of the insured. Finality,
if the insured has other insurance, the insurer agrees to share
the loss on a prorata basis with other insurers.
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9.2. AUTOMOBILE INSURANCE

Most automobile insurance contracts are schedule contacts that
permit the insured to purchase both property and liability
insurance under one policy. The contract can be divided,
however, into two separate parts: one providing insurance against
physical damage to automobiles and the other protecting against
potential liability arising out of the ownership maintenance or
use of an automobile.

Types of Contracts: Two standard automobile insurance contracts

can be used by businesses. The first is the business auto policy
(BAP), designed for corporations and partnerships insuring any
type of automobile (e.g., private passenger automobiles, trucks,
or taxis) or for sole proprietors insuring any automobile other
than a private passenger automobiles, trucks, or taxis) or for
sole proprietors insuring any automobile other than a private
passenger automobile.

The second contact is the personal auto policy (PAP), designed

primarily for no business automobiles, but which sole proprietors
can purchase to insure private passenger automobiles used in
their businesses. The major provisions of these two policies are
discussed below.

The Business auto Policy (BAP). The BAP permits the insured to
purchase four kinds of protection:
1. Physical damage or property insurance
2. Liability insurance
3. Medical payments insurance
4. Uninsured motorist insurance

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Property Insurance- Under the property insurance section of the

BAP, the insured may choose the perils against which the
organization wishes to be insured. The choices are a Specified
perils policy, policy, or collision policy

The protection is limited to direct property loss with one

exception: extra transportation costs incurred because of the
theft of a private passenger auto insured under the policy.
Several conditions affect the amount basis, the insurer promises
to pay the smaller of two amounts (less, of course, deductible,
if applicable):
1. The actual cash value of the damaged or stolen property
at the time of the loss.
2. The cost of repairing or replacing the damaged or stolen
property with another of like kind and quality.

Liability Insurance: Under the liability insurance part of the

BAP, the peril covered is an accident for which the insured is
legally liable. “Accident” is defined to include, but not
limited to, continues or repeated exposure to the same
conditions, resulting in bodily injury or property damage that is
neither expected nor intended. The source of the liability
covered is the “ownership, maintenance, or use of a covered
automobile.”

The named insured is an insured person for any covered

automobile. With two exceptions, anyone else using a covered
automobile owned, hired, or borrowed by the named insured is an
insured person if he or she is using the auto with the permission
of the named insured.
The two exceptions are (1) someone else using an automobile the
named insured borrow from any employee or a member of the
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employee’s household, and (2) some one else using a covered auto
while working in a business of selling, servicing, repairing, or
parking automobiles.

The amount of recovery is determined by several provisions. A

single limit per accident applies to all court awards or
settlements. Separate limits for bodily injury and property
damage loss are available by endorsement.

Medical Payment Insurance: Medical payments insurance, covering

expenses for medical services is a form of health insurance added
by endorsement to the BAP. The legal liability of the insured for
these expenses is not an issue. The insurer promises to pay all
reasonable medical and funeral expenses incurred within three
years following an accident occurring while a person is entering,
occupying, or leaving a covered automobile.

Uninsured Motorists Insurance: To provide protection against

uninsured motorists and hit-and –run drivers, insurers have
developed uninsured motorist insurance, which can be added by
endorsement to the BAP. Under this endorsement, any person
injured while occupying the insured auto can subi8t a claim to
the insurer, which will then act as if it represented the
negligent uninsured or hit-and – run driver. It should be noted
that the insured victim cannot collect under this coverage unless
the uninsured motorist was negligent

The Personal Auto Policy (PAP): The personal auto policy is

designed for family use but sole proprietors can also use the PAP
to insure private passenger automobiles used in their business.
Pickup, sedan delivery, or panel trucks can be insured but not
for business use. The PAP includes:

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1. Property insurance.
2. Liability insurance.
3. Medical payments insurance.
4. Uninsured motorist coverage

Property Insurance: The PAP covers all perils except those

specifically excluded Collision is excluded unless it is
specifically covered. Glass breakage and collision losses caused
by falling objects, contacts with birds or animals, fire, theft,
explosion, earthquake, windstorm, hail, water, fold, vandalism,
riot, or civil commotion are not excluded even if collision is
excluded. Otherwise, the excluded perils are similar to the BAP
exclusions.

The property covered is principally the owned vehicles shown in

the declarations including their equipment. The persons covered
are the named insured and his or her spouse if a resident of the
same household. If the named insured dies, his or her legal
representative is covered. The losses covered are the same as
those under the BAP- the cost of repairing or replacing a covered
automobile that is damaged or stolen plus the extra
transportation cost incurred if the automobile is stolen.

Liability Insurance: Under the liability insurance part of the

PAP, the peril covered is an accident.

The source of liability covered is the ownership, maintenance, or

use of the owned automobiles or trailers that can be covered
under the property insurance part plus, for the named insured,
spouse, and any “family members,” most other automobiles and
trailers. A family member is a person related to the named
insured or spouse by blood, marriage, or adoption who is a
resident of the named insured’s household.
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Exclusions cut out liability for injuries to employees in the

course of employment (except for domestic employees not subject
to workers’ compensation); liability arising out of using the
vehicle to carry persons or property for a fee; liability for the
ownership, maintenance, or use of a motorcycle or other vehicles
with less than three while; and the liability of any person
employed in the business or occupation of selling, repairing,
servicing, storing, or parking of automobiles. The losses covered
and the amounts of recovery provisions are basically the same as
under the BAP.

Medical Payments Insurance: The medical payments insurance

provided under the PAP differs from the BAP coverage in two major
respects. First, the named insured or any resident relative need
not be in an insured automobile to collect benefits. They are
covered if injured while getting in, getting out of, or occupying
any automobile not excluded. They are also covered if, as a
pedestrian, they are struck by an automobile. Second, the insured
party cannot collect twice under this policy for the same medical
expenses.

Uninsured Motorists Insurance: The uninsured motorists insurance

is also basically the same as its BAP counterpart except that the
named insured or any resident relative need not be in a covered
automobile to collect benefits.

9.3. TRANSPORTATION INSURANCE

Insurance on the risks of transportation of goods is the oldest

and most vital forms of insurance. All types of trade depend

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heavily on the availability of insurance for successful and

expeditious handling. The goods shipped by business firms each
year are exposed to damage or loss from numerous transportation
perils. The goods can be protected by ocean marine and inland
marine contracts.

Ocean marine insurance provides protection for goods transported

over water. All types of ocean-going vessels and their cargo can
be insured by ocean marine contracts; the legal liability of ship
owners and cargo owners can also be insured.

Inland marine insurance Provides protection for goods shipped on

land. This includes insurance on imports and exports, domestic
shipments, and means of transportation such as bridges and
tunnels.

Ocean Marine Insurance

Modern commerce has caused insurance to develop and attain the

high degree of refinement it has today. As world trade grew and
values at risk became larger, the need for coverage became more
apparent. Larger ships and more advanc3ed instruments of
navigation made long voyages possible, and with these changes
came the realization that insurance protection was almost a
necessity.

Major Types of Coverage: Ocean marine insurance can be divided

into four major classes to reflect the various insurable
interests:

1. The vessel/Hull
2. The cargo
3. The shipping revenue or freight received by the ship owners
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4. Legal liability for proved negligence – protection and

indemnity (P & I)

Hull insurance: covers physical damage to the ship or vessel. It

is similar to automobile collision insurance that covers physical
damage to automobile caused by a collision. Hull insurance is
always written with a deductive. In addition, hull insurance
contains a collision liability clause (also called a running down
clause) that covers the owner’s legal liability if the ship
collides with another vessel or damages its cargo. However, the
running down clause does not cover legal liability arising out of
injury or death to other persons, damage to piers and docks, and
personal injury and death of crew members. The insurance is
commonly subject to geographical limits. If the ship is laid up
in port for an extended period of time, the contract may be
written at a reduced premium under the condition that the ship
remains in port. The contract may cover a builder’s risk while
the vessel is constructed.

Cargo insurance: covers the shipper of the goods if the goods are
damaged or lost. The policy can be written to cover a single
shipment. If regular shipments are made, an open cargo policy can
be used that insures the goods automatically when a shipment is
made. All shipments, both incoming and outgoing, are
automatically covered. The shipper reports to the insurer at
regular intervals as to the values shipped or received during the
previous period. Under the open-cargo policy, there is no
termination date, but either party may cancel upon giving notice,
usually 30 days. If the policy is cancelled, the coverage
continues on shipments made prior to the cancellation date.

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Freight insurance: indemnifies the ship owner for the loss of

earnings if the goods are damaged or lost and are not delivered.
The money paid for the transportation of the goods, known as
freight, is an insurable interest because in the event that
freight charges are not paid, the carrier has lost income with
which to reimburse expenses incurred in preparation for a voyage.
The earning of freight by the hull owner is dependent on the
delivery of cargo unless this is altered by contractual
arrangements between the parties. If a ship sinks, the freight is
lost, and the vessel owner, loses the expenses incurred plus the
expected profit on the venture. The carrier’s right to earn
freight may be defeated by the occurrence of losses due to perils
ordinarily insured against in an ocean marine insurance policy.
The hull may be damaged so that it is uneconomical to complete
the voyage, or the cargo may be destroyed, in which case, of
course, it cannot be delivered. Freight insurance is normally
made a part of the regular hull or cargo coverage instead of
being written as a separate contract.

Protection and indemnity (P&I) insurance: is usually written as a

separate contract that provides comprehensive liability insurance
for property damage or bodily injury to third parties. To provide
liability coverage for personal injuries, loss of life, or damage
to property other than vessels, the protection and indemnity (P
&I) clause is usually added to the hull policy. This clause is
intended to provide liability insurance for all events not
covered by the more limited running down clause.

Basic Concepts in Ocean Marine Insurance

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Ocean marine insurance is based on certain fundamental concepts.

The following section discusses these concepts and related
contractual provisions.

Implied Warranties: Ocean marine contracts contain three implied

warranties (1) seaworthy vessel, (2) No deviation from course,
and (3) legal purpose.

The ship owner implicitly warrants that the vessel is seaworthy,

which means that the shop is properly constructed, maintained,
and equipped for the voyage to be undertaken. The warranty of no
deviation means that the ship cannot deviate from its original
course, no matter how slight the deviation. However, an
intentional deviation is permitted in the event of an unavoidable
accident, to avoid bad weather, to save the life of an individual
on board, or to rescue persons from some other vessel. The
warranty of legal purpose means that the voyage should not be for
some illegal venture, such as smuggling drugs into a country.

The implied warranties are just as binding as any expressed

warranty stated in the contract. A violation of an implied
warranty, such as an unexcused deviation, permits the insurer to
deny liability for the loss. The implied warranties are strictly
enforced, since a breach of them would cause an increase in
hazard to the insurer.

Covered Perils: An ocean marine policy provides road coverage

for certain specified perils. including perils of the sea, such
as damage or loss from bad weather, high waves, collision,
sinking, and standing. Other covered perils include loss from
fire, enemies, pirates, thieves, jettison (throwing goods
overboard to save the ship), barratry (fraud by the master or

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crew at the expense of the ship or cargo owners), and similar

perils.

Ocean marine insurance can also be written on an “all-risks’

basis. All unexpected and fortuitous losses are covered except
hose losses specifically excluded. Common exclusions are losses
due to delay, war, inherent vice (tendency of certain types of
property to decompose), and strikes, riots, or civil commotion.

Particular Average: In marine insurance, the word average refers

to a partial loss. A particular average is a loss that falls
entirely on a particular interest, as contrasted with a general
average, a loss that falls on all parties to the voyage.

General Average. A general average is a loss incurred for the

common good and consequently is shared by all parties to the
venture. For example, if a ship damaged by heavy waves is in
danger of sinking, part of the cargo may have to be jettisoned to
save the ship. The loss falls on all parties to the voyage: the
ship owner, cargo owners, and freight interests. Each party must
pay its share of the loss based on the proportion that its
interest bears to the total value in the venture. For example,
assume that the captain must jettison Birr 1 million of steel to
save the ship. Also assume that the various interests are as
follows:

Value of steel Birr 2 million

Value of other cargo 3 million
Value of ship and freight 15 million
Total 20 million
The owner of the steel would absorb 2/20 of the loss, or Birr
100.000. The owners of the other cargo would pay 3/20 of the loss

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or, Birr 150000. Finally, the ship and freight interests would
pay 15/20 of the loss, or Birr 750000.

Coinsurance: Although an ocean marine policy does not contain a

specific coinsurance clause, losses are settled as if there is a
100 percent coinsurance clause. An ocean marine policy is a
valued contract, by which the face amount is paid if a total loss
occurs. If the insurance carried does not equal the full value of
the goods at the time of loss, the insured must share in the
loss. Thus, if Birr 50000 of cargo insurance is carried on goods
worth Birr 100,000, only one –half of any partial loss will be
paid. The policy face is paid in the event of a total loss.

Inland Marine Insurance

Inland marine insurance is transportation insurance that provides

protection for goods shipped on land including imports, exports,
domestic shipments, and means of transportation, personal
property floater risks, and commercial property floater risks.

Inland marine cargo insurance covers shipments primarily by land

or by air. Although the trucker, railroad, or airline may be a
common carrier with the extensive liability (under bailer
liability exposures), the shipper may still be interested in
cargo insurance because (1) it is usually more convenient to
collect from an insurer than a carrier, and (2) a common carrier
is not responsible for perils such as an act of God (e.g.
lightning), an act of war, acts of public authority, improper
packaging by the shipper, and inherent vice.

No one cargo insurance contract exists. Instead, different

insurers may issue different contracts, and a given insurer will
tailor the contract to the insured’s needs. A convenient way to

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classify the contracts is according to the type of transportation

covered. One or more of the following modes of transportation may
be covered-railroad, motor truck, or air. Shipments by mail are
covered under separate first-class mail, parcel post, or
registered mail insurance. Another classification of these
contracts would group them according to the perils covered. Most
provide protection against a broad list of specified perils, but
some, especially those covering air transportation of high value
items, are written on an all risk basis. Finally, some contracts
cover one trip, while others cover all shipments during the term
of the policy.

Floater Contracts: The practice of insuring property at a fixed

location or while it is being transported by a common carrier is
will established. A more difficult insurance problem is the risk
of loss associated with property that is either not at a fixed
location or not being transported by a common carrier.

Inland marine property floaters can be used to cover properties

that are frequently moved from one location to another, such as
bulldozers, tractors, cranes, earth movers, and scaffolding
equipment.
The term floater policy is generally understood to be a contract
of property insurance that satisfies three requirements.
1. Under its terms, the property may be moved at any time.
2. The property is subject to being moved; that is, the
property is not at some location where it is expected to
remain permariently.
3. The contract insures the goods while they are being moved
from one location to another, that is, while they are in
transit, as well as insuring them at a fixed location.
Property Held by Bailees. Inland marine insurance can be used to
insure property held by a bailee. A bailee is someone who has
temporary possession of property that belongs to another.
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Examples of bailees are dry cleaners, laundries, and television

repair shops. Bailee liability insurance protects a bailee
against liability for damage to property in his or her care,
custody, or control.

9.4. AVIATION INSURANCE

Major commercial airlines own fleets of expensive jets, and the

liability exposure is enormous. Occasionally, a commercial jet
will crash killing hundreds of passengers and causing extensive
property damage to surrounding buildings. Legal liability arising
out of the crash of a fully loaded jet airliner can be
catastrophic. In addition, some firms may own aircraft used on
company business. Company planes may crash, resulting in death or
bodily injury to the passengers, as well as death or injury to
people on the ground and substantial property damage to
surrounding buildings where the crash occurs.

Like automobile insurance, aviation insurance includes both

property insurance on the planes and liability insurance.
Aviation insurance policy provides physical damage coverage for
damage to the aircraft, liability converge for injury to
passengers.

Physical Damage Coverage: A plane on the ground can be damaged

from fire, collapse, theft vandalism or other perils. While
taxiing, the plane can collide with vehicles, buildings, or other
aircraft. But the most severe exposure is present when the plane
is in flight. A plane can collide with another aircraft; it can
be struck by lightning or be damaged by turbulent winds; it can
also experience mechanical difficulties from a fire or explosion.

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An aircraft hull policy provides protection, either for damage

caused by specified perils or on an open-perils basis. Although
aircraft can be covered on an “ all-risks” or open-perils basis,
certain exclusions apply. Excluded losses include damage to tires
(Unless caused by fire, theft, or vandalism), wear and tear,
deterioration, mechanical or electrical breakdown, and failure of
installed equipment. However, these exclusions do not apply if a
covered loss occurs.

Liability Coverage: Liability coverage pays for bodily injury or

property damage arising out of the insured’s ownership,
maintenance, or use of the insured aircraft.

Admitted liability co9verage, also known as voluntary settlement

coverage, is issued only with passenger legal liability. It is
written on a per seat basis and provides a specified sum for loss
of life, limb, or sight by a passenger.

Medical Payments to Passengers: The policy also provides medical

payments coverage to passengers which includes hospital,
ambulance, nursing, and funeral services.

Activity 9-1

1. How are ocean marine and inland marine insurance alike? What distinguishes them from
one another?

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9.5 CRIME INSURANCE AND BONDS

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There are two basic types of financial protection against the

catastrophic losses that can be caused by crime: (1) surety bonds
and fidelity bonds and (2) burglary, robbery, and theft
insurance. Surety bonds and fidelity bonds provide guarantees
against loss through the dishonesty or incapacity of individual’s
who are trusted with money or other property and who violate this
trust. Theft insurance, on the other hand, provides coverage
against loss through stealing by individuals who are not in a
position of trust.

Fidelity and Surety Bonds

Strictly speaking, all bonds are surety bonds, but it is

convenient to classify them as fidelity bonds and surety bonds.

Fidelity bonds Provide protection against loss caused by the

dishonest or fraudulent act of employees, such as embezzlement
and theft of money. As such, the bonds are hardly distinguishable
from insurance as far as the employer is concerned. Although
technically there are three parties to a fidelity bond-the
employer (oblige), the employee (obligor), and the insurer
(surety)- in practice the main parties are only two, the employer
and the surety.

Surety bonds Provide for monetary compensation in case of failure

by bonded persons to perform certain acts, such as the failure of
a contractor to construct a building on time.

Parties to a surety Bond: There are always three parties to a

surety bond:

 Principal

 Obligee

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 Surety
The principal is the party who agrees to perform certain acts or
fulfill certain obligations. For example, Sunshine construction
may agree to build an office building for the city of Adama. If
the company is required to obtain a performance bond before the
construction is awarded, Sunshine Constriction would be known as
the principal.

The oblige is the party who is reimbursed for damages if the

principal fails to perform. Thus, the city of Adama would be
reimbursed for damages if Sunshine construction failed to
complete the building on time or according to contract
specifications.

The surety is the party who agrees to answer for the debt,
default, or obligation of another. For example, Sunshine
Construction may purchase a performance bond from city of Adama
(Obligee) would be reimbursed for any loss by Ethiopian Insurance
Corporation.

Burglary, Robbery, and Theft Insurance

The meaning of burglary, robbery, and theft insurance as used in

insurance contracts are very essential to understand the extent
of the coverage. Generally, these terms always refers to crimes
by persons other than the insured, officer /director of the
insured, or employees of the insured, coverage on which is
provided by fidelity bonds.

o Burglary is the unlawful taking of property from within

premises closed for business, entry to which has been
obtained by force. There must be visible marks of forcible
entry. Thus, if a customer hides in a store until after

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closing hours or enters by an unlocked door, steals some

goods, and leaves without having to force a door or window,
the definition of burglary is not met under burglary policy.

o Robbery-is the unlawful taking of property from another

person by force, by threat of force, or by violence.
Personal contact is the key to understanding the basic
characteristics of the robbery peril.

o Theft is a broad term that includes all crime of stealing,

robbery or burglary. In other words, any stealing crime not
meeting the definition of burglary or robbery is theft.

9.6. Liability Insurance

Liability insurance contracts obligate the insurer to pay amounts

the insurer becomes legally obligated to pay as result of covered
injury to others. Moreover, the insurer is obligated to provide
legal defense services for the insured against liability claims
to which the coverage applies.

The perils of legal liability arise out of the general rule of

law that people are responsible for any loss or injury they cause
another to suffer. The law creates three categories for
describing the situation in which one person injures another:

 Torts or civil wrongs

 Breach of contracts

 Criminal acts

The liability exposure arising from business operations are both

numerous and varied as for the individual. Though there is
virtually no calculable limit to the losses that can arise from

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legal liability; the source from which liability can result

multiplies with the complexity of the business and hence the
field of commercial liability is significantly more complicated
than the field of liability coverage for the individual. The
liability insurances are categorized as:

o Business general liability insurance: the business general

liability exposures can be categorized as follows;

 Direct liability-arise out of the firms actions. E.g.

product liability

 Vicarious /indirect liability- most often arise when a

firm hires an independent (sub) contractor.

 Contractual liability- arise from contractual

agreements
o Business liability umbrella policy: provides coverage after
the underlying liability policies have been exhausted when a
firm is sued for an amount in excess of available policy
(comprehensive general liability limits). It is often called
excess liability insurance.

o Professional liability insurance: arise from professional

mal practice. E.g policies issued to druggists, physicians
and etc.

9.7. Workers compensation Insurance

Covers the loss of income and the medical and rehabilitation

expenses that results from work related accident and
occupational disease. The workers compensation law provides
four principal benefits. These are medical care, disability
income, death benefits, and rehabilitation services.

Activity 9-2

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1. What are the difference between professional liability

insurance and other liability insurance?

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2. Distinguish between fidelity bonds and surety bonds.

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3. Explain burglary, robbery and theft insurance.

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Chapter summery
In this last unit of this module comprehensive, effort is
done to introduce the major non-life insurance policies
offered in insurance industry.

Fire and special peril insurance is the first non-life

insurance policy discussed in this unit. This policy has
basically provides cover for losses that may occur to the
insured’s property due to fire, lightning and some other
perils. The other none life insurance policy discussed are
summarized as follows.

 In general, auto policy basically provides protection

against losses related with ownership and use of
vehicle. Not only is the major classification of auto
insurance policy is presented, but also both the
private auto policy and commercial auto policy have
been properly introduced; the difference between the
two being the fact that the former is used for private
purpose while the latter is used for commercial
purpose.

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 Transportation insurance-this is insurance for the

risks of transportation of goods. The goods can be
protected by ocean marine and inland marine contracts.
Ocean marine insurance provides protection for goods
transported over water. Inland marine insurance
Provides protection for goods shipped on land.

 Aviation insurance policy provides physical damage

coverage for damage to the aircraft, liability
converge for injury to passengers. Like automobile
insurance, aviation insurance includes both property
insurance on the planes and liability insurance.

 Crime insurance is coverage for losses resulting from

dishonest or fraudulent act, failure to perform duty
of privities, theft, burglary, and robbery. The basic
types of financial protection against such perils are
surety bonds and fidelity bonds and burglary, robbery,
and theft insurance.

 Liability insurance contracts obligate the insurer to

pay amounts the insurer becomes legally obligated to
pay as result of covered injury to others.

 Workers compensation policy is the policy that covers

the insured employers’ legal liability for death,
bodily injury or illness sustained by an employee at
the place assigned to him/her during the time of work.

Self assessment test

Dear learner! Single out the alternative of your best choice and
compare your answer with the answer key provided at the end of
the chapter.

1. Which of the following is correct regarding insurance and surety bonds:

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A. In both cases there are two parties to contract

B. Unlike the surety bonds the insurer does not have the right to recover a loss
payment from the insured
C. Unlike insurance surety theoretically expects no loss to occur
D. All but “A”
2. In most cases, coverage through employment:
A. Will cover you off duty accidents
B. Will not cover off duty accidents
C. Will cover you both on duty and off duty accidents D. None
3. Which of the following cannot be considered as implied warranties in ocean marine
insurance;
A. Seaworthy vessel
B. No deviation from course
C. Legal purpose
D. All E. None
4. Which of the following polices cannot be purchased under Business Auto Policy.
A. Physical damage/property insurance
B. Liability insurance
C. Medical payment insurance
D. None of the above

Answer key
1. D 2.B 3. E 4.D

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