Named PerilP&C producer exam prep

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Liability insurance basics on the P&C exam

Liability insurance basics is the tort law beneath every casualty form: what makes someone legally liable, which defenses cut a recovery, what damages a court can award, and how limits and the duty to defend respond, down to the per-person cap inside a split limit.

A tort is a civil wrong other than a breach of contract, and torts fall into three groups. Intentional torts are deliberate acts such as assault, battery, libel, slander and false arrest. Negligence is failing to use the care a reasonably prudent person would use. Strict (or absolute) liability applies regardless of fault to inherently dangerous activities like blasting or keeping wild animals.

Vicarious liability makes one party answer for another's negligence because of the relationship between them, for example an employer answering for an employee acting within the scope of the job. Exposures come in four kinds (premises, operations, products, completed operations), and the business coverage for them sits in commercial general liability. Driving exposures belong to the personal auto policy and business auto; workers compensation has its own part, with benefits set by statute.

Who was on the property

Premises cases classify the injured person. An invitee is there for the owner's business purpose and is owed the most care: inspection, then warning or repair. A licensee, such as a social guest, is there with permission for their own reasons and must be warned of known dangers. A trespasser is owed the least, though the attractive nuisance doctrine raises the duty when something like a backyard pool draws children onto the land.

How the limits are written

Liability limits come in three shapes. Split limits set separate caps for bodily injury per person, bodily injury per accident and property damage, written as three numbers such as 50/100/25. A combined single limit puts one figure over injury and damage together for each accident. An aggregate caps the total paid during the policy period. The worksheet below uses split limits and our own numbers.

The four elements of negligence

  1. Legal duty

    The defendant owed the injured party a duty of care, as every driver does to others on the road.

  2. Breach

    The defendant fell short of what a reasonably prudent person would have done.

  3. Proximate cause

    The breach set off an unbroken chain of events that produced the injury. An intervening cause can break the chain.

  4. Damages

    There is a real, measurable injury or loss. Carelessness with no harm gives no negligence claim.

Where three negligence rules part ways

What a plaintiff recovers on $80,000 of damages at high shares of fault (our numbers)
Plaintiff's situationContributory negligencePure comparativeModified comparative
50% at fault$0$40,000$0 under a 50% bar; $40,000 under a 51% bar
60% at fault$0$32,000$0
What bars recoveryAny fault at allNothing; recovery shrinks with faultFault at or above the bar (50% or 51%, by version)

Which rule applies is state law; the general block tests the mechanics. Assumption of risk is a separate defense: someone who knowingly accepted a danger can't recover for it.

Where the $100,000 per-accident cap bites

WorksheetSplit limits

Auto liability limits of 50/100/25; three people hurt ($60,000, $30,000, $25,000); $18,000 of property damage

Bodily injury per person
$50,000
Bodily injury per accident
$100,000
Property damage per accident
$25,000
  1. Person 1lesser of $60,000 and $50,000$50,000
  2. Person 2lesser of $30,000 and $50,000$30,000
  3. Person 3lesser of $25,000 and $50,000$25,000
  4. Bodily injury, capped per accident$105,000 vs $100,000$100,000
  5. Property damagelesser of $18,000 and $25,000$18,000

Policy pays$118,000

The $15,000 of injury damages above the limits falls on the insured unless an umbrella responds; where it starts is on the umbrella vs excess liability page. A combined single limit would apply one figure to all of it.

Fault, defenses and limits

0 of 16 answered · 0 right

Notes on each optionCommit to an answer first. The notes under the item then open on every option: what rules it in or out, and the one word that splits the runner-up from the key.

  1. Item 01

    A plaintiff suffers $100,000 of damages and is found 30% at fault for the accident. Under pure comparative negligence, how much can the plaintiff recover?

    1. A$100,000 ignores the plaintiff's own 30% share of fault, which comparative negligence deducts.
    2. B$30,000 converts the plaintiff's share of fault into dollars, which is the part that is taken away, not the part recovered.
    3. CCorrect: pure comparative negligence reduces recovery by the plaintiff's share of fault, so $100,000 less 30% is $70,000.
    4. D$0 is the contributory negligence result, where any fault by the plaintiff bars recovery.
  2. Item 02

    A florist's delivery driver, while making a delivery, negligently hits a parked car. The car owner sues the florist. The florist's liability for the driver's act is:

    1. AStrict liability applies to inherently dangerous activities or products regardless of fault, not to a driver's negligence.
    2. BNegligence per se rests on violating a statute, and the florist is answering for someone else's act.
    3. CContractual liability arises from a contract, and no contract with the car owner is involved.
    4. DCorrect: an employer answers for an employee's negligence within the scope of the job, which is vicarious liability.
  3. Item 03

    A professional liability policy has a consent-to-settle provision with a 'hammer' clause. The insurer recommends a $100,000 settlement, the insured refuses, and the jury later awards $250,000. The insurer's payment is generally limited to:

    1. ACorrect: under a hammer clause, the insurer's payment is capped at the settlement it recommended (plus defense costs to that date).
    2. BThe insurer does not owe the full judgment; the hammer clause shifts the excess to the insured.
    3. CThe insurer does not owe its full policy limit, only what it could have settled for.
    4. DRefusing to settle does not void coverage; it only caps the insurer's payment.
  4. Item 04

    While mowing a customer's lawn, a landscaping company's employee throws a rock that breaks a neighbor's window. From which liability exposure does this claim arise?

    1. AProducts liability arises from goods the insured sold or made, and no product caused this damage.
    2. BCompleted operations applies only after the work is finished, and the mowing was still going on.
    3. CPremises liability is about conditions at locations the insured owns or rents, not a customer's lawn.
    4. DCorrect: the damage happened while the work was being performed, so it arises from operations.
  5. Item 05

    An insured borrows a neighbor's ladder and accidentally breaks it. Under the 2011 HO-3, what pays for the ladder?

    1. ACoverage E excludes property damage to property in the insured's care, which a borrowed ladder is.
    2. BBorrowed property is not left uncovered; the Section II additional coverage handles it.
    3. CCorrect: the HO-3 additional coverage for damage to property of others pays up to $1,000, at replacement cost, regardless of fault.
    4. DCoverage C insures property against named perils, and accidental breakage by the insured is not one of them.
  6. Item 06

    Jane's auto policy has liability limits of 100/300/50. She runs a stop sign and causes $70,000 of damage to a storefront. How much will her policy pay for the storefront?

    1. A$100,000 is the bodily injury per-person limit and cannot be used for property damage.
    2. B$300,000 is the bodily injury per-accident limit, not the property damage limit.
    3. CCorrect: the third number in 100/300/50 is the property damage limit, so the policy pays $50,000 and Jane owes the other $20,000.
    4. DPaying the full $70,000 ignores the $50,000 property damage limit.
  7. Item 07

    A company's employee is injured on the job and sues the company. Under the company's CGL policy, the claim is:

    1. ACorrect: the CGL excludes bodily injury to employees arising from employment, since that belongs to workers compensation and employers liability.
    2. BAn employee is not a third party for CGL purposes, so the employee exclusion applies.
    3. CCGL medical payments also excludes employees, so that route is closed too.
    4. DThe employer's negligence does not matter; the employee exclusion applies either way.
  8. Item 08

    Joe carelessly leaves his campfire burning. Wind carries sparks to a neighbor's barn, and the fire then spreads from the barn to the neighbor's farmhouse. Joe's carelessness is the farmhouse loss's:

    1. AAn intervening cause is an independent event that breaks the chain, and the wind and burning barn are foreseeable links in it.
    2. BContributory negligence refers to the injured party's own fault, and the neighbor did nothing careless.
    3. CCorrect: Joe's carelessness started an unbroken chain of events leading to the farmhouse loss, which makes it the proximate cause.
    4. DA remote cause is too distant to be legally responsible, but here the chain was never broken.
  9. Item 09

    Which of the following is NOT an intentional tort?

    1. ACorrect: negligence is an unintentional tort, the failure to use reasonable care.
    2. BFraud is intentional deception causing loss, so it is an intentional tort.
    3. CFalse imprisonment means unlawfully restraining someone on purpose, so it is intentional.
    4. DAssault is an intentional threat that causes fear of harm.
  10. Item 10

    Two defendants are held jointly and severally liable for a $200,000 judgment. Defendant A was 80% at fault but is bankrupt and uninsured. Defendant B, who has liability insurance, was 20% at fault. How much can the plaintiff collect from B?

    1. A$160,000 is A's 80% share, and A is bankrupt; this mixes up which defendant pays.
    2. BAn equal split of $100,000 is not how joint and several liability works.
    3. CCorrect: under joint and several liability, the plaintiff can collect the entire $200,000 from B regardless of B's share of fault.
    4. D$40,000 is B's 20% share, which is the most under several-only liability, not joint and several.
  11. Item 11

    A client sues an accountant because an error on a tax return led to IRS penalties. Which coverage is designed to respond to this claim?

    1. ACorrect: a financial loss from a mistake in professional services is covered by professional liability (errors and omissions).
    2. BCoverage B covers listed offenses such as libel or false arrest, not professional errors.
    3. CThe businessowners policy specifically excludes professional services.
    4. DCoverage A requires bodily injury or property damage, and IRS penalties are neither.
  12. Item 12

    An auto policy has limits of 25/50/25. The insured causes an accident injuring two people, with damages of $40,000 and $20,000, and damaging a car by $30,000. How much will the policy pay in total?

    1. ACorrect: BI pays $25,000 (capped) + $20,000 = $45,000, and PD is capped at $25,000, for $70,000.
    2. B$75,000 pays the full $50,000 per-accident BI limit instead of applying the $25,000 per-person cap.
    3. C$90,000 ignores all the caps and just adds the damages.
    4. D$45,000 is only the bodily injury part and leaves out the property damage.
  13. Item 13

    Dana, a waitress, accidentally spills scalding grease on a customer while serving him. The customer sues the restaurant that employs her, and the restaurant is held liable. This illustrates:

    1. AAbsolute liability applies regardless of fault to ultra-hazardous activities, and serving food is not one.
    2. BCorrect: the restaurant is liable for its employee's negligence on the job, which is vicarious liability.
    3. CContributory negligence is a defense based on the injured person's own fault, and the customer did nothing wrong.
    4. DAssumption of risk is a defense that the injured person knowingly accepted a danger, which a diner did not.
  14. Item 14

    A customer shopping in a retail store is, for premises liability purposes, classified as a(n):

    1. AA trespasser enters without permission and is owed the least care; a shopper is invited in.
    2. BA licensee, such as a social guest, enters for her own purposes and is owed only a warning of known dangers.
    3. CCorrect: a customer enters for the owner's business benefit, which makes her an invitee owed the highest duty of care.
    4. DA bailee is someone holding another's property, not a classification of visitors.
  15. Item 15

    A customer sues a restaurant, claiming she became ill after a meal. The restaurant's CGL insurer hires defense counsel and pays investigators and court costs. Which part of the CGL provides for these defense expenses?

    1. ACoverage B covers offenses such as libel or false arrest, not the costs of defending a suit.
    2. BCoverage C pays injured people's medical bills without regard to fault; it is not a defense coverage.
    3. CThe other insurance condition divides a loss among policies; it does not pay defense costs.
    4. DCorrect: supplementary payments pay defense costs, investigation and court costs in addition to the limits.
  16. Item 16

    A single limit that applies to bodily injury and property damage combined for each accident is called a:

    1. ACorrect: a combined single limit is one dollar amount for all bodily injury and property damage from an accident.
    2. BAn annual aggregate limit caps all claims in a policy period, not each accident.
    3. CSplit limits set separate amounts for BI per person, BI per accident and property damage.
    4. DA per-person limit caps what one injured person can collect, not BI and PD combined.
Mixed practice test · Timed mock

Special damages come with a receipt. General damages never do.

Damages, occurrences and the duty to defend

What separates special, general and punitive damages?

Special damages are measurable out-of-pocket losses such as medical bills and lost wages. General damages compensate harm with no invoice, such as pain and suffering. Both are compensatory. Punitive damages punish especially reckless or malicious conduct on top of compensation.

Is an occurrence the same as an accident?

An occurrence is broader. The standard definition is an accident, including continuous or repeated exposure to substantially the same harmful conditions, so a slow leak that stains a neighbor's ceiling for months can be one occurrence. Whether a policy is triggered by the injury or by the claim is covered on claims-made vs occurrence.

When does the insurer's duty to defend end?

Under the standard ISO liability forms, once the applicable limit is used up by judgments or settlements. Until then the insurer defends even a suit that turns out to be groundless. The 2013 CGL (CG 00 01 04 13) also pays up to $250 for bail bonds and up to $250 a day of the insured's lost earnings, outside the limit.

How does an aggregate limit differ from a per-occurrence limit?

A per-occurrence limit caps one event; an aggregate caps everything paid during the policy period. On the CGL the products-completed operations aggregate is separate from the general aggregate. An umbrella sitting above both is compared with follow-form coverage on umbrella vs excess liability.

Torts and limits, off the page

Negligence, damages and split limits underpin every casualty line. Keep them sharp with extra general-block practice, available for iPad as well as iPhone.

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