Liability Insurance
Chapter One Hundred One
Syllabus topic 7, "Liability for Accidents and Insurance"
Pages 571 to 576 of 745
In one line
A liability policy pays a stranger for what the insured did to him, so the insured's loss is not damage to his own property but the money he has to find for somebody else's.
In the wording a student can write in an exam: liability insurance is the class in which the subject matter of the insurance is not the insured's property or person but his legal liability to a third party, arising from his acts or omissions; it is written on the miscellaneous side of general insurance business under section 2(13B) of the Insurance Act, 1938, and it differs from first party insurance in what triggers it, in who is paid, in how the loss is measured and in when the loss can be said to have occurred.
First party and third party cover
A first party policy insures the insured against his own loss. The fire policy, the burglary policy, the marine cargo policy, the personal accident policy and the health policy are all first party covers. There are two parties to the transaction, the insured and the insurer, and the money goes to the insured.
A third party policy insures the insured against what he owes somebody else. There are three parties in view: the insured, the insurer and the injured stranger. The event that triggers the policy is not damage to the insured's property but a claim by a person outside the contract.
| First party cover | Third party cover | |
|---|---|---|
| Subject matter | The insured's own property, person or earnings | The insured's legal liability to another |
| What triggers it | Physical loss or damage, or a bodily event | A claim made against the insured, or an event giving rise to one |
| Who is paid | The insured | In substance the injured third party, and in motor insurance by statute |
| The measure | The value of the thing lost, capped by the sum insured | The damages the insured is legally liable to pay, plus defence costs, capped by the limit of indemnity |
| When the loss is fixed | At the moment of the fire, theft or accident | Only when liability is established, which may be years later |
| Interest required | An insurable interest in the property or life | No interest in any property; the exposure to liability is enough |
| Sum insured | A value that can be estimated in advance | A limit of indemnity chosen in the dark, because the size of a court's award is unknown |
| Subrogation | Common, against the wrongdoer | Rare, because the insured is the wrongdoer |
| Salvage | Frequent | None; there is nothing left over |
| Typical Indian example | Standard fire and special perils | Motor third party, public liability, professional indemnity |
The row that matters most is the last but three. In first party insurance the sum insured is a valuation. In liability insurance it is a guess about what a court will award to a person who has not yet been injured, and that is why liability policies carry a limit of indemnity per event and in the aggregate, and why they are the class most often found to be inadequate.
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