September 28, 2017
Thoughts on liability and property insurance
BY ROB KENNALEY AND JOSH WINTER
Two common types of insurance are liability insurance and property insurance.
Liability insurance provides protection against liabilities imposed by lawsuits. It provides coverage to the insured in the event the insured is liable, or is accused of being liable, to others. The insurance is generally intended to cover claims for damage to persons or property, but can be extended to cover claims for purely economic losses, depending on the terms of the policy. By providing liability insurance, the insurer is agreeing to either indemnify the insured from a cause of action or defend the insured from a cause of action and pay any damages that may be awarded against the insured.
Property insurance, on the other hand, is intended to compensate the insured for damage to the person’s own property. Simply put, the distinction between the two is that liability insurance protects the insured in the event claims are made against the insured, while property insurance protects the insured’s own property.
When purchasing insurance, it is important to work with your insurance broker to understand what is, and what is not, included in the insurance policy. Insurance policies, of course, generally include exclusions. There are certain risks which the insurance company are not willing to incur, and these are often removed from the scope of the policy through exclusions. Exclusions are set out in the insurance contract, or policy of insurance.
A sound risk management strategy involves identifying exclusions outlined in the policies and understanding how these exclusions could affect an individual’s liability or property. Put another way, understanding the exclusions helps to understand your exposure.
It is also important to work with your insurance broker to understand how declarations may increase your exposure. Declarations are statements formally made by the insured at the time the insured applies to obtain, or renew, a policy. These declarations help the insurance company assess the risks it will insure. Generally, of course, the greater the risk the insurance company underwrites, the higher the premiums the insured will be required to pay.
It is not uncommon for an insured to agree to an exclusion or make a declaration at the time of signing the initial insurance contract, but continue to renew that same policy year after year without reviewing the terms. This can be problematic as circumstances may change; overlooking an exclusion or declaring something to be so when it is not, may result in an expectation that the insured is protected when this is not the case.
Take for example the contractor who regularly pours foundations as part of his or her work and who has had the same insurance policy coverage for the past 10 years. At the time of signing the initial insurance policy contract, the contractor may have agreed to an exclusion which provided that liability for underpinning work was excluded. He or she may also have made a declaration that he or she did not perform underpinning work. If, 10 years later, the contractor undertakes a contract to perform such work, and something goes awry, the contractor may find unexpected liability exposure.
In regards to property insurance, individuals should also be aware of the risk of being underinsured. In the property insurance context, underinsurance occurs where the insured is covered for less than a property’s actual value. It is not uncommon for property value to increase while the rate at which the property is insured stays the same. If an individual purchased a commercial property 10 years ago, the value of that commercial property may have increased by way of improvements made to the property, new equipment or machinery purchased and installed, other new developments in the area, inflation or rising property values. In any case, if the value of the property is higher than that for which it was insured, there may be insufficient coverage to cover the full extent of any potential damage.
Underinsurance can arise in two ways. First, the limits of the policy may be insufficient relative to the damage caused to the property. This occurs, for example, where there is $2 million in property damage but only $1 million in coverage. In such a circumstance, the insurer’s maximum exposure under the policy is $1 million.
The second way in which underinsurance occurs is more complicated. This occurs where there is more than enough coverage in place to cover the damage caused, but the entire loss is nonetheless not covered because insufficient overall coverage was purchased. By way of example, if property is insured for $1 million and there is $500,000 in damage, the insured might believe he or she is fully covered for the loss. However, if the property insured for the $1 million was actually worth $2 million, the insurer may take the position the insured is “underinsured.” In that case, the insurer might only cover a percentage of the damage caused. In this regard, there will generally be a term in the policy that requires the insured to purchase insurance up to a certain percentage of the property’s value. Where the percentage is not met, the insurance company is no longer insuring the entire value of the property, but is instead only insuring a portion of that value. In such a case, the insurer will only be obliged to pay for a portion of damage.
Sound risk management involves making sure you are working with your broker to ensure your coverage is up-to-date. As your business changes, you need to be sure that you are not carrying out work that is contrary to a declaration made in a policy, or assuming unacceptable risks that are caught by an exclusion. In addition, we need to monitor the value of the property we insure, to make sure the insurance we have is enough to cover in the event of a loss. If we are not proactive in monitoring our insurance coverage, we run the risk of unintentionally exposing ourselves to liabilities and property losses we might not be able to afford. In the end, of course, we have insurance for a reason, and making sure it is up-to-date and covers our needs is part of sound risk management.
Rob Kennaley and Josh Winter practice construction law in Toronto and Simcoe, Ont. They speak and write regularly on construction law issues and can be reached for comment at 416-700-4142 or at rjk@kennaley.ca and jwinter@kennaley.ca. This material is for information purposes and is not intended to provide legal advice. Readers who have concerns about any particular circumstance are encouraged to seek independent legal advice in that regard.