Liability Insurance: Coverage and Claims Handling
How liability coverage works
Liability policies respond to the insured's legal liability to third parties for bodily injury or property damage, and oblige the insurer to defend the insured. Coverage is triggered by an occurrence or accident, and the policy defines who is an insured, what damages are covered, and which exclusions apply.
Concepts to master
- Duty to defend is broader than the duty to indemnify; if any allegation could fall within coverage, the insurer generally must defend.
- Occurrence versus intentional acts: intentional harm is typically excluded.
- Exclusions such as professional liability, pollution, auto, and contractual liability.
- Limits per occurrence and aggregate, and how defence costs interact with limits.
- Third-party claims handling: investigate, reserve rights, communicate with the claimant, and manage settlement within limits.
- Reservation of rights: when coverage is uncertain, the insurer defends under a reservation letter.
- Subrogation and contribution between insurers.
Traps in questions
Candidates assume the duty to defend ends when indemnity is denied, or confuse the insured's liability with the insurer's obligation. Another trap is treating a settlement above limits as the insurer's responsibility.
Worked example
A contractor is sued after a client's floor is damaged. The petition alleges both faulty workmanship (excluded) and negligent supervision causing property damage (potentially covered). Because at least one allegation could fall within coverage, the insurer must defend, even while reserving rights on indemnity. The adjuster sends a reservation-of-rights letter and continues investigating.