Casualty Insurance Fundamentals
Legal foundation
Liability insurance responds to the insured's legal obligation to pay damages. Negligence requires duty, breach, proximate cause, and damages. Defenses include comparative or contributory negligence, assumption of risk, and statutes of limitation. Vicarious liability makes an employer responsible for employees acting within scope. Strict liability applies to abnormally dangerous activities and defective products. Damages divide into special (medical bills, lost wages), general (pain and suffering), and punitive; punitive damages are uninsurable in some states.
Policy mechanics
A liability policy promises to pay sums the insured becomes legally obligated to pay as damages because of bodily injury or property damage, and to defend covered suits. The duty to defend is broader than the duty to indemnify and is triggered by the allegations of the complaint, even if the suit is groundless, false, or fraudulent. Supplementary payments - defense costs, bail bonds, appeal bonds, and similar - often sit outside the limits of liability in general liability policies, while many professional liability policies include defense inside the limit.
Limits appear as per occurrence and aggregate, or per person and per accident in auto. A self-insured retention or deductible shifts first dollars. Occurrence policies respond when the injury or damage happens; claims-made policies respond when the claim is first made and reported, subject to an extended reporting period.
Traps: confusing defense inside versus outside limits; forgetting that consent-to-settle clauses limit the insurer's ability to settle without the insured; intentional act exclusions.
Rule of thumb: if the complaint alleges facts potentially within coverage, the insurer defends.