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Insurance Law - an Introduction



Rob Merkin


Forms of liability insurance

Liability insurance protects the assured against claims by third parties. The indemnity provided will cover any judgment, arbitration award or binding settlement in respect of the assured’s liability, and will also cover any defence costs incurred by the assured in fighting a claim. Most forms of liability may be covered. Liability insurance is compulsory in some sectors, most importantly for road users and employers (see below), as these sectors account for about 90% of personal injury claims, but in practice such cover is taken out by occupiers of land, those engaged in the supply of goods or services, company directors, and contractors. The liability insured against is generally expressed as being liability at law or liability to pay by way of damages or compensation. The term “liability” encompasses both tortious and contractual liability, and it is usual for coverage to be extended to costs incurred in defending third party claims. The only real restriction on securing coverage is against liability arising from an illegal enterprise, although here it should be noted that the mere fact that the assured has committed an incidental criminal act in the course of a lawful enterprise as a result of which liability has been incurred is not necessarily a bar to recovery under a liability policy (see below). A liability policy will not cover a payment made by the assured which is not based on legal liability but which is made to secure the continuation of a commercial relationship following a dispute (see Smit Tak Offshore Services Ltd v. Youell, The Mare [1992] 1 Lloyd’s Rep. 154) or expenditure which is incurred to prevent liability arising at some future point (Yorkshire Water v. Sun Alliance & London Assurance [1997] 2 Lloyd’s Rep. 21—see Chapter 5). It has also been decided that expenditure incurred by an assured in order to meet statutory obligations to clean up pollution under the Water Resources Act 1991 is not within the scope of a standard liability policy, because the sum does not constitute “damages” (Bartoline Ltd v. Royal & Sun Alliance Insurance plc, November 2006, unreported)

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