Personal Insurance – Liability Exposure

Liability Exposure – Cause of Loss (Peril)

Cause of loss

Cause of loss is any condition or situation that poses the threat of loss to an asset. This is commonly called a hazard. A hazard is any situation that increases the frequency or severity of a loss.

For a liability loss exposure, the primary cause of loss is a claim or lawsuit. The liable party will be brought to court and sued for the damages caused to the injured party. Liability claims are settled under civil law in the United States. There are two types of law applied in the United States:

  • Civil law – Civil law is the type of law applied when the rights of a party are breached. This is the type of law used when the legal matter is not considered criminal and does not fall under the criminal law jurisdiction. This law covers liability claims. This law protects the rights of S. citizens; it provides a solution when a breach of these rights occurs. This allows the damaged party to sue the liable party for breach of duties, often resulting in monetary compensation.
  • Criminal law – Criminal law is the type of law that applies to criminal acts. This law is applied when an action is harmful to the public. This law penalizes the at-fault party for wrongfully harming society.

There are three primary causes of liability loss

  • Contract law
  • Statute law
  • Tort law


Contract law

A contract is a legally binding verbal or written agreement between parties. In a contract, each party makes a promise to the other party. For example, Amy signs a document stating that she will pay Beth $30 next month in return for Beth’s help cleaning her car. This is a contract; the promise of each party are clearly stated.

Breach of contract is the act of breaking the promise set in a contract. If a contractual promise is not met, the promisee can sue the promisor.

  • Promisor – this is the party making the promise.
  • Promisee – this is the party to which the promise is made.


Statute law

Statute law is the laws set forth by legislation. These laws can be enacted at a state or federal level. For example, the state of Massachusetts passes a new law stating that no person under the age of twenty-five will be allowed to operate an automobile without wearing a seatbelt. This is statute law, this is a statute enacted by the state government.


Tort law

A tort is a wrongful act, other than a crime, that infringes upon another party’s legally protected rights. There are two primary types of torts:

  • Intentional tort
  • Negligent tort

An intentional tort is a purposeful act; this is the deliberate and planned action to commit a tort. The person committing the tort should have understood that their actions would harm another person. Types of intentional torts:

  • Absolute liability – this is also called strict liability, this is liability imposed by law. This law states that the party performing a dangerous activity, one that is not a normal action, is automatically held liable for any damage caused regardless of any other determinants of fault. Even when no party is technically at fault, if the activity is considered strict liability, the party performing the dangerous act is automatically held liable for the damage.
  • Assault – Assault is a threat to physically harm another person. Assault is only the threat of physical harm; it does not actually physically harm anyone. To be considered assault, the other party must fear and believe that they will be physically harmed. For instance, Marry waves a knife at Shannon shouting “I’m going to cut you!” is considered assault even though no harm was done.
  • Battery – Battery is a deliberate physical act that physically harms another party. The act of battery must be purposeful and malicious. Accidental harm is not battery; accidentally tripping another person is not battery. For example, Nick punches Taylor in the face. Nick is liable for battery.
  • Libel – Libel is a false written statement that damages a party’s reputation. Like slander, libel must be a statement made to a third party other than the plaintiff. If a statement is made directly to the plaintiff and only the plaintiff, it cannot damage their reputation. For example, Adam writes a newspaper article claiming that the governor is stealing money from the town government, causing the governor to lose votes in the upcoming election.
  • Nuisance – A nuisance is an act that causes annoyance or inconvenience, which interferes with another party’s right to enjoy property. Such as storing rotten vegetables outside, knowing the smell will bother the neighbors and attracting insects.
  • Slander – Slander is a false oral statement that damages a party’s reputation. There must be substantial proof that the oral statement damaged the plaintiff’s reputation and the slanderous statement must be made to a third person other than the plaintiff to constitute slander. For example, Bill lies and tells all of the parents that the principal of the high school is an alcoholic, causing the principal to be fired.
  • Trespass – Trespass occurs when a person enters onto or interferes with another party’s real property without the owner’s consent. Entering onto another’s land, even if accidental, is considered trespassing. Interfering with real property, such as trimming the bushes on another person’s property, is considered trespassing. Interfering with another party’s personal property is also considered trespassing.

A negligent tort is a tort resulting from the act of negligence. Negligence is the failure to take proper care in doing something. This failure to take reasonable care results in damage or injury to another party. For an act to be considered negligent, the court must establish that the four components of negligence exist. Four components of negligence must be established in this order:

  • Party owes a duty of care – All parties owe a legal duty of care to others, meaning they must act with reasonable care while performing any act to avoid harming others. For example, a taxi driver has the legal duty to drive carefully and not harm others on the road.
  • Party breaches their duty of care – This is the second aspect of negligence. A breach of the duty of care is a party’s failure to act with reasonable care and avoid harming others. This means the party failed to act with the care of a reasonable person.
  • Party’s negligent act causes damage – This is the third aspect of negligence. Proximate cause is an event that causes an outcome. If the event had not occurred, the outcome would have been different. For example, Joe leaves his basketball on the stairs. Max, Joe’s neighbor, steps on the ball and falls down the stairs, breaking his arm. The basketball is the proximate cause because if Joe had not left the ball on the stairs, Max would not have fallen down the stairs.
  • The other party suffers actual damages – The fourth and final aspect of negligence states that the actual injury and damage caused must be the direct result of the negligent act of the defendant. If the defendant’s act did not actually harm the plaintiff, then the act is not legally considered negligent.
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