For us in the insurance industry, our daily quota of complications typically includes technical issues. Take some time to follow the sage advice of Seals and Crofts: let those summer breezes make you feel fine, blowing through the jasmine in your mind.

And in that jasmine-induced spirit, permit me to offer two potential forests you may have overlooked while battling those endless coverage trees. Both derive from what seems either a fundamental misunderstanding of the intent of liability coverage—that each insured should procure such coverage to assist in responding to and/or meeting legal responsibilities for harm caused to others by his or her actions or failure to act—or a willful refusal to accept that intent. We begin with the latter.

Vicarious liability

Count me in with Luther Ingram: If vicarious liability is wrong, I don't want to be right. Yet to read the diatribes from many a construction or insurance pundit, you would think ISO's ongoing mission to limit additional insured coverage to vicarious liability is one of the great travesties of the liability universe. How dare ISO not provide full liability protection for the additional insured's direct liability arising solely from the AIs own actions? Ummm, because the AI is supposed to have its own liability insurance for those exposures?

Related: Read Chris Amrhein's June column, “Walk the Line“

At least give ISO points for consistency. In the personal and business auto forms, it is clear an insured's sole liability arising from use of a covered auto is only provided for named insureds and other specified or permissive users. When it comes to third parties who may be brought into a suit arising from the covered auto, the protection is limited to only liability arising from the actions of an otherwise insured. In other words, vicarious liability. And the basis of one of the great creators of potential liability ever devised by man, the master-servant rule? Vicarious liability.

If some entity wants coverage for liability arising solely from its own actions, guide them to a policy wherein they are a named insured. Additional insured status to provide protection from any added liability created by the AI's reliance upon a third party makes perfect sense: the AI would not have been exposed to that liability arising from the third party's actions if no relationship existed between the two.

As many a regretful spouse has discovered to their financial regret, create a relationship, you create added potential liability arising from the now additional related party. But where did the idea arise that an AI should not only be able to foist off its own sole negligence onto another party's insurance, but it should be entitled to do so?

 “You have to take full responsibility for not only your actions but mine” is typically foisted upon the weaker firm by the party carrying the bigger bat, and it makes even less sense. How is it great strategy for the firm more able to bear the financial burden to base the foundation of its protection, whether via hold-harmless, contractual requirement, “primary and noncontributory” demands or even triple-net leases, on the party least likely to be able to shoulder that same burden?

First party versus third-party protection

Many years ago I wrote about drivers suffering fatal strokes or heart attacks while piloting their autos. The intent was to illustrate how a basic misunderstanding of the term “legally liable” can dangerously mislead far too many consumers (and, unfortunately, far too many folks in this business) into a sense of complacency as to just how much protection they are provided by the liability insurance of others.

Related: Read Chris Amrhein's May column, “Tailor or Seller?”

The basic facts of the claim were as follows: driver is operating vehicle; driver suffers massive and fatal heart attack; despite (or because) the car is now driverless, the vehicle continues speeding down the road, eventually coming to rest only after striking another car or crashing into a roadside home/business; significant bodily injuries and/or property damage is done to others.

Now to the question: Assuming the driver truly died at the moment of the heart attack, and all injured/damaged parties are innocent victims, what, if any, of the following injuries and damages caused to others will be covered by the careening auto's liability protection?

Answer: none.

And now, whether presented in print or offered in seminar, the weeping and gnashing of liability angst reaches epic levels. “But the others were innocent!” “Oh, that's just wrong!” “No court would ever allow that in <fill in applicable state here>!” Please note the major underlying theory being espoused by those shocked by my assertion of no coverage is what is commonly known as the “innocent victim” doctrine. In basic terms, if the injured or damaged parties are innocent of wrongdoing, then someone else must be responsible and should be forced to pay.

But although sympathy is an admirable human trait, legal liability is not based upon “innocent victims”— that is the outcome, not the reason for responsibility. As you learned in Insurance 101, legal liability is based upon the “prudent man” rule for determining negligence: Did the insured, at the time of injury/damage, “fail to do what a reasonable and prudent man would have done under similar circumstances”?

So with the warning this may seem a bit crude, the correct way to ask if our late driver is legally liable for the above injuries/damages is to ask, “What would a reasonable and prudent dead person have done under similar circumstances?” Given our case facts as stated, can there be any doubt our insured did exactly that? So where is the negligence required for insurance liability coverage to pay claims?

Further support for the “no liability coverage” result is found in English common law doctrines that basically state any person's legal responsibility for his or her actions ceases at death. Note this is also why UM/UIM would also prove of no help in this scenario. UM/UIM only pay when the other party is legally liable for the damages, and fails to pay due to no or too little liability coverage. Because our now deceased driver was not legally liable for the resulting injuries, there is no basis for UM/UIM to pay either. 

The sad result of such uproar over this seemingly sad “no coverage under the allegedly responsible party's liability coverage” is the missed opportunity to understand how the various components of proper insurance protection function. Liability is one avenue of coverage, known as “third party” because someone else is responsible to pay other than the injured party. In situations such as our unlucky driver and his victims, protection should have been in place and provided under “first party” options available to the injured/damaged victims. In our specific case, these may have included but not be limited to: PIP, medical payments, health insurance, accident policies, and direct property coverages applicable to the damaged vehicles and structures.

So there you have just two examples where our industry's seeming need to overcomplicate even the most basic concepts of liability leads not only to bad advice and unreliable coverage assumptions, but far too often to truly innocent parties finding at exactly the wrong time that they were relying on assumptions now found to be tragically untrue. What really hurts is each of those victims in fact had freely available insurance options that would have provided those financial guarantees supposedly coveted by all—if only the supposed “expert” knowledge had been replaced by simple and solid common sense.

Feel free to keep complicating your insurance lives, to the protection peril of yourselves and others. Or take time this August to take a break, grab a cold iced tea or lemonade, crank up the Gershwin and ease back in that shaded hammock.

“Summertime, and the insurance is easy…”

Preach on, George, preach on.