Opinion
Liability Insurance:
Key differences between PL, PI, and D&O policies Crossley Gates and Frank Rose, Keegan Alexander
U
nderwriters have historically broken-down liability insurance into several well-known products. Each product addresses a specific basket of ways that the insured can become legally liable to a third party. In this article, we address the three best known ones: Public Liability (also known as Broadform Liability), Professional Indemnity and Directors and Officers Liability. We consider the core types of liability each is addressing and what differentiates them. Ideally, they should all work together so that the cover across them is seamless; there should be no overlaps or gaps. As we will see, there is room for underwriters to improve this. PUBLIC LIABILITY
Liability in connection with property damage In this era of the ACC’s statutory cover for bodily injury in New Zealand, a Public Liability (PL) policy is focussed on indemnifying the insured for the insured’s liability for damage to a third party’s property. However, there is a major limitation on the cover. Historically, there has been no cover for liability for property damage to the item the insured has sold to, or worked on for, the third party beforehand (called a ‘product’). The cover has only been for liability for any property damage to other property resulting from the initial property damage to the product. Sometimes there is no resultant property damage, meaning there is no cover under the policy at all. In our experience insureds generally don’t understand this, leading to unnecessary disputes. In recent years, some liability underwriters have provided limited cover (usually between $100,000 to $250,000) for liability for damage to the product itself as well, in the circumstances stated. Putting this to one side for a moment, the nature of the insured’s business can greatly affect the potential scope of the cover. For example, for a business selling agricultural equipment, the scope of cover is narrower because the policy will only cover liability for damage to other property resulting from damage to the agricultural equipment itself (the product). However, for a commercial electrician, 28
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the scope of cover is wider. As the electrician often only works on the switchboard and wiring in discrete areas of a building (the product), a PL policy will cover liability for resultant damage beyond those areas to the rest of the building if, say, a fire occurs. As we understand it, the historical exclusion for liability for damage to the product itself has been a wellrecognised underwriting demarcation between the greater risk of property damage to the product, on the one hand, and the lesser risk of this damage causing resultant property damage beyond the product, on the other hand. Traditionally, a Products Guarantee policy covers the former risk (expensive and generally only available from overseas underwriters), whereas a PL policy covers the latter risk. The recent move to provided limited Product Guarantee cover for the product itself in a PL policy shows a softening of this historical demarcation. It will be interesting to see if it grows. Even with the limited Product Guarantee cover, we recommend underwriters of PL policies make the resultant damage limitation more explicit when they refer to their product. We also recommend brokers always bring this limitation to the attention of their clients. Bodily injury to employees A PL policy always excludes liability for bodily injury to an employee. We understand the reason for this is historical and relates to stopping the cover overlapping with a worker’s compensation policy in the days before ACC. Despite the ACC statutory cover, there is a narrow window of injuries not covered by it for which common law liability is still possible. Where this liability arises outside the third party’s employment, the main insuring clause of a PL policy will cover it. However, where it arises in the course of the third party’s employment, the exclusion applies - hence the need these days for a separate Employer’s Liability policy to plug the gap. Broadform Liability Historically, a standard PL policy provided very narrow cover. Even the limited cover for liability for resultant
