Underwriters 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, 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 well-recognised 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 damage was an optional extension, along with bailment and other common extensions.
In the 1990s the liability underwriter at New Zealand Insurance, Karl Kemp, decided he wanted to adopt a type of PL policy that incorporated all the common extensions as standard. The Americans had a policy like this called a Broadform Liability Policy.
Typically, the American version had just one overly broad insuring clause, followed by a lengthy list of exclusions. This made the extent of the cover hard to fathom as an insured had to digest all the exclusions first before the cover (what the exclusions didn’t address that still came within the insuring clause) could be determined.
The New Zealand Insurance version turned this on its head by putting all the insuring clauses of the common extensions together into the policy, making the various categories of cover easier to navigate.
The Broadform Liability policy has now become the dominant type of PL product in New Zealand.
Liability in connection with advice
One of the key exclusions in a PL policy is the one about liability in connection with advice given by the insured to a third party. This exclusion creates the key underwriting demarcation between a PL policy and a PI policy. A PI policy does not have this exclusion.
In the decision of Timtech Chemicals Limited v QBE Insurance (International) Limited CA 219/2011, the Court of Appeal considered what amounts to advice. The insured manufactured industrial equipment used to treat freshly sawn timber in a type of kiln. The process was a delicate one needing the precise setting of ‘set points’ in the equipment. The insured made a mistake in these settings resulting in the third party incorrectly treating a large amount of timber, making it unsaleable as intended.
The insured held a PI policy, but not a PL policy. It tried to argue that the mistake it made in the settings was advice. The Court of Appeal rejected this. It said:
[40] The fatal flaw in this argument is that TimTech did not communicate that “technical advice” (that is, the design or fixing of the set points on the Uniplant) to CHH. In the text Professional Indemnity Insurance Law, advice is defined as “the communication of information or opinion, perhaps even couched in the form of a promise”. The information comprising the advice may be communicated in a number of forms. But, however it is done, communication to the recipient is an essential element of advice. Unless communicated, the advice is merely an internalised opinion.…
Therefore, it is an essential element of any advice that information is communicated to the third party, otherwise it is not advice at all.
Insured parties
A PL policy primarily insures the legal entity conducting the insured business, whether it is a sole trader, partnership, incorporated company, or some other incorporated entity.
The cover under the policy is commonly extended to include partners, directors, and employees of that legal entity, as applicable.
Professional Indemnity
Liability in connection with advice
As the name of a Professional Indemnity (PI) policy implies, it was originally aimed at the traditional professions. The need for it was obvious. The traditional professions generally sell advice, not products. As the PL policy excludes liability in connection with advice, another policy covering advice was needed.
In the light of this, it is perhaps surprising that the only indication that this is the main purpose of the policy is the absence of the advice exclusion found in the PL policy. The significance of this absence is not obvious to a casual reader of the policy.
Description of business activity in the schedule crucial
Historically, the policy has often been triggered by a ‘wrongful act’ in connection with the insured’s business as described in the schedule. The definition of ‘wrongful act’ had a large number of failings, many of them torts, and usually included any ‘act or omission’ by the insured. Given those words will apply to almost any situation, the rest of the words in the definition achieve little.
More recently, policies have done away with the definition of ‘wrongful act’ and simply cover any act or omission of the insured in connection with the insured’s professional services as described in the schedule. This makes that description especially important.
Brokers take note: make sure that definition is both comprehensive and all-encompassing of the insured’s business activities. The use of the adjective ‘professional’ in policies does not limit the cover anymore, despite it still being used heavily by underwriters. The business skills the underwriter agreed to cover in that description are what counts in terms of the nature of the business activities covered.
In one Australian court case, the insurer argued that there was no cover for the activities of a real estate business because those activities were no professional. This was despite the description of the business in the schedule clearly referring to real estate activities and the insurer agreeing to insure them. The court gave that argument short shrift.
Liability for property damage
Broadly, there are two types of advisers: those whose negligent advice will result in the third party suffering economic loss (e.g., lawyers, accountants, and financial advisers), and those whose financial advice will result in property damage, or both (e.g., architects and engineers).
It is important to consider which category a client falls into. This is because some PI policies are aimed at the first category only and have an exclusion for liability for damage to property. This is obviously of little use to an architect or an engineer.
Some businesses involve both giving advice and selling a product. In this situation, the policy often just excludes liability in relation to the selling of products by the insured. This keeps the cover in place for the advice element but excludes product liability for resultant damage that a PL policy covers.
Insured parties
A PI policy primarily insures the legal entity conducting the insured business, whether it is a sole trader, partnership, incorporated company, or some other incorporated entity.
The cover under the policy is also commonly extended to include partners, directors, and employees of that legal entity, as applicable.
Directors and Officers Liability
Liability as a director
The primary purpose of a Directors and Officers Liability (D&O) policy is to address the liability exposure of the directors of a company under the Companies Act 1993.
A company is a legal entity that requires its own PL or PI policy, or both. In certain circumstances the directors of a company can be sued personally, either separately or in addition to the company, and they need their own liability policy to address this separate liability exposure. A D&O policy achieves this; it is a separate type of PI policy for the directors.
Many companies indemnify their directors for breaches of their duties as directors out of company funds, short of an intentional or fraudulent breach by them. A D&O policy recompenses the company for this payment instead of the directors. This is the second limb of the policy.
Some D&O policies have a third limb of the policy that provides liability insurance for the company itself. However, this is just the same as providing a separate PI policy to the company. The two products are being combined under the one policy.
We have seen that the cover under both a PL and a PI policy is extended to include the directors of an insured company as well. How is the intended cover under a D&O policy kept separate from this? The usual way is to limit the cover under a D&O policy to directors whose alleged liability is in their capacity as directors only.
We are not aware of any case law that has determined the boundaries of this capacity.
The name of a D&O policy includes the word ‘officer’. Under the latest Companies Act 1993, there is no legal standing for this title, so it is redundant.
However, a D&O policy covers employees of the company as well. In our experience, this cover is often forgotten about. It is not clear whether this cover is meant to overlap with the cover for employees under a PL or PI policy, or somehow be separate from it.
Summary
1. A business selling, constructing or repairing goods needs a PL policy that covers liability to a third party for damage to its property resulting from a fault in those goods.
2. A business selling advice needs a PI policy that covers liability to a third party for its economic loss arising from any fault in that advice. Depending on the subject matter of the advice, this may need to extend to liability for property damage as well.
3. Directors of companies (and managers of other incorporated entities) need a D&O policy that covers directors’ breaches of duties contrary to the Companies Act 1993.
4. Employees have separate cover under all three types of policy.
Please feel free to contact us if you require any further information.
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Crossley Gates | cgates@keegan.co.nz
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Frank Rose | frose@keegan.co.nz
