Liability Guide to Risk Management

An Overview

REDUCING RISK is GOOD BUSINESS

Failure to follow REASONABLE STANDARDS OF CONDUCT can lead to liability

Depending on the type of risk, a proper risk management plan can REDUCE, TRANSFER, RETAIN or ELIMINATE the potential loss or injury

Insurance is a necessary evil for business, and is often an important part of a risk management program. Insurance must never be thought of as an entire risk management program. When it is combined with the other parts of a risk management program, insurance transfers responsibility for financial loss away from the business to an outside source. Insurance is necessary in situations where the risk cannot be eliminated, reduced or absorbed by the business. Insurance allows the business to acquire adequate funds to compensate for potential losses.

Insurance, aside from coverage losses, provides funds to cover the legal costs that result from injury litigation. Even if the business is eventually found not responsible for the injury or loss, the legal costs can be extremely high.

The Philosophy of Risk Management

A good risk management strategy performs four major functions:

  1. It REDUCES risk by limiting the chance of mishap. Enforcing rules is an example of risk education.
  2. It TRANSFERS risk by making others responsible for injuries or loss. For example, contracts and insurance transfer responsibility for injuries away from the business.
  3. It RETAINS risk by being prepared for mishaps. Having an emergency action plan ensures that if an incident does occur the actual loss or damage will be minimized.
  4. It ELIMINATES risk by stopping activities which will cause injury. By stopping work on a project when conditions become dangerous or blocking off an unsafe area, you ensure that injuries will not occur.

A good risk management plan reduces the chance of an injury occurring and, if an injury does occur, minimizes the potential for a lawsuit. If there is a lawsuit, the plan lowers the chances of the suit's success. Finally, if the legal action is successful, it reduces the financial consequences for the business. 

Liability

As a business person, it is helpful to understand your legal obligations. When a third party is injured as a result of someone else’s mistake, financial reimbursement may be obtainable through a lawsuit. The courts expect that a common sense approach will be brought to the situation at hand and reasonable care will be exercised in handling it. Failure to follow or enforce appropriate rules and regulations, not correcting dangerous situations or improper preparation for foreseeable emergencies, are all scenarios that have the potential to result in liability. In the recent case of Hunt versus Sutton Group Realty the Ontario Supreme Court determined that the employer was responsible for an impaired employee driving after an office party, and that they should not have allowed her behind the wheel of a car. They failed to correct a dangerous situation and because she was impaired and incapacitated by the liquor that they served, they assumed responsibility for her actions. 

Insurance & Contract Law

A liability insurance policy is not a medical or accident policy to insure companies against losses from injuries. It is a contract insuring the firm - its employees, directors and officers - while acting on its behalf against liability to third parties for negligence and providing a defense against such claims. For coverage to apply, the activity must be a company function.  Liability equates with responsibility - it is the responsibility which falls upon persons by virtue of their actions or arising from their ownership or use of something - it is liability imposed by law.

Law imposes liability in three different ways:

  1. A finding of negligence when someone commits a tort (wrong) against another person/s causing injury or damage.  A tort is defined as an injury, other than a breach of contract, which the law will redress with  monetary compensation.
  2. A finding in nuisance (private or public nuisance relating to the holding of land under the common law).
  3. Breach of contract (one may attract liability by breaking a contract).

With regard to negligence, in order to be successful a plaintiff must establish three things; the existence of a duty of care and a breach of that duty and a dollar amount of damage caused by the breach 

Liability (CGL) Insurance

Our system of civil justice imposes responsibility (liability) to both individuals and corporations. Courts will judge each set of circumstances brought before them and attempt to compensate those who have suffered injury or damage due to the negligent action of others. Over the years, as individuals and corporations became more aware of the responsibility they owed to others, they determined that they could not accurately predict, nor then budget for, the amount of compensation that might be awarded. This compensation then became the subject of liability insurance. Its main purpose is to provide protection to the Insured with respect to certain types of injury or damage caused by their negligence.

Liability insurance takes many forms.  The type and limit of coverage required by an organization depends upon their operations, the extent to which these operations may be subject to litigation, and the anticipated level of compensation that could result from such an action.

Since most organizations deal with the public by providing services or products, they have a greater chance of causing catastrophic harm to others than does the average person who has very little contact with the public in his private life.

There are three types of insurance policy contracts dealing with tort liability coverage:

  1. A Commercial General Liability (CGL) insurance policy defends negligent acts, which result in bodily injury or property damage to third parties.
  2. An Errors & Omissions Liability policy which defends the individual for third party legal liability resulting from an actual or alleged error omission, or negligent act.
  3. A Directors & Officers Liability (D&O) insurance coverage defends the wrongful actions of the board of an organization which result in financial harm and tort legal action from a third party (parties). 

For more detail on what is not covered in a liability insurance policy you need to refer to the policy contract wording.

The Duty to Defend

In addition to providing protection to an Insured for damages suffered by a third party, liability insurance policies also contain provisions requiring the Insurer to defend certain types of lawsuits brought against the Insured. With respect to liability insurance, the limit stated in the policy is merely the maximum amount that will be paid to a third party on behalf of the Insured. In addition to this is the cost of providing a defense and this cost is not contractually limited. The costs resulting from lengthy investigation, initial court proceedings, appellate litigation, and the interest on judgements frequently exceed the amount of the loss and have the potential to exceed the limit of liability.

The duty to defend is always tied to the obligation to indemnify. In other words, the only claims that the Insurer must defend are those which, if proven, would fall within the scope of liability coverage provided. The Insurer is not obligated to defend claims which fall wholly outside the scope of coverage. Further, the duty of the Insurer to defend a claim or suit falling within the scope of coverage, ends when the amount paid in settlement of claims or suits reaches the limit of liability stipulated in the policy.

Unincorporated Organizations

According to the law, unincorporated organizations do not exist, therefore as such they can neither sue or be sued. If an accident occurred as a result of an activity organized by an unincorporated organization, the plaintiff would probably sue the officers or directors and attempt to establish personal liability. If negligence is proven, the individuals who face liability will not be able to hide behind the corporate identity of the organization. 

Liability of an organization is established in either of two ways; vicariously through the specific negligence of its servants (e.g. officers, volunteers) or through direct liability for negligence on the part of the organization as a whole.

Protected Persons

Persons protected by liability policies will depend upon the type of liability coverage provided contractual liability assumed and the nature of the operation

The Named Insured is always fully protected and subject, of course, to the policy terms, conditions and exclusions. Other individuals or organizations may also be protected under the policy. The additional insured may be specifically named or unnamed, depending on their relationship with the Named Insured.

The Named Insured is the person or organization named in the liability policy declarations. In other words, it is the risk whose liability we have underwritten and accepted and to whom our insurance policy is issued.

The Named Insured must be a legal entity. In basic legal terms, an individual has legal status simply by being. An organization must be recognized to some extent in legal terms as having a sufficiently separate existence which enables it to own property, conduct lawful business, enter into contracts, sue or be sued, and make or carry out decisions through its agents, to qualify as a legal entity.

An insurable relationship is one in which a person or organization may incur tort liability simply because of its position, relationship or association with the Named Insured or what the Named Insured is, does or has.

Usually a relationship is considered insurable if it is based on or involves a position or job held or occupied with the Named Insured, such as a director, executive officer, employee,  a special relationship or association with the Named Insured or an additional insured, such as being the spouse, or a partner, stockholder,  a premises or other property owned, rented, leased or borrowed by the Named Insured, a financial interest in the business or property owned or operated by the Named Insured or work done by or for the Named Insured .

Additional Insured

The person or organization named in liability policy declarations is not necessarily the only person or organization protected under the contract. In addition to the Named Insured, certain other persons or organizations will be protected under various liability policies by virtue of their insurable relationship with the Named Insured. Although these persons or organizations may be afforded coverage under the liability policy, there are significant differences between them in the areas of rights, duties and coverage.

Some or all of the following Additional Insured may automatically be covered under a liability policy: 

if an individual is named, that person and his or her spouse if a partnership or joint venture is named, the members of that partnership or joint venture and their spouses if an organization other than a partnership or joint venture is named, the organization named and its executive officers, directors and stockholders employees of the Named Insured (for acts within the scope of employment) any person (other than an employee) or organization while acting as the Named Insured real estate manager

Contractual Liability Assumed

In today’s business environment contracts play an integral role in the delineation and management of the contracting parties’ responsibilities and obligations. The widespread use of contracts is evident with nearly all service, purchase, lease or rental relationships governed by contract, whether written, oral or implied.

It is important to understand that even though the Named Insured may assume the liability of another party by contract or agreement, not all such contracts or agreements are covered within the scope of general liability insurance. Contractual liability is not covered by a separate insuring agreement. Rather liability for injury or damage assumed by the Insured under any contract or agreement will be specifically excluded. Coverage is then granted for specific contracts or agreements by exception to this broad exclusion. Coverage that would have existed in the absence of a contract or agreement is also covered by exception.

Contractual Liability is the liability resulting from agreements to transfer liability. Such agreements are also referred to as “Hold Harmless” agreements. For written contracts, these agreements will usually be located under a section or clause that references indemnification. Although the contract verbiage used to effect the transfer of liability varies, they can usually be recognized by the inclusion of such terms as “assume”, “hold-harmless” and/or “indemnify”. Most courts will not uphold a transfer of liability resulting from the sole negligence of the indemnitee or events which are beyond the control of the indemnitor. The argument against such a transfer is that the responsible party should be held accountable for liability resulting from their acts of sole negligence or control.

Medical Payments

This insuring agreement covers reasonable medical expenses incurred by a third party without the need to prove negligence or establish any other legal obligation on the part of the Insured. In other words, it applies on a no-fault basis.

Coverage applies to reasonable medical expenses incurred and reported to the Insurer within one year after sustaining bodily injury. The bodily injury must be caused by an event which occurs while the agreement is in effect and result from business activities. The injured party must submit to any reasonable medical examinations by a doctor chosen by the Insurer.

Automobile Liability

Automobile insurance coverage is mandated by provincial acts of parliament and mandatory insurance coverage is required for all vehicle operators as specified by the law in all provinces and territories of Canada. Third party liability coverage is covered by these regulations so all operators and managers must understand their exposures under the law. There are several situations under which someone can have liability imposed by law: negligence, vicarious liability, under contract, and deliberate acts.

Vicarious liability is liability resulting from the negligence of others (e.g. a master/servant relationship) someone the insured has permitted to operate the automobile. It has been established by law that if someone is working and or a volunteer for an organization, he is carrying out instructions for their benefit. Therefore, the company must be responsible for the actions of employees. In the same vein if the company owns or rents a vehicle and lends it out to other people, it must take responsibility for their negligent actions. 

Liquor Liability

The CGL policy insures the named for liability in the case of liquor served to third parties. Vicarious liability attaches in the case of Sutton Realty versus Hunt the party providing or selling liquor assumes responsibility for the actions of persons for whom they have impaired their ability to act responsibility. They are responsible for their actions until they are no longer a hazard, or their blood alcohol level is less than .08, as defined by the law. 

Errors & Omissions Insurance

Consultants and professionals require coverage for personal liability exposures with regard to their work. Professional liability insurance or Errors & Omissions insurance coverage shields personal assets and helps to defend and maintain a good reputation. Protection extends in your defense, even in the event of allegations of wrong doing, which may be frivolous or false. 

Insurance policies give people the assurance that adequate funding will be available to make amends for any wrong that has been committed.  Amends for damages resulting from the actions of a professional forester or consultant.

A professional liability insurance policy covers errors, omissions or negligent acts which arise from the normal or usual duties carried out by the insured. Registered Professional Foresters (RPF) are responsible for their actions in the practice of forestry, and an “RPF” designation indicates a greater duty of care and knowledge in matters relating to the forestry business.

The public, government, and the legal system expect more of professionals. Professional standards and codes of conduct set higher expectations, which make people more inclined to pursue disciplinary action or to sue. When adjudicating cases, the courts base their judgements on an increasingly higher standard of care and responsibility. The ever-increasing levels of education, training, experience, regulation, and reputation of professionals have lead the public to demand service which is superior than the average person.

The employed professional who offers an opinion or “moonlight” professional services on his or her own time is personally liable for the consequences of these actions. The policy of the employer may not cover the liability exposures of the moonlighter.

When a claim does occur, the professional’s decision to have obtained professional liability will remove the financial consequence of a legal action and provide them with a solid reputable insurer, offering in house legal expertise, upon whom he or she may rely in full confidence.

Claims do not always come directly from the clients involved but their insurers, lenders and other interested third parties may try to recover a financial loss, by going after project advisors and consulting professionals. Who are the end parties? Who may use your work and rely on your opinion? 

See also Information on Errors & Omissions Insurance

For more information, or an application form, call the OPFA office.  

Directors & Officers Insurance

Directors & Officers insurance policies indemnify directors and officers for the board or corporation’s actions that may cause a financial exposure for them personally. In the eyes of the court each director is responsible for the board’s actions whether they participate in the vote or not. Absence from a meeting and the level of voting ability, may not abrogate your fiduciary responsibility as a director. 

Lawsuits involving directors and officers have created complex coverage issues. The Directors and Officers of a corporation face the possibility of incurring personal financial liability, due to their responsibilities for their decisions as a corporate director. Directors of corporations have a fiduciary duty to the organization’s shareholders and other stakeholders to manage their moneys with a high degree of care. 

Employment liability issues, abuse, harassment and discrimination lawsuits have increased in frequency, resulting in large legal costs and settlements. Wrongful dismissal and breach of contract coverage are two exclusions from directors and officers insurance policies. 

There is also developing law in the area of vicarious liability of the organization for the intentional acts of employees specifically assaults upon third parties. In British Columbia organizations have been held vicariously liable in two recent decisions, while in Nova Scotia a church was found not to be liable on appeal. 

Directors & Officers Insurance coverage is a major part of any plan to manage these risk exposures. It is important to read the policy and is exclusions to ensure that they fit within your requirements. Coverage for punitive or exemplary damages arising from abuse or breach of fiduciary duty are increasingly common. 

This type of insurance is in place for the members of the governing Council of the OPFA.