Liability Insurance- Employers Liability Policy - Essay Example

Liability insurance- Employer’s liability policy Name Course Tutor Date Liability insurance- Employer’s liability policy Introduction Liability insurance is one of the common insurance policies since its cost are much less as compared to the full coverage policies. This kind of policy is responsible for protecting one from being held responsible for the other parties’ damages. In simple terms, liability insurance is only responsible for covering other people loses, this means that the property of the owner are still unprotected (Bowdren, 1999). This insurance policy is a portion of general insurance system of risk financing which protects the insured against the risks of liability imposed to him by the lawsuit and other claims. The insured is protected in the event he is sued for the claims that occur within the insurance policy (Robinson, 2009). In reality, liability insurance is there to offer protection against the third party insurance claims where the compensation is given to a third party suffering a loss that was caused by the insured. On the other hand, a loss caused intentionally and contractual liability is not covered in liability insurance policy. Liability insurers have three duties; they include the duty to defend, the duty to indemnify and the duty to settle reasonable clear claim. Under the duty of defend, the insurer comes in to defend the insured against the claims leveled against him by the third party (Bowdren, 1999). When the insurer decides to defend the insured it means may be the claims are not under coverage, thus they protect the insured not to pay compensate the third party. Under the duty of indemnifying, the insurer comes in to compensate the damages caused to the third party after satisfying that the claim is under the coverage (Robinson, 2009). Whereas under the duty of settling under reasonable claims means that the insurer has the responsibility of ascertaining the exact amount that should be paid to the third party not exceeding the policy limits. This means that the process of compensation in liability insurance may involve several considerations before the compensation is reached. There are different forms of liability insurance. We have public liability insurance, product, employers, professional, directors’ and officers’ liability insurance. Public liability insurance protects a firm from third party claims. Director’s and officers’ liability insurance protects the acts or the omissions of the people in the office positions (Oliver, 2003). Employer’s liability protects the third party in most case the employees from the damages caused by the employer. While professional liability is protect those people seen as professionals in a given field in case the cause damage to the third party. In general, these forms of liability insurance protect an individual from the claims initiated by the third party. This paper specifically focuses on the employer’s liability insurance. It will show the mechanism the insurers use when underwriting, it will show the factors based on when pricing the premiums to be paid by the insured. Moreover, the paper will have to discuss the external factors that will affect the underwriting and the pricing process. Employer liability insurance Employers’ liability insurance is a policy that covers the health and safety of the employees within an organization Wills.com (2011). In most cases, employees are injured at their place of work; the employer is required to take the responsibility of the damages caused to the employee. The employers liability policy is a compulsory act which ought to be taken by every employer who employees workers in his firm (Oliver, 2003). This policy ensures that an employer has at least a minimum level of coverage against any claims that may arise. The employers’ liability insurance coverage often enables the employer to meet the cost of compensation for his employees, damages. Why should a business entity or an employer take an employers’ liability coverage? First it is under the law that every employer who employees workers either on permanent or casual basis must take this form of insurance policy Wills.com (2011). This is meant to protect the employees from the damages they may get when working in the employers premises. Therefore, it is mandatory for any employer to have this coverage. Secondly, somebody’s business could be prosecuted and fined by the authorities if there is no cover of amounting up to five million pounds Wills.com (2011). Thirdly, an employer who does not have this coverage may face a major claim for compensation if his employee suffers damages because of working in his business premise. History of employers’ liability insurance The history of employers’ liability has its roots back in 19th century at around 1880 in the United Kingdom. This insurance cover emerged because of backdrop of industrialization and the growth of the railway construction, which created risks that could easily lead to injuries to the workers (Hse.gov n. d). During this time, employees were able to claim compensation for the damages caused under the provision of the workmen’s compensation act 1897. Moreover, the workers retained the right to sue their employers in common law although they could not get both civil damages for the negligence and awards under the act the new act (Oliver, 2003). Initially, workmen’s compensation only covered the accidents but later on in 1906, it extended to cover diseases. Employer’ liability insurance greatly developed in the mid twentieth century from 1940 to 1950 to compliment the state benefits. Workmen’s compensation act was replaced by industrial injuries scheme in 1948 (Oliver, 2003). This industrial injuries scheme intended to cover loss of earnings and health care costs and the elements of pain and suffering. Prior to 1972, when the workers leveled claims against the employer, claims often failed because the employers did not hold employers’ liability insurance policy due to inadequate funds. This necessitated the making of the employers’ liability policy to be compulsory for every employer to ensure that the funds were available when the employees make the claims for damages (Mathias, Neumeier & Burgdoerfer, 2000). In 1980, some legislation to this coverage was introduced to govern the time limit within which a person injury case can be brought into action. This act was called limitation act 1980 .This act states the clams for personal injury should be brought to within three years from the date, which the injury occurred. There has been significant increase in the scope of coverage where medical and technical advances has occurred and linked to the workplace injuries. Employers’ liability coverage has been also altered by various legal changes that have been effected in the course of time (Mathias, Neumeier & Burgdoerfer, 2000) These legal changes have influenced the claims handling, legal action funding, and level of damages and the conduct of litigation. Most of these changes have even increased the costs of the claims. Another issue in the current employers’ liability is that there is a sense that people are more aware of the rights and responsibilities (Robinson, 2009). ). Claims pursuance is aided by the introduction of the conditional fee arrangements and even the development of the legal expenses. This has enabled individuals to pursue the claim action irrespective of their financial means. Conditions for compensation in employers’ liability For an employers’ liability claim to succeed by the injured worker, some conditions must be satisfied. First, the employee should prove the negligence of the employer before any compensation is made .This means that the complainant should prove that the employer had a legal duty of care and he breached this duty when the injury or damage occurred (Bowdren, 1999). In case negligence is not proven, both the insured and the insurer have no legal liability hence the injured person would not be compensated. Secondly, the bodily injury or the financial loss, which the plaintiff is complaining about, must arise out of and in the course of the employees’ employment for the insured. This implies that employers’ liability is payable only when a third party suffers body or financial damage as a direct result of the work related damage (Robinson, 2009). One cannot claim compensation for the injuries he sustained from outside from the employers work. Thus, the plaintiff or the injured person must prove that the injury he sustained is a direct result of the work of the employer. It can be within the premises of the employer or outside but should be part of the assignments of the employer. Thirdly, the damage caused to the third party must occur during the policy period. This means that for any claim of injury can only hold water during the litigation when it is proved that that incident occurred during the period the policy was covering the risk (Matthews, 2009). When taking employers’ liability coverage, an employer and the insurer agree on the valid period of the policy. This is the duration that the policy would be valid to cover the damages that would occur. This depends on the amount of fees the employer pays to the insurer (Detini.gov.uk, n. d). Therefore, the third party is only compensated when the injury occurred during this specified period. Thus, no claim that can be brought by the third party and be successful when the policy period has expired. Lastly, the compensation covers up to a specific limit. The insurer would not compensate the injured person a large sum of money more that what the policy provided. This limit varies from state to state (Matthews, 2009). However, the employer and the insurer can increase the coverage limit upon the agreement by adjusting the policy requirements. This means that before an insurer compensate a particular third party, it analyzes if the compensation prices are exceeding the amount stated in the policy during the time when the cover was being taken. Underwriting mechanisms Before the underwriter or the insurer of a particular liability accepts to cover a certain liability for the employer in the employer liability, he will use various mechanisms to determine if the coverage is possible. One of the mechanisms is determining if the loss being insured against arise from a pure risk .A pure risk is that one that cannot lead to a possibility of gain by the insured. An insurable risk must have the possibility of only two results i.e. it must lead to a loss or no loss. In case a risk involves a possibility of gain, then it is called a speculative risk. Insurance policies do not provide cover for the, speculative risks, they protect against t the pure risks . The underwriter before accepts the application of the employer to over him for the liabilities, the underwriter will have to determine if the said risks are pure or speculative. He will sort out the risks listed that his employees may be exposed to, cover those one that re pure, and leave the ones that are speculative. The second mechanism is to determine if he can cover employers’ risks is defining the loss. In general, insurance companies cover those losses that can be definable in terms of the cause, time amount and even the place .ime of the loss must be defined in order to determine if the damage occurred during the policy period. As mentioned earlier, an insurance cover policy has a period in which it provides coverage. Any loss or damage that occurs when this period has expired cannot be compensated. On the other hand, the place of the occurrence of the damage must be defined to make sure that the said los occurred within the defined territory stated in the policy. Thirdly, the loss should be calculable. This means that the underwriters should be in a position to calculate both the expected and the actual loss .Here the expected losses are the basis of the premiums to be paid while the actual losses come because of adjustments made for the preceding period for the ongoing coverage. Therefore, for an insurance company to accept to cover an employer against a particular risk, the losses expected must be calculable in financial terms. Another mechanism is that that is used to decide whether to underwrite an employer is when the loss expected cannot occur to many people simultaneously (Matthews, 2009). Even though the insured are vulnerable to same types of losses, the exposure for each insured has to be independent. This means that when the insurer realizes that loses insured against can occur to many people at once, it would not accept to underwrite such an employer Ceclass.com .This is because when a loss happens to many people, the insurer would not be in a position to pay them all or pay the losses since they would be enormous. The last mechanism is the determining if the losses that may occur are unintentional. In insurance deliberate losses are not insurable. The premiums amounts are majorly based on the frequency and the severity of unintentional losses (Matthews, 2009). Intentional losses are taken to be a crime or fraud thus the person involved may be sued for this. The underwriter before accepting to making the insurance policies with the employer to cover some specific risks that the employees are exposed to, the insurer determine whether the losses may be caused deliberately by the employer. If it is likely that the employer can commit cause the losses intentionally for some reasons, then the underwriter refuses to sign a policy of coverage. . Pricing mechanisms or rate determination Pricing mechanism are the methods used by the liability insurers to determine the rates, which the insured would be paying as premiums. In most of the countries, insurance laws influence the determination rates (Wills, 2011). In fact, some states predetermine the amount to be paid through the enactment of some regulatory laws to certain lines of insurance policies However, the management of the insurers determines a large range of rates after examination of the various factors. Insurance companies when pricing the premiums and even dividends use many mechanisms. The first method is judgment rating. Judgment rating is when the underwriters use their own knowledge and experience to certain the rates that should be imposed to a particular risk being covered (Wills, 2011). In this kind of rating, no specified rates are applied. This kind of rating is applicable to the employers’ liability insurance because liability insurance is quite diverse and many factors are involved. The best rates can only be reached when the underwriter takes time to look to the past records. It will help him find the experience so that he can do some comparison with the one being insured against to come up with reasonable rates. Judgment here involves the consideration of the time between the experience and the current times. Things tend to change with time, thus the underwriter would not just heavily rely on the past records but he will also consider the legal, political, social and economic changes between the periods . Another thing that is considered in judgment rating is the probability of the occurrence of the risk covered against. The second rating mechanism is manual rating. Under this kind of rating, the predetermined rates found in manuals are adopted to set the price of the liability policy. Manual rating is the most commonly used method especially in the regulated lines of liability insurance. Manual rating can be promulgated by the government insurance department, the insurance company itself or even by the rating bureau. This kind of rating is less involving because is just a matter of finding how the rates are put in the manual and adopting these rates. In most cases, in employers’ liability insurance, there are common risks normally insured against by the employers. Some of these risks include the body injuries such as cuts, burns, shock, stress, loss of financial earning etc (Bowdren 1999). Therefore, these kinds of risks are common and now there are even standard rates assigned to them and these rates are found in manuals. Moreover, as mentioned earlier, employers’ liability insurance is necessary to every employer. It is under the laws and the state laws predetermine the rates to be paid by the employer to the insurer to ensure that there is enough money to compensate the injured employees. Thus, manual rating in most cases is composed of the rates imposed to the employers by the law to ensure that they cover their workers. The third method of rating is the merit rating. Under this kind of rating manual rating is used and it is modified basing on the certain characteristics of the hazards involved. These modifications of the rates are based on the experience of the underwriter for a specific period (Bowdren, 1999). Under merit rating, we have experience merit rating where the applicant is generally asked about the relevant behavior or experience that he has had in the past to determine the rates of insurance coverage. Therefore, the rates are basically based on the number of violations over this time frame. Under merit rating, we also have retrospective merit rating where the underwriter reviews the loss experience during the policy period and determine the rate basing on the loss experience. It is common on workers compensation and commercial lines of insurance. Moreover, we have scheduled merit rating, which is a complicated kind of manual rating. In this type, the manual rates are used as the base rate then addition or subtractions are done to these base rates to determine the amounts of various hazards characteristics. External factors that influence underwriting and pricing Some of the factors considered by the insurers to determine the mechanisms of rating include; past loss experience, type and scope of the risk, the profit margin, dividends and return to premium and past expenses. In brief, past and prospective loss experience is the experience in record, which the insurer has had in the past, which is more related to the risk being insured. This helps a lot the insurer to estimate the prices of the premiums to be paid by the insured. The type and scope of the hazard or risk to be insured against is also a big determinant of the amount o premiums to be paid, by the insured. When the risk is quite vulnerable to the employees in the firm, it means that the damage would likely to occur (Oliver, 2003). Therefore, the insurer would probably be required to compensate the injured person. The degree of likelihood raises the amount of the premiums that would be paid by the insured. The reasonable profit margin is the profit the insurer is expected to earn by covering the insured over a particular risk. Insurance work is a business; any business has the aim of earning a profit at the end .Therefore, before the insurance company decides to settle for a certain amount of money as premiums to be paid by the insured; something inform of profit must be on top of the amount paid. This is compared to the compensation fee that would be paid to the injured party. Lastly, the past and prospected expenses should also be a guide on what amount of premiums that ought to be paid by the insured. At least in the past records of the insurance company it must have experienced such a risk it seeks to cover a client. Therefore, this past record would be a guide to it to determine the right amount. Conclusion Liability insurance is one of the most common kinds of insurance policy coverage provided by the insurance companies. Liability insurance policies do not cover directly the losses for the insured but protect the damages that may be caused to the third party. Under liability insurance, we have different forms of coverage; we have public liability insurance, product liability insurance, employers’ liability insurance etc. Employers’ liability insurance is an old insurance coverage, which dates back in 19th century. Thus, form of coverage protects the safety and health of the employees within the employers’ premises or work. Before an insurer accepts to cover a particular employer against the risks his employees are exposed to, the insurer will have to use many mechanisms to ascertain if the employer is eligible to be covered. On the hand, the insurer or the underwriter use different mechanisms to determine the amounts of prices he will attach to the premiums to be paid by the employer when covering particular risks. In deter mining the eligibility and the amount to be paid by the insured, some external factors have o be considered first in order to reach to such decisions. Employers’ liability insurance has enabled the employers to work with ease since they know that they are covered against the damages that may occur to their employees. Bibliographic references Bowdren, Kelly. (1999). Employment practices liability insurance. Cornell University. New York. USA Ceclass.com. Insurance underwriting: Online study book. Accessed on web 28th Nov 2012. Retrieved from http://www.ceclass.com/CE-164%20UNDERWR.pdf Detini.gov.uk. Review of employers’ liability compulsory insurance. Accessed on web 28 Nov 2012. Retrieved from http://www.detini.gov.uk/dw2583_employers_review.pdf Hse.gov. Employers’ liability (Compulsory insurance) Act 1969. A guide for employers. Accessed on web 28 Nov 2012. Retrieved from http://www.hse.gov.uk/pubns/hse40.pdfs Iowa employers’ liability commission. Report of employer’s liability commission. General books. USA. Matthews, Attorney, Joseph. (2009). How to win your personal injury claim. Nolo. Berkeley. California. USA. Mathias, J. Neumeier, M. & Burgdoerfer, J. (2000). Directors’ and officers’ liability. Law Journal press. New Jersey New York. USA. Oliver, M. (2003). Employer’s liability cases. International specialized book service. New York USA. Qbeeurope.com. Excess employer’s liability insurance (A). Accessed on web 28th Nov 2012. Retrieved from http://www.qbeeurope.com/documents/casualty/library/PLEX010807_Excess_Employers_ Liability_Insurance_%28A%29.pdf Robinson, A. (2009). Employer’s liability. Bibliolife. South Carolina. USA. Wills.com. (2011). UK’s Employers’’ liability- A guide. Accessed on web 28th Nov 2012. Retrieved from http://www.willis.com/Documents/Publications/Services/International/2011/UK_Intl_Ale rt_0911_v3.pdf Read More