Liability Principles Applied
A liability policy pays what its insured is legally obligated to pay, up to a limit, and not a dollar more. Four questions decide most claims: whether the insured was legally at fault, how much fault the law assigns to each person, how the limits divide among the people hurt, and which of several policies pays. Each question is worked below with numbers. The sections that follow cover the two clauses that protect a lender or other third party named on a property policy, and the loss ratio that tells an insurer how its book is performing. Every name and figure in the examples is invented and is not a statutory figure.
Deciding Whether the Insured Was Negligent
A claimant who sues a policyholder for negligence has to prove four things: the policyholder owed a duty of care, breached it, the breach caused the harm, and the harm produced damages. Take each against a case.
Ridgeway Tree Service sends a three-person crew to remove a damaged maple beside a driveway. The crew leaves a cut limb hanging in the canopy overnight without a warning sign. In the morning a delivery driver, Amara Okafor, parks beneath the tree, the limb falls, and she suffers a broken collarbone and her van’s windshield is destroyed.
- Duty. A contractor working beside a place the public uses owes a duty to take reasonable care not to endanger people nearby. Ridgeway owed it to Ms. Okafor.
- Breach. A reasonable crew would have dropped the limb or cordoned the area. Leaving it hanging unmarked fell below that standard.
- Causation. The limb falling caused the injury. The test has two parts: the injury would not have happened without the breach, and falling limbs injuring people below are a foreseeable result of leaving them hanging.
- Damages. Medical bills, lost earnings and pain are bodily injury damages. The windshield is property damage.
If any of the four fails, there is no negligence. Had a storm snapped the limb loose and Ridgeway’s crew had already finished and marked the site, causation or breach would fail, and the policy has nothing to pay for liability. Policies defend and pay for what the law makes the insured liable for, so the analysis comes before the coverage question.
What Michigan Does With the Claimant’s Own Fault
A rule that any fault by the injured person defeats the claim is not the rule in Michigan. Michigan assigns every person a percentage of fault and reduces the recovery to match. Two statutes do the work.
First, in a tort action for personal injury, property damage or wrongful death, the trier of fact allocates the liability of each person in direct proportion to that person’s percentage of fault, subject to MCL 600.6304, and it considers every person’s fault whether or not the person is a party (MCL 600.2957(1)). A person who was never sued, such as a contractor nobody named, can still be assigned a percentage. That assignment does not make the nonparty liable in the case, and it is used only to measure the fault of the named parties (MCL 600.2957(3)).
Second, the court reduces the damages by the percentage of comparative fault of the injured person (MCL 600.2959). If the injured person’s fault is greater than the combined fault of everyone else, whether or not parties, the court still reduces economic damages by that percentage, but noneconomic damages are not awarded (MCL 600.2959).
Economic damages are measurable out-of-pocket losses such as medical bills and lost wages. Noneconomic damages are losses such as pain and suffering. Suppose a jury values Ms. Okafor’s claim at $80,000 economic and $120,000 noneconomic, $200,000 in all, and finds her partly at fault for parking beneath a limb she could see hanging.
| Finding | Her fault versus all others | Economic | Noneconomic | Reduced award |
|---|---|---|---|---|
| She is 20% at fault | 20% is not greater than 80% | $80,000 x 0.80 = $64,000 | $120,000 x 0.80 = $96,000 | $160,000 |
| She is 50% at fault | 50% is not greater than 50% | $80,000 x 0.50 = $40,000 | $120,000 x 0.50 = $60,000 | $100,000 |
| She is 60% at fault | 60% is greater than 40% | $80,000 x 0.40 = $32,000 | $0 | $32,000 |
The break point is a tie: a claimant exactly as much at fault as everyone else combined keeps the noneconomic award, reduced. One more percentage point of fault removes all of it. A producer explaining why a seemingly strong claim paid little should look at this line before anything else.
Now add the allocation rule. The jury assigns Ms. Okafor 20%, Ridgeway 50% and a utility contractor who left a loose line on the tree 30%. The utility contractor is not in the lawsuit.
| Person | Fault | Share of $200,000 |
|---|---|---|
| Ms. Okafor | 20% | $40,000 |
| Ridgeway | 50% | $100,000 |
| Utility contractor (nonparty) | 30% | $60,000 |
In an ordinary negligence case like this, Ridgeway answers for its own 50%, or $100,000. Its liability policy pays that amount if it is within the limit and the loss is covered. The $60,000 assigned to the nonparty is not collected from Ridgeway, and the insurer owes nothing for it.
Auto claims follow their own statute. In an auto accident in Michigan, noneconomic damages are assessed by comparative fault, and a person more than 50% at fault cannot recover them (MCL 500.3135(2)(b)). The claimant must also first meet the serious-impairment threshold that Michigan’s no-fault rules set.
Dividing Limits Among Several Claimants
Limits are a ceiling for the whole accident, however many people claim. The arithmetic differs for split limits and a combined single limit, and neither is always better for the insured.
A liability policy carries split limits of $100,000 per person, $300,000 per accident for bodily injury, and $50,000 for property damage, written 100/300/50. A second policy carries a $300,000 combined single limit. These limits are for the example. For a vehicle registered or principally garaged in Michigan, the required minimums are $250,000 per person and $500,000 per accident for bodily injury and $10,000 for property damage, and a named insured may choose bodily injury limits as low as $50,000 and $100,000 on the Director’s form (MCL 500.3009(1), (5)). The example’s bodily injury limits are such a choice.
Scenario 1: Three Injured and Property Damage
Three people are hurt and a storefront is damaged. The claims are $140,000, $90,000 and $120,000 for bodily injury and $65,000 for property.
Under the split limits:
- Claimant A: $140,000 claimed, capped at $100,000 per person. Excess: $40,000.
- Claimant B: $90,000 claimed, under the cap. Excess: $0.
- Claimant C: $120,000 claimed, capped at $100,000. Excess: $20,000.
- Bodily injury paid: $100,000 + $90,000 + $100,000 = $290,000, which is under the $300,000 per-accident cap.
- Property damage: $65,000 claimed, capped at $50,000. Excess: $15,000.
- Total paid: $290,000 + $50,000 = $340,000. The insured owes $40,000 + $20,000 + $15,000 = $75,000.
Under the $300,000 combined single limit, the claims total $415,000. The insurer pays $300,000 and the insured owes $115,000. Here the split limits pay $40,000 more, because their three limits add up to $350,000 against a single $300,000.
Scenario 2: One Severely Injured Claimant
One person suffers $250,000 in bodily injury and the property damage is $10,000.
- Split limits pay $100,000 for the person and $10,000 for property, $110,000 in all. The insured owes $150,000.
- The combined single limit pays $260,000. The insured owes nothing.
What the Two Scenarios Teach
A combined single limit helps most when one claim is large, because no per-person cap applies. Split limits can pay more when many claims are moderate and the three limits together exceed the single figure. A producer choosing between them for a client should ask what the likely accident looks like, a single catastrophic injury or several smaller ones with property damage. Neither form protects against a loss that exceeds the total limits, and that gap is why umbrella and excess policies exist.
The standard business auto form is written with a single limit, and it caps what it pays for any one accident at that limit, regardless of the number of insureds, claims or vehicles involved (CA 00 01 03 10, Section II, C). The form sets no priority among claimants. A producer should explain that the limit is one pool for everyone hurt, not a guarantee to any one claimant.
Which Policy Pays When Several Apply
A single loss can fall under more than one liability policy, for example a contractor’s own liability policy and a policy under which the contractor has been added as an additional insured. The other-insurance condition says who pays first and how the rest is shared.
The standard commercial general liability form is primary unless it states it is excess, and it names its excess situations, which include other primary insurance available to the insured for liability arising out of premises, operations or products and completed operations for which the insured was added as an additional insured. When two or more primary policies apply, the form shares by equal shares if every policy allows it, with each insurer paying equal amounts until its limit is used or the loss is paid. If any of the other insurance does not permit equal shares, the insurer contributes by limits, in the ratio of its limit to the total of all limits (CG 00 01 04 13, Section IV, Condition 4).
Three primary policies cover the same loss: Insurer X with a $100,000 limit, Insurer Y with $200,000 and Insurer Z with $300,000, $600,000 in all.
| Loss | Method | X pays | Y pays | Z pays |
|---|---|---|---|---|
| $150,000 | Equal shares | $50,000 | $50,000 | $50,000 |
| $150,000 | By limits (1/6, 2/6, 3/6) | $25,000 | $50,000 | $75,000 |
| $450,000 | Equal shares | $100,000 | $175,000 | $175,000 |
| $450,000 | By limits | $75,000 | $150,000 | $225,000 |
For the $450,000 loss under equal shares, the first round gives each insurer $150,000, but X’s limit stops at $100,000. The unpaid $50,000 of X’s share is divided between Y and Z, $25,000 each, so Y and Z each pay $175,000. Equal shares favor the insurer with the largest limit, since the small-limit insurer runs out first. Sharing by limits asks the large-limit insurer to pay the most from the first dollar.
Excess policies work differently. An excess insurer does not share at all until the primary limits are used up, and the primary insurer in the example does not become liable for more than its limit just because the excess is available.
Protecting Lenders and Other Third Parties on Property Policies
Two clauses name someone other than the insured as a party with a right to the proceeds.
The Mortgage Clause
Under the mortgage clause in a standard homeowners form, a named mortgagee is paid together with the insured, as their interests appear, for losses to the dwelling and other structures. If more than one mortgagee is named, payment follows the order of the mortgages. The clause gives the mortgagee a position the owner’s own misconduct cannot erase. If the insurer denies the owner’s claim, the denial does not apply to the mortgagee’s valid claim, provided the mortgagee does three things: tells the insurer of any change in ownership, occupancy or substantial change in risk it knows about; pays any premium due on demand if the owner has not; and submits a signed, sworn statement of loss within 60 days after the insurer notifies it that the owner failed to do so. The insurer must also give the mortgagee at least 10 days’ notice before cancellation or nonrenewal takes effect (HO 00 03 05 11, Section I Conditions, L).
When the insurer pays the mortgagee and denies the owner, it may either be subrogated to the mortgagee’s rights under the mortgage or pay the whole principal plus accrued interest and take an assignment of the mortgage. Subrogation does not impair the mortgagee’s right to the full amount of its own claim (same clause, items 4 and 5).
Work two losses. A fire causes $120,000 of covered damage to a house whose mortgage balance is $180,000. Payment goes to the mortgagee and owner as interests appear, and the mortgagee’s interest is larger than the loss, so the full $120,000 goes toward the debt. A second fire causes $200,000 of damage with a $150,000 balance: the mortgagee is paid $150,000, and the owner receives the remaining $50,000.
Now suppose the owner set the first fire and the insurer denies the claim. The mortgagee, having kept its duties, is paid its $120,000. The insurer can then pursue the owner for it. Or the insurer pays the whole $180,000 principal plus, say, $2,250 of accrued interest, $182,250, and takes over the mortgage and its collateral.
The Loss Payable Clause
A loss payable clause is weaker than the mortgage clause. In the dwelling fire form, if the Declarations show a loss payee for certain listed personal property, that person is treated as an insured with respect to that property, and is told in writing if the insurer cancels or does not renew (DP 00 03 07 14, Conditions, Y). In practice a simple loss payee, such as a finance company on equipment, is named on the payment but, generally, has no greater rights than the owner. If the owner’s claim fails for fraud, so does the loss payee’s. A lender who wants protection from the borrower’s acts needs a mortgage-type clause or a lender’s loss payable endorsement, and the producer’s job is to read which one is on the policy.
The Loss Ratio
The loss ratio compares what an insurer pays in claims with what it earns in premium. Insurers use it to judge a class of business, an agency’s book, or one account, and to decide whether rates must change.
Loss ratio = incurred losses divided by earned premium.
Incurred losses are claims paid in the period plus the change in reserves, which are the amounts set aside for claims not yet paid. Earned premium is the part of the premium that has been used up by the passage of time on the policies in the period. A one-year policy sold for $1,200 on July 1 has earned about $600 by December 31.
An insurer’s liability book for a year shows these figures:
- Earned premium: $2,400,000.
- Claims paid: $1,380,000.
- Reserves at the start of the year: $400,000. At the end: $520,000.
- Incurred losses = $1,380,000 + ($520,000 - $400,000) = $1,380,000 + $120,000 = $1,500,000.
- Loss ratio = $1,500,000 / $2,400,000 = 0.625, or 62.5%.
If the insurer also spent $180,000 adjusting those claims, the loss and loss adjustment expense ratio is ($1,500,000 + $180,000) / $2,400,000 = 70.0%. If its other expenses, such as commissions and overhead, run at 28% of premium, adding the 28 points gives a combined ratio of 98.0%. A combined ratio under 100% means underwriting made money before investment income, and above 100% means it lost money.
An agency whose book runs a loss ratio well above the insurer’s average should expect pressure on its rates and on its appointment. A loss ratio is useful only when the premium base is large enough to be stable, since one big claim on a small book can swing it.
Lesson summary
- Negligence needs duty, breach, causation and damages. If one is missing there is no liability for the policy to answer.
- Michigan allocates fault in direct proportion among every person at fault, party or not, and reduces the claimant’s damages by the claimant’s own percentage (MCL 600.2957(1), 600.2959).
- A claimant more than 50% at fault, with fault greater than everyone else’s combined, loses noneconomic damages and has economic damages reduced.
- Split limits cap each person and the property; a combined single limit pays any mix up to one figure. Which pays more depends on whether claims are few and large or many and moderate.
- When several primary policies apply, the commercial general liability form shares by equal shares if all allow it, and otherwise by limits.
- A mortgage clause lets the mortgagee collect even if the owner’s claim is denied, if the mortgagee keeps its duties. A simple loss payable clause generally gives the payee no more than the insured has.
- Loss ratio is incurred losses divided by earned premium. Adding loss adjustment expense and the expense ratio gives the combined ratio.