When you purchase liability insurance, you don’t tend to think about the different types of liability and if they are included in the liability insurance policy you just purchased. Our last newsletter addressed professional liability versus general liability, but what do these policies really cover? There are two general areas of damages we commonly discuss when transferring liability risks through insurance – compensatory and punitive damages.
The easiest way to describe compensatory damages is that it makes someone whole after a loss. It pays the monetary amounts necessary to replace what a person lost because of your negligence. This could be repairing or replacing property, loss of income, medical bills, or even additional expenses incurred after an incident caused by your negligence. These are the types of damages most people think of when they purchase insurance to protect their personal or business assets. However, your exposure to loss may go beyond making an injured party whole again and it isn’t always included in your insurance policy.
Punitive damages are monetary compensation awarded to an injured party that goes beyond that which is necessary to make them whole after a loss and is intended to punish the wrongdoer. Punitive damages are a way of punishing you based on the theory that the interests of society and the injured party can be met by imposing additional damages on the defendant. In other words, it is intended to make the risk of loss larger to get your attention, so you will make more of an effort to avoid incidences or to correct an exposure to lower the chance of loss. Punitive damages are not awarded easily as you have to be proven to be malice or reckless – grossly negligent. However, if this coverage is not included in your liability policy and is not being discussed by your insurance agent, you don’t really know if you are covered and when a loss occurs, it is too late.
This month’s case study has a situation where a business was about to purchase a liability policy that excluded punitive damages. Their quote actually listed the exclusion on it. However, it was not highlighted by his agent and the client didn’t notice it among a list of common exclusions. The agent, a national broker, made no effort to get an optional quote for the client to even consider the coverage. Situations like this is why we rely so heavily on our insurance audit process and why the process includes the review of policies for any prospective client.
-W. Greg Whitlock, CIC, CRM, President