Introduction
“A good decision is based on knowledge, not on numbers” (Plato)
The background to liability insurance is of course liability, largely liability in tort rather than contract,1 liability in tort is the response of society to the wrongdoer where something has gone wrong. For society, the first issue is to identify the wrongdoer and “to decide who should bear the loss resulting from an event.”2 This leads to the question, who is the superior risk bearer? In the view of Posner and Rosenfield in the United States, a “party can be a superior risk bearer for one of two reasons. First, he may be in a better position to prevent the risk from materializing.”3 Prevention, however, the argument continues, “is only one way of dealing with risk; the other is insurance,”4 and, being risk averse, clearly liability insurance is what many if not most people prefer.
In the United Kingdom, it has been shown that most courts today are wary of such exercises,5 in part because the necessary information may not be available to them.6 Courts depend on the submissions of counsel. Counsel are unlikely to incur the cost of research into disciplines such as economics, generally or in the context of the particular case, unless encouraged to do so by the court. However, the court, too, is expected to be cautious about the duration and cost of litigation and is unlikely to encourage such research except in rare cases.7
As Lord Roskill once pointed out (of the doctrine of frustration), the court “is principally concerned with the incidence of risk—who must take the risk of the happening of a particular event” and must have “regard to the express provisions of the contract into which the parties have entered,”8 a matter of construction. Construction is important, in particular, where parties have also sought to handle risk by contracting liability insurance.9
The purpose of liability insurance is obvious to most. One purpose is the compensation of victim. As one scholar said, liability insurance “is highly desirable if compensatory justice is tort law’s objective.”10 From the point of view of the wrongdoer, the purchaser of liability insurance, however, another purpose is to have claims handled by someone else, insofar as the law or the policy itself provides for ALI.11 Liability insurance under which the insurer is usually obliged to defend the policyholder is hard to find.12
Convincing definitions of insurance do not exist.13 A plausible theory is the “principal object” test. This test originated in the United States to draw a line between product guarantees (also called product warranties),14 something ancillary to the sale of the product. In England, some support for the principal object test appears from a judicial observation on the question whether an indemnity that was part of a wider agreement could be treated as (re)insurance.15