January 29th, 2019
If your business is operating and generating revenue of any kind, chances are you have liability exposures. Whether it be a slip and fall, your product harming someone, or even frivolous lawsuits; you need a plan to deal with these problems before they happen. There are a couple of ways to address these issues, but in this post, we will be talking about the most common method – commercial general liability insurance.
By definition, general liability insurance is the transfer of risk onto a 3rd party. This risk transfer is an agreement that is between you (the business) and an insurance company that says that they will pay for any bodily injury or property damage that you caused (or even allegedly caused) that is covered by the policy. This transfer of risk is what allows you to operate your business how you want and offload certain risks to an insurance company for an annual (or monthly) premium.
Insurance has a significant history and has changed to fit the needs of many different cultures and countries throughout time. Even though the origin of insurance can be traced back to the 1600s, the original intent remains the same; to financially back entrepreneurs (sailors in the early days of Lloyds of London) so that they could take business risks to serve the greater good of society. It helped the sailors, the economy, and the investors. In modern days insurance isn't quite as simple, but the same simple principles apply. Insurance allows entrepreneurs and businesses the ability to take risks and do what they do best without worrying about how they will pay for a liability lawsuit or losing all their property. It is a tool that allows people with great ideas to create a better world without having massive resources.
It is true that all businesses don't carry the same risks. A restaurant does not have equal liability exposure to an aircraft manufacturing company. You could even say that no two companies in the same industry carry the same risk.
If we want to know what a general liability insurance policy covers, the first place one would look is at the "insuring agreement." It is the foundation of the insurance policy and the statement that all other parts of the insurance contract modify. Although there can be variations, most insurance contracts read similar to the following:
1. Insuring Agreement
a. We will pay those sums that the insured becomes legally obligated to pay as damages because of “bodily injury” or “property damage” to which this insurance applies. We will have the right and duty to defend the insured against any “suit” seeking those damages… CG 00 01 04 – Insurance Services Office, Inc
The Commercial General Liability policy begins with a tremendous amount of coverage. The rest of the contract will be defining and narrowing down this insuring agreement. Even though the insuring agreement is similar in most policies, what comes after is what you should review very carefully. The exclusions and modifications are different for almost every business and will almost assuredly change from year to year.
An Example of a General Liability Claim
Leon owns a plumbing company called "Leon's Best Plumbing Company, Inc." Recently Leon's Best Plumbing Company, Inc was involved in a bathroom remodel for a residential customer. Later it was discovered that the pipes were installed improperly and consequently, the entire house was flooded causing $75,000 in water damage.
Would this be covered?
In most general liability policies, the damages outlined in this example would have coverage because it is "property damage" the insured caused a person or company.
It would be nice if every business liability insurance policy were just the "insuring agreement." We would be able to save much paper and spend a lot less time reading over insurance forms. Sadly, this is not the case. The rest of the insurance contract is used to define and limit the coverage from all "bodily injury" and "property damage" to what the insurance company intends to cover. Each policy comes with its own set of unique exclusions. As a business owner, it is worth the time going over every exclusion on all insurance contracts.
Expected or intended injury - The policy will not pay for claims that result from intentional damage. One cannot purposely cause bodily injury or property damage and expect a liability insurance policy to respond or settle the claim.
Contractual liability - The insurance policy does not cover additional liabilities that you assume in a contract unless you would have been otherwise legally responsible without the agreement.
1st party damage - Business liability insurance is a 3rd party coverage that covers damage that you cause to other parties or entities. A liability policy will not cover bodily injury or property damage to yourself. Coverage for yourself and your property can be purchased via different types of insurance such as commercial property or workers compensation insurance.
Damage to your product or work - The commercial liability insurance policy will not pay for or replace the work that you performed, only the work of others that your product or work damaged. This purpose of this exclusion is to prevent commercial general liability insurance from acting as a warranty policy. Using the claims example from above; Leon's insurance would cover damage to the house, but it would not pay to replace the work that his company installed incorrectly.
Recall of products - Although other policies can cover this exposure, liability insurance will not pay for the costs associated with recalling your products.
Electronic Data - This insurance will not pay for most claims arising out of the handling of electronic data. Electronic data coverage can be purchased on a separate cyber liability insurance policy.
Below is an example of an endorsement schedule for a general liability policy that comes with every commercial insurance policy. On the liability policy, you want to look down the list and find the endorsements that say "Exclusion" or any variation of the word. I have highlighted the example below in the method just described. These are the items that you should keep track of and discuss with your insurance broker.
Every liability policy will come with exclusions. It is an unavoidable reality of commercial insurance. As a business owner, you need to know what those exclusions are so that you are more aware of your potential exposures. If any exclusion is a deal breaker, you can often find coverage with a separate policy or see if any insurance carrier will provide coverage with the terms you need.
Look for Premises/Operation Limitations - Frequently insurance policies will include an endorsement that limits coverage to a select location, operation, or both. The commercial general liability insurance policy will only cover the defined activities or areas that you provide to them at the onset of the insurance contract.
The presence of these endorsements are sometimes unavoidable, but both you and your insurance broker should be aware of these limitations. It would be best if you also let your broker know about any work that might not fall inside the limitation endorsement.
Look for Subcontractor Limitations - Usually listed as the CG 2294 endorsement, this excludes coverage to any independent contractors or subcontractors. If you are hiring (or even considering hiring) any subcontractors, it is critical that this is removed. Frequently this exclusion can be removed for a $100 charge. It is worth getting if a subcontractor were to leave you responsible for any damages.
Review the Exclusions Listed on the Endorsement Schedule Page - As mentioned above, looking at your endorsement schedule page is something that you should commit to doing every renewal. It is a quick process that can save you potentially millions of dollars. Just because you are renewing with the same carrier does not mean that there are no new exclusions or limitations on the renewal policy.
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