Chapter 13: business liability issues in insurance.
Business liability is the risk exposures that any business entity assumes in its dealings with the public. Among the exposures that a business faces are the following: premises and operations liability; products and completed operations liability. To survive as a going concern, a business must identify its liability exposures and decide how to deal with those exposures.
1. Many (if not most) of the business entity's liability risk exposures have been transferred. The insured business does not have to worry about and plan for certain types of losses, and so, the time and money spent on responses to losses can be spent on other items designed to aid the profitability, continuing operations, and survivability of the company. And, should a loss occur, or a lawsuit be filed, the company resources won't be spent paying for the loss or defense costs.
2. The premium paid for the commercial general liability (CGL) form is a legitimate business expense that can be deducted from tax liabilities.
3. After a loss occurs or a lawsuit is filed, the insured can rely on the insurance company to handle most, if not all, of the legal work and other paper work. If the insurance company is competent, the liability claims against the insured will be disposed of or paid promptly so the insured need not spend time and resources addressing the problem.
4. Before a loss or lawsuit occurs, an insurance company could act as a loss control aid to the insured so that liability exposures can be discovered and analyzed and preventive measures put into place so as to prevent losses. For example, an insurer may send its loss control specialist to the insured's premises, the specialist finds something that could cause a future loss and recommends steps to prevent the loss, and the insured implements the recommendation, and no loss occurs thanks to the loss control inspection and efforts.
1. The insurance coverage costs money, and the premium spent on insurance is money that the insured business does not have for any of its business plans.
2. If the insurer is incompetent or not willing to settle a claim quickly, the insured business is the one getting the bad publicity, and it could end up becoming embroiled in a lawsuit with not only the claimant but also with its own insurer.
3. The insured, through the insurance contract, has agreed to give up any control over the management and settlement of the claim. The general liability insurer retains for itself the right to investigate and settle any claim or lawsuit without the insured having any right to either force a settlement or reject a settlement. This may or may not fit the management style of the company, but that is part of the CGL contract.
4. If the insurer becomes insolvent, the burden of management and settlement of the claim or lawsuit falls back on the insured. No court would allow an injured party to go without compensation just because the insurer of the entity at fault files for bankruptcy. The insured will be forced to pay the compensation because, after all, it is the party legally liable for the injuries to the claimant.
5. While the CGL form does provide financial protection for the insured, that protection is limited by the form's exclusions and set policy limits--not all the risk exposures of the insured will be covered by the CGL form--and the policy limits are of a finite character, so the final sum for which the insured is liable may exceed the policy limits, leaving the insured with the responsibility of paying that excess amount.
BUSINESS LIABILITY INSURANCE
One of the ways a business can handle its liability exposures is by purchasing insurance. The commercial general liability (CGL) coverage form, CG 00 01 or CG 00 02, is an insurance policy that provides insurance coverage for most of the business liability exposures. CG 00 01 is an occurrence form and CG 00 02 is a claims-made form. An occurrence form simply means that for coverage to apply the injury or damage must occur during the policy period; a claim based on those injuries or damages can be made at any time during or after the policy period. A claims-made form also requires an occurrence to take place during the policy period, but in addition, the claim for damages has to be made during the policy period.
Both CGL forms have basically the same policy structure:
1. Insuring agreements--The insuring agreements are the contractual connection between the insured and the insurance company whereby, in consideration for the premium paid by the insured, the insurer agrees to pay those sums that the insured becomes legally obligated to pay as damages.
2. Exclusions--The exclusions on the CGL form are those exposures that the insurance policy will not cover.
3. Supplementary payments--Supplementary payments are amounts that the insurer promises to pay (in addition to the stated limits of insurance) for certain expenses incurred in handling and settling a claim or lawsuit against the insured.
4. Who-is-an-insured clauses--These clauses tell who is considered an insured under the terms of the policy.
5. Limits of insurance section--This section describes the amounts that the insurer will pay for a claim against the insured; these limits are stated on the declarations page of the policy.
6. Conditions--The conditions set guidelines for the insurer and the insured to follow; these are part of the insurance contract between the insured and the insurer and should be followed as legally binding on both parties.
7. Definitions--The definitions tell the insured and the insurer what certain terms used on the CGL form mean; these definitions are important in that the applicability of insuring agreements, exclusions, and conditions may depend on how a word or phrase is defined.
The CGL form is termed "general liability" because it provides coverage for the overall business risk exposures of the insured, that is, the premises and operations liability and the products and completed operations liability of the insured.
Example. The insured owns an office building. If a visitor trips and falls in the building lobby and is injured, a claim can be made against the building owner for the injuries. The insured as the owner of the building owes a duty to visitors to maintain the premises in such a way that no harm comes to them. If that duty is breached and harm results to an innocent victim, the building owner is held responsible and is liable to the injured person for the damages done to him. The CGL form would provide insurance coverage for the insured building owner's liability.
Example. The insured owns an apartment building and his employee is laying carpet in a hallway. While hammering the tacks into the carpet, the employee lets the hammer slip and it flies into the face of a deliveryman, breaking a cheekbone. The insured--through his employee's activity--is performing an operation in his building and this operation caused an injury. The CGL form would apply to a resultant claim.
Example. The insured manufactures chairs. A customer buys the product and when he sits on it, the chair collapses and the customer falls, breaking his arm. This is a product failure for which the insured is liable because he made the product and offered it for sale as a safe and useful product to the general public. The product failed and this was a breach of the insured's duty. The breach caused harm and the CGL form would apply to a claim due to this breach.
Example. The insured is a contractor and builds a retaining wall for a customer. One month after the job was completed, the wall falls on the customer's son and causes severe internal injuries. The insured's completed operations caused the injury to an innocent victim and the CGL form would respond to a claim made against the insured.
The key point throughout all these examples is that the insured was legally liable for the injuries. The CGL form will provide insurance coverage for the insured, but he must be legally liable, that is, obligated by law, to pay for the damages he caused to another. If the insured is not legally liable, there is no obligation on the insurer's part, through the CGL form, to pay for the injured person's damages. Of course, even though the CGL form will not pay damages if the insured is not legally liable, the form will pay defense costs for the insured if he is sued due to the damages. This duty to defend is a contractual obligation under the terms of the CGL form and is a broader duty than the duty to pay damages.
LIMITATIONS AND EXCLUSIONS
The CGL form does apply to the insured's general liability exposures. However, this coverage is not absolute. There are exclusions and limitations written into the CGL form that affect the scope of coverage.
One of the limitations is that the liability insurance provided by the CGL form is for bodily injury (BI), property damage (PD), or personal and advertising injury. These are all defined terms on the policy and if the injury or damage claim alleged against the insured does not match one of these definitions, the CGL form will not cover the claim. For example, bodily injury on the CGL form is defined as "bodily injury, sickness, or disease sustained by a person, including death resulting from any of these at any time." If the claim against the insured is one of discrimination or breach of contract, the CGL form will not respond because there was no BI or PD as defined on the form. As another example, personal injury is defined on the CGL form as including infringing upon another's copyright, but does not include patent infringement; so, a patent infringement claim against the insured will not be covered by the CGL form.
Another limitation is that the injury or damage has to take place in the coverage territory and during the policy period. Coverage territory is a defined term and "during the policy period" means that the injury or damage has to occur while the policy is in force. There usually is no problem in determining whether the injury or damage occurred in the coverage territory, but "during the policy period" is a period subject to differing interpretations by courts around the country.
Another limitation is on just how much the insurer will pay for a claim against the insured. When an insured chooses to buy an insurance policy, he has to decide the limits of insurance. These stated limits are the most that the insurer will pay for a claim regardless of the number of insureds, claims made or lawsuits brought, or persons or organizations making the claims or bringing the lawsuits. If the amount the insured is legally liable to pay an injured person exceeds the limits of insurance stated on the CGL form, that particular part of the risk will not fall to the insurer.
The exclusions on the CGL form are standardized and represent those types of risk exposures that an insurer either cannot or does not want to insure against. For example, coverage A (BI and PD) on the CGL form has an exclusion for BI or PD expected or intended from the standpoint of the insured. The coverage A insuring agreement is based on an occurrence--an accident--so if the insured intended to hurt someone or damage another's property, that would not be in accord with the intent of the insuring agreement. Note that it is the intentional injury, rather than the intentional act, that is excluded. So, this exclusion does not automatically rule out protection of an insured who commits an intentional act unless it can be proved that the consequences of the act could have been expected. But it is the intent of the general liability policy to exclude coverage for intentional torts committed by the insured, that is, torts in which the insured is expressly or impliedly judged to have possessed the intent or purpose to injure.
Other examples are the workers compensation and employers liability exclusions; these are better handled by a workers compensation policy in accordance with the workers compensation system established in the various states. Also, BI or PD arising from the escape or release of pollutants is largely excluded under a CGL form because of the specialty type nature of that exposure.
The coverage B (personal and advertising injury) insuring agreement on the CGL form does apply to intended acts of the insured, but this does not mean the coverage is without limitations. For example, coverage B will not apply to criminal acts committed by the insured. The same is true of a knowing violation of the rights of another by publishing material that the insured knows is false. And, if the insured is in the business of advertising, broadcasting, publishing, or telecasting, the personal and advertising liability coverage will not apply; these businesses need a specialty type liability policy that can specifically address their unique liability exposures.
Other exclusions are added to the CGL form through the use of endorsements. There are many situations when either an insured or an insurer will desire to exclude certain coverages that may otherwise be provided by or potentially within the coverage of the CGL form, so endorsements are added to the CGL form to prevent such coverage. For example, the standard CGL form does not exclude BI or PD arising out of the providing of professional health care services. Since this type of coverage is meant to be written through specialty type policies (such as hospital professional liability or physicians professional liability insurance), an insurer would normally add an endorsement like CG 21 16, Exclusion--Designated Professional Services, to the CGL form to prevent the CGL form from applying to a claim based on medical malpractice. As another example, if the insured does not desire products-completed operations liability insurance for some reason, or the insurer is not willing to provide that coverage, endorsement CG 21 04, Exclusion--Products/Completed Operations Hazard, can be added to the CGL form to prevent such coverage.
Thus, while the scope of coverage under the CGL form may be very general, that coverage can be limited or excluded depending on the requirements and objectives of the insured and the insurer.
OTHER TYPES OF INSURANCE FOR BUSINESS LIABILITY RISKS
The business entity seeking to transfer its liability risk exposures through the use of a commercial general liability insurance form should analyze its exposures and decide if a CGL form is the appropriate tool with which to handle the exposures.
A CGL form will apply to liability exposures that a business entity faces arising out of the entity's premises, operations, products, and completed operations. A CGL form would be the appropriate tool to transfer risk exposures for businesses such as retail stores, offices, motels and hotels, service organizations, theaters, and clubs. These entities have no out-of-the-ordinary risk exposures and a commercial general liability policy should be adequate to protect the insured's interests.
However, for businesses that do have special exposures or that have risk exposures that the insurance company does not wish to insure, there are other liability policies that can fill the risk exposure gaps on the CGL form that exist. For example, there are pollution liability coverage forms that offer protection for this type of liability; there is an employment-related practices liability form that applies to injuries based on things like humiliation, discrimination, and sexual harassment; and there are various professional liability policies that more properly apply to professional liability exposures than does the CGL form (see Chapter 17, "Professional Liability Insurance").
And, speaking of policies that more properly apply than does the CGL form, there are certain risks that, while not always specifically excluded under a CGL form, should have a different liability form so that the insured's unique exposures are properly handled. For example, there is an owners and contractors protective liability coverage that applies to BI or PD arising out of operations performed for the named insured by a contractor or the named insured's acts or omissions in connection with the general supervision of those operations; an underground storage tank policy that applies to BI or PD arising out of a release of petroleum from an underground storage tank into water or subsurface soils; and a warehouseman's legal liability coverage policy that applies to the insured's legal liability for loss to property while in his care, custody, or control.
Whatever liability risk exposures an entity has, if the business decision is made to manage those exposures through insurance, the risk manager of the business entity must look at all the possible liability exposures, and decide what type of liability policy is best suited for the purpose. A CGL form will apply to most of the liability exposures, but other liability policies may be needed to complete the protective circle around the insured. One size does not fit all when it comes to buying insurance. So, the specific problems, exposures, goals, and financial situation of the individual have to be determined before an insurance buying decision is made.
As part of the decision making process, the entity should discuss its liability exposures with an experienced insurance agent so that, not only can all the risk exposures be identified, but also so that the proper types of liability policies can be purchased. One more thing for an insured and an agent to discuss--premium. The premium paid for the liability insurance should be within the capabilities of the insured to pay, and should be in line with what the insured has decided it can afford to pay and wants to pay to have its liability risks covered by an insurance policy.
Once the CGL form (and any other liability policies) has been purchased, the insured needs to monitor the results.
1. Have the liability policies been applicable to the losses and claims?
2. Are the limits of insurance adequate?
3. Is the amount paid in premium cost effective?
4. Are there any new exposures that have arisen or ceased to exist since the liability policies became effective?
5. Have any claims and lawsuits been properly and satisfactorily handled by the insurer?
If the results of this monitoring are satisfactory, the insured can rest assured that its decision to purchase liability insurance was a wise business decision. If the results are not as expected, changes have to be made.
WHERE CAN I FIND OUT MORE ABOUT IT?
1. FC&S(tm) Online, http://www.fcands.com (Cincinnati, OH: The National Underwriter Company, updated monthly).
2. Donald S. Malecki and Arthur l. Flitner, Commercial General Liability, 8th ed. (Cincinnati, OH: The National Underwriter Company, 2005).
QUESTIONS AND ANSWERS
Question--What are the two types of commercial general liability forms?
Answer--An occurrence type and a claims-made type.
Question--What are supplementary payments under the CGL form?
Answer--Amounts that the insurer promises to pay for certain expenses incurred in handling and settling a claim or lawsuit against the insured.
Question--How does the CGL form define "bodily injury"?
Answer--Bodily injury, sickness, or disease sustained by a person, including death resulting from any of these at any time.
Question--What is coverage B under the CGL form?
Answer--Coverage B is for personal and advertising injury liability.
Question--To what type of business risk exposures does the commercial general liability apply?
Answer--The CGL form provides coverage for the following business risk exposures: the premises and operations liability and the products and completed operations liability of the insured.
END OF CHAPTER REVIEW
1. Under an occurrence form, the injury or damage can occur at any time before or after the policy period.
2. A claims-made form requires the claim for damages to be made during the policy period.
3. Supplementary payments made under a general liability policy are in addition to the stated limits of insurance.
4. The duty to defend the insured in case of a lawsuit against him is dependent on his being legally liable for the alleged injury or damage.
5. The commercial general liability coverage form provides liability insurance for bodily injury, property damage, and personal and advertising injury.
6. The definition of personal injury on the general liability policy includes patent infringement.
7. A warehouseman's legal liability policy applies to the insured's legal liability for loss to property while in his care, custody, or control.
8. A premium paid for general liability insurance is a legitimate business expense that can be deducted from tax liabilities.
9. The general liability insurer retains for itself the right to settle any claim or lawsuit against the insured without seeking approval from the insured.
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|Publication:||Tools & Techniques of Risk Management for Financial Planners, 2nd ed.|
|Date:||Jan 1, 2007|
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|Next Article:||Chapter 14: product liability insurance.|