Business Liability Insurance

What is Liability Insurance?

Because mistakes happen, we need liability insurance.

Essentially, liability insurance fixes your business’s mistakes, providing coverage for claims related to negligent business activities (injury related to the use of your product, for example) or the failure to use reasonable care. The insurer typically pays damages and legal defense fees, as well as case settlement charges.

How much liability coverage do you need? Determining this is a difficult task, because benchmarks really do not exist. While some brokers recommend that your coverage match that of the largest court award for a case relevant to your business, others base recommendations off company assets.

Moreover, unlike property–which has a fixed value–liability claims do not have any limitations. In this lawsuit-crazed society, the sky could indeed be the limit.

Commercial General Liability Policy (CGL)

Most companies obtain basic liability coverage through a commercial general liability (CGL) form. The CGL covers four types of injuries: bodily injury that results in actual physical damage or loss, property damage or loss, personal injury, and advertising injury.

Slander or damage to reputation falls under personal injury. Advertising injury protects companies from charges of negligence that result from the promotion of its own goods or services.

The CGL usually extends to include liability charges that result from contractual liability, meaning you’ll be covered in a situation where you have agreed to hold another company harmless. (However, don’t expect it to cover you for breach of contract–because it won’t!)

Companies requiring higher levels of coverage than provided with their CGL often augment the policy with an umbrella liability insurance policy.

Exclusions

Liability insurance doesn’t cover everything. Most companies will need to supplement their CGL with at least two other types of coverage, : automobile insurance and umbrella insurance .

Also, if your company risks facing particular types of claims–if, for example, you sell or serve alcohol, pose an environmental threat, or, say, produce goods that could be subject to product recall–you may have to obtain special coverage.

In addition, professionals who can be threatened with malpractice might want to consider malpractice insurance (also known as professional liability insurance). Corporate officers and directors who may be subject to personal lawsuits as a result of a company’s negligence, may want special directors’ insurance.

How Coverage is Defined

Probably the most important decision you will need to make regarding liability insurance is how you will define your coverage. The question: Should a claim be covered by a policy that was in effect at the time the incident occurred or at the time the claim was filed?

Traditionally, liability insurance has been based on the time of occurrence. This means that the policy in effect (or in force) at the time of the incident is responsible for handling any resulting claims–even if you are no longer with the insurance firm that originally provided coverage. With this coverage, it is obviously critical to keep good track of your policies.

Linking coverage to occurrences does have its downside. Unlike property claims, liability claims can be filed years after the actual occurrence–years that don’t necessarily take into account inflation or the recent sky’s-the-limit attitude towards legal awards.

As a result, the limits you originally purchased for coverage may in fact be too low for today. Moreover, time passage usually makes the actual date of an incident difficult to pin down– and responsibility for coverage that much more difficult to assign.

Claims-made insurance is an alternate way to establish liability coverage. With these policies, coverage is linked to the policy in force when a claim is filed and reported. This minimizes the tracking and claim inflation problems that can occur with occurrence policies.

To limit the total risk to the insurance company, claims-made policies do place some limits on when an incident had occurred in order to qualify for coverage. Typically, claims-made policies will cover incidents that occurred as long as seven years before the policy began. They also normally provide coverage of claims made shortly after the policy expires.

If a new claims-made policy refuses to extend coverage to occurrences far in the past, you may need to purchase coverage from your previous insurer. This is known as a supplemental ERP, or tail end coverage.

Tail-end coverage does not tend to be a very good deal for a company, since the insurer typically knows that you have nowhere else to turn for coverage. It can, however, be used to fill gaps in coverage that cannot be otherwise addressed.