Business Liability Insurance
About 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.
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.
Gaps and Overlaps
If your company needs several types of liability insurance, pay special attention to any gaps or potential overlaps in coverage.
This is particularly pertinent for claims falling in the realm of both automobile and general liability coverage. Rather than finding yourself caught between an “it’s your claim” tiff between carriers, it is probably safer to have one insurer write both policies.
Even if this is done, though, be careful to see where you might have overlapping coverage. When more than one policy covers a given incident, the insurer may try to assign the claim to the policy providing–surprise!–less coverage.
Try to avoid this by making sure any overlapping coverage results in fairly equal reimbursement levels, or by having clearly defined policies to minimize these redundancies.
Beyond the amount of coverage you require, three factors determine how expensive your premiums are.
First, insurers place your company into a specific business classification, depending on the nature of your business. (This can be subject to interpretation, so you should pay attention to how they choose to classify you.)
They next consider your exposure base, or the size of your firm. Depending on how your business is classified, the exposure base may be measured in terms of payroll, gross sales, or square footage.
The final factor is your history of claims, or experience rating. The insurer may then debit or credit your premiums if your claims history is better or worse than average.
If your business is at all typical, it is constantly changing. And checking and clarifying mistakes in your company profile as your business grows, to make sure the risk structure is still accurately reflected, can often reduce premiums.
Many businesses can be classified under any one of several different business listings. If your insurance premiums is based on a classification relevant for only a small portion of your operations, a reassignment can potentially lower your costs.
A second area to investigate is whether your exposure base is calculated correctly, with all appropriate exemptions taken into account. For example, if payroll is used to calculate the exposure base, you may want to see if you can exclude payroll from employees whose positions are unrelated to the coverage, such as clerical workers and drivers. You should also check that the appropriate exclusions are taken when reporting overtime and corporate officers’ salaries.
If the exposure base is sales, you may want to exclude amounts that do not appropriately reflect your exposure to claims. This could potentially include sales to other divisions in your company, or revenues such as finance charges that increase exposure without increasing actual sales volumes.
Using independent contractors?
It may be that your contractors already have sufficient coverage. If so, you may want to see how you can transfer liability risk to them.
Everyone wants a good claims history. If you can, improve your experience rating by minimizing the occurrence of smaller, more frequent claims, which insurers look at more severely than infrequent, large claims.
For temporary relief only …
Some premium-reduction methods provide strictly temporary relief. One tactic: advance the retroactive date of a claims-made policy. The time period covered is curtailed, typically providing rate relief for about five years. However, consider the risk very carefully before taking such action.
Switching from an occurrence-made policy to a claims-made policy will also result in initial premium savings, but the costs tend to be deferred rather than lowered, since at the policy’s end, if a supplemental ERP is necessary, the premiums can actually be quite large. This should not be done solely for the savings.
Unlike insurance that covers specific liabilities, umbrella insurance acts as an excess liability policy, providing additional coverage above and beyond that of the primary policies. In addition, umbrella insurance provides coverage for areas where you are not insured, coming into effect once a certain deductible, or self-insured retention level, is met.
But be careful with umbrella insurance, particularly because they aren’t standard at all. Contracts are typically tailored to each account, and the risks covered are usually negotiated. Rates also fluctuate significantly depending on how the underwriter assesses risk in a given industry. Before purchasing umbrella insurance, make sure to also get comparable quotes on extending the limits of your existing primary policy.