COMMERCIAL GENERAL LIABILITY INSURANCE

BUSINESS LIABILITY EXPOSURES

Premises And Operations Exposure

Commercial General Liability insurance covers business liability exposures. Business liability is liability that arises out of the conduct of a business. A business has a number of liability exposures, one of the most important of which is its premises and operations exposure: liability arising out of the business location or the activities of the business. This includes liability for bodily injury, property damage and personal and advertising injury. Personal and advertising injury includes such things as slander, libel, copyright infringement, invasion of privacy, false arrest, wrongful entry onto another’s premises, and malicious prosecution.

One example of the premises and operations liability exposure is a claim against Sandle Appliances for injuries a customer suffers when she slips and falls on a newly waxed floor inside the store. Another example is a claim against Breckenridge Manufacturers for libelous statements made about a competitor’s products.

Products - Completed Operations Exposure

A business may also be exposed to liability by defects in its products or completed operations. Examples of this exposure include a claim against Hooks Bakery for injury resulting from the sale of spoiled cream puffs and a claim against Magic Carpets Inc. for injury that results when a customer steps on a carpet tack left behind by Magic’s workers.

Indirect / Contingent Liability Exposure

A business may not only be held liable for its own actions, but in certain cases, may be held liable for the actions of others. A business may have indirect or contingent liability for the actions of its employees, agents, contractors, or subcontractors. An example is a claim against First National Bank when a passerby is injured at the construction site of a new bank branch being built by Rolland Construction Company. This liability exposure is sometimes called owners and contractors protective (OCP).

Exposures Covered By Commercial General Liability Insurance

There are other types of liability exposures faced by businesses, including:

* Work-related injuries to employees

* Pollution

* Contractual agreements in which the insured assumes liability

* Ownership, maintenance or use of autos, watercraft and aircraft

However, because of the unique nature of these liability exposures, they are either excluded outright from the Commercial General Liability policy or may be covered only in certain circumstances or for limited amounts. More complete protection for these liability exposures is available under contracts specifically designed to cover them.

A business’s liability for the premises and operations exposures, products-completed operations exposure and indirect/contingent liability exposure can all be covered by the Commercial General Liability (CGL) policy.

COMMERCIAL GENERAL LIABILITY COVERAGE PART

The Commercial General Liability policy may be included in the CPP (Commercial Package policy) or issued as a stand-alone policy. The coverage provided by the Liability section of the Businessowners policy is similar to that provided by the CGL.

A Commercial General Liability coverage part must include the following:

* Common Policy Declarations

* Common Policy Conditions

* CGL Declarations

* One or more CGL coverage forms

* Any mandatory endorsements

OCCURRENCE AND CLAIMS-MADE FORMS

Occurrence Form

There are two primary CGL coverage forms: the occurrence form and the claims-made form. While the two forms contain basically the same coverages, exclusions and conditions, they differ in how coverage under the form is activated, or “triggered”.

Traditionally, Liability policies have been written on an occurrence basis. Coverage under the occurrence form is triggered by damage or injury that occurs during the policy period.

Suppose Joe Street is injured when a small piece of steel from the defective motor of a Niftycare lawnmower hits him in the eye. Provided the claim is otherwise covered, Niftycare’s occurrence policy that was in effect at the time the injury occurred will apply to the loss, whether Joe makes his claim against Niftycare during the policy period or years later. There is coverage for any covered occurrence that happens during the policy period, even if the claim is made after the policy expires.

Suppose on April 7, 1995, a ladder on which Brian Barker is standing falls apart. He lands on his back and complains of some slight pain, but nothing major. Because the injury seems so slight, Brian does not file a claim for the injury. In 1997, however, he experiences recurring back pain and consults a physician, who decides the problem is a result of the 1995 injury. Brian files a claim against the manufacturer of the defective ladder, Newstep Ladder Company. Newstep had an occurrence CGL with Company A from 1990-1996; it took out a new occurrence CGL with Company B in 1997. Company A would pay for Brian’s injury.

Claims-Made Form

The occurrence form is suitable for many insureds, but for others, it is not the best choice.

Consider an individual who owns and renovates rental properties. From 1961-1971, he painted his properties with a lead-based spray made by a well-known manufacturer. In 1998, he is diagnosed as having developed lead poisoning from exposure to the lead-based paint. This individual may be able to recover damages from the paint manufacturer under all of the occurrence policies in effect between 1961 and 1971. This insurance may be interpreted in several ways as to how it should be paid, and the insurance companies may not have set aside adequate reserves to take care of such long-range exposures since there is no way of adequately predicting such losses. The claims-made form was developed to address these types of considerations.

Coverage under the claims-made form is triggered when a claim is first made against the insured during the policy period, even if the actual injury or damage occurred at another time. This means that if Joe Street from our earlier example files a claim against Niftycare, it will be covered under the policy in effect when the claim is filed, rather than the policy in effect when the injury occurred. Under the claims-made form, claims filed during the policy period are covered, even when the occurrence took place prior to the effective date of the policy.

Retroactive Date

While we have said that a claim made during the policy period is covered by a claims-made form even if the injury did not occur during that period, there may be some date before which a claims-made policy will not pay. This is known as the retroactive date, and it provides some measure of protection against previous losses that may have occurred before the claims-made form was written.

The retroactive date is listed in the CGL Declarations. The insured has three options for the retroactive date:

* Use the same date as the policy effective date

* Use an earlier date than the policy effective date

* Use no retroactive date

An agent must be careful when selling a new CGL to avoid creating a coverage gap (a period of time during which the insured is without coverage). For instance, if the expiring policy is a claims-made form and it is being replaced with another claims-made form, the retroactive date of the new policy should be the same as the old one to avoid a coverage gap.

Advancing the retroactive date can also create a coverage gap. To avoid this situation, the rules by which claims-made CGL coverage is governed require that the insured give written consent to advancing the retroactive date. And, even with the insured’s consent, the retroactive date may be advanced only for one of the following reasons:

* A different insurance company is writing the new policy.

* A substantive change in the insured’s operations has resulted in a greater exposure to loss.

* The insured did not provide the insurer with information the insured knew or should have known that would have been material to the insurance company’s decision to accept the risk, or the insured did not provide information requested by the insurance company.

* The insured requests that the retroactive date be advanced.

Extended Reporting Periods

A gap can also occur when a claims-made policy is replaced by an occurrence form. However, a special feature built into the claims-made form, called the extended reporting period, can help close potential coverage gaps.

Extended reporting periods (ERP) provide coverage for claims made after the policy’s expiration date. The policy provides an extended reporting period if:

* The claims-made form is cancelled or not renewed

* The insurer renews or replaces the form with insurance that has a retroactive date later than the date shown in the Declarations of the current form

* The insurer renews or replaces the form with an occurrence form

Once an extended reporting period is in effect, it cannot be cancelled.

A basic extended reporting period of either 60 days or five years is available automatically and free of charge under specified conditions.

Let’s first consider the 60-day basic ERP. When a claims-made policy is terminated, a 60-day basic ERP automatically becomes available. The insured does not have to apply for it, and no premium is charged. It provides automatic coverage for any valid claim made during the 60 days after the policy expires, as long as the incident occurred between the expiring policy’s retroactive date and its expiration date.

Now, suppose the insured is aware of an event that took place before the claims-made policy expired, but suspects that claims may first come in after the 60-day basic ERP. The insured has up to 60 days following policy expiration to report the occurrence or offense to the insurer. In this case, the five-year basic ERP automatically applies. Claims for damages arising from the reported occurrence can be brought any time during the five-year period.

A Supplemental Extended Reporting Period endorsement is also available. It provides an unlimited extension of the reporting period, although the event causing the claim must still occur between the retroactive date and the policy expiration date. This ERP takes effect at the end of either the 60-day or five-year ERP, whichever applies. The insured must request this endorsement and pay an additional premium.

COVERAGE A - BODILY INJURY AND PROPERTY DAMAGE LIABILITY

Coverage

The CGL forms provide three coverages:

* Coverage A - Bodily Injury And Property Damage Liability

* Coverage B - Personal And Advertising Injury Liability

* Coverage C - Medical Payments

Coverage A - Bodily Injury And Property Damage Liability pays those sums the insured becomes legally obligated to pay as damages because of bodily injury or property damage to which the insurance applies. To be covered, the BI (Bodily Injury) or PD (Property Damage) must be caused by an occurrence, which is defined in the CGL as an accident, including continuous or repeated exposure to the same general harmful conditions.

Remember that the occurrence form covers only BI or PD that occurs during the policy period. The claims-made form covers BI or PD that occurred on or after the retroactive date, if any, and for which a claim for damages is first made against the insured during the policy period. A claim is considered to have been made when notice of claim is received and recorded by any insured or by the insurer, whichever comes first.

In addition to paying those sums the insured is legally obligated to pay, the company has the right and duty to defend an insured against any suit alleging liability for damages to which the policy applies.

Exclusions

There are a number of important exclusions that apply to Coverage A, including liability:

* Arising out of intentional injury

* The insured assumes under a contract or agreement

* For those in the alcoholic beverage business, any liability imposed by law concerning alcoholic beverages

* For work-related injuries covered under Workers Compensation or Employer’s Liability laws

* For most pollution losses that result in bodily injury, property damage or clean-up costs

* Resulting from the maintenance, operation or use of aircraft, autos or watercraft, except as specified in the policy

The exclusion for liability assumed under contract has some important exceptions. Liability that the insured would have incurred even without assuming it under contract and liability assumed under insured, or incidental, contracts is covered. Insured contracts include leases, sidetrack agreements, easement agreements, contracts with municipalities required by ordinance, elevator maintenance agreements, and contracts relating to the insured’s business under which the insured assumes another’s liability.

Also excluded under Coverage A is liability:

* Arising out of the transportation of mobile equipment by auto or the use of mobile equipment in any prearranged racing or related activity, or while practicing or preparing for such an activity

* Assumed under a contract for war or warlike acts

* For damage to property owned, rented or occupied by the insured or in the insured’s care, custody or control (does not apply to property and its contents for premises rented to the insured for seven consecutive days or less)

* For damage to the insured’s own product arising out of the product itself

* For damage to the insured’s own work

* For claims based on:

* Defects, deficiencies, inadequacies, or dangerous conditions in the insured’s products or work; and

* Delays or failures to properly perform contracts.

* Related to recall of the insured’s products or work because of a known or suspected defect

* For bodily injury arising out of personal and advertising injury

An exception to certain exclusions under Coverage A protects the insured against legal liability for negligent acts that result in fire damage to a premises rented to the insured or temporarily occupied by the insured with the owner’s permission.

COVERAGE B - PERSONAL AND ADVERTISING INJURY LIABILITY

Coverage

Coverage B provides Personal And Advertising Injury Liability coverage. It covers liability arising out of offenses such as libel or slander. Like Coverage A, Personal And Advertising Injury Liability coverage may be offered on either an occurrence or claims-made basis.

Exclusions

The Coverage B exclusions are divided into two categories:

* Exclusions that apply to both personal and advertising injury

* Exclusions that apply to pollution losses

Liability arising out of any of the following is excluded under both personal and advertising injury:

* Knowingly inflicting injury that violates the rights of another

* Oral or written publication of material that the insured knows is false, but publishes anyway

* Material that was published before the effective date of the policy

* Criminal acts committed by or at the direction of the insured

* Assumed under contract, except for liability the insured would have incurred even without assuming it under contract

* Pollution losses

* Breach of contract

* Failure of goods, products or services to conform with advertised quality or performance

* Incorrect price descriptions of goods, products or services

* Any offense committed by an insured who is involved in the business of advertising, publishing, broadcasting, or telecasting

Coverage B also contains a blanket exclusion for any type of pollution loss. You may be wondering why an exclusion for pollution losses is needed for Coverage B. In the past, some insureds were able to recover pollution liability losses under Coverage B because the policy’s definition of personal injury includes “wrongful entry into another’s premises”. The CGL now contains a pollution exclusion for Coverage B to prevent insureds from obtaining personal and advertising injury coverage for pollution liability.

COVERAGE A AND B - SUPPLEMENTARY PAYMENTS

The following Supplementary Payments are also available for Coverage A and B. These are paid in addition to the amounts paid for Liability claims under Coverage A and B and do not reduce the limits of insurance available for these coverages.

Supplementary Payments

* All expenses incurred by the insurance company

* Up to $250 for the cost of bail bonds

* Cost of bonds to release attachments

* Reasonable expenses incurred by the insured to assist in the investigation and defense of a claim, including up to $250 per day for loss of earnings

* All costs taxed against the insured in a suit

* Prejudgment and postjudgment interest

* Defense costs for an indemnitee

Since these costs are classified as covered damages, they will reduce the policy’s limit of liability. The Supplementary Payments section provides that, if certain conditions are met, the insurer will:

* pay the defense costs for an indemnitee - a party who is not an insured who is under contract to provide goods or services to an insured - in addition to the policy’s limit of liability, and ;

* provide a defense for the indemnitee.

Among the conditions that must be met for this coverage to apply are that the insured and the indemnitee must be named in the same lawsuit and the liability assumed by the insured must be covered by the policy.

COVERAGE C - MEDICAL PAYMENTS

Coverage

Coverage C of the CGL coverage forms is Medical Payments. It pays for medical expenses incurred for bodily injury caused by an accident on premises the insured owns or rents, on ways next to premises the insured owns or rents, or arising from the insured’s operations. To be covered, the expenses must be incurred and reported to the insurer within one year of the date of the accident. Medical payments are made without regard to fault, unlike other coverages under the CGL forms.

Exclusions

Excluded under Coverage C of the CGL are injuries:

* To any insured or to a tenant or employee of the insured, including a person injured on a part of the insured’s premises that he or she normally occupies

* Payable under Workers Compensation or related laws

* That occur to a person while he or she is taking part in athletics

* Included in the products-completed operations hazard (these would be paid under Coverage A)

* Excluded under Coverage A

* Related to war

WHO IS AN INSURED

Named Insured

In the CGL, who is considered an insured under the policy depends on how the named insured is designated in the CGL Declarations: as an individual, partnership or joint venture, limited liability company, or organization other than a partnership, joint venture or limited liability company.

Others

Newly Acquired Organizations

Limits of insurance

Conditions: Duties in The Events Of Occurrence, Offense, Claim, Or Suit

Nonrenewal

Other Insurance

Claim Information

Other Commercial General Liability Coverage Forms And Endorsements.

UMBRELLA LIABILITY INSURANCE (Excess)

This is an excess liability policy introduced in the United States in 1947 by Lloyd’s of London. Today, numerous American insurers have their own version of the policy. The contract is designed to: (1) provide high excess limits of liability coverage for the business firm, and (2) fill any gaps of liability coverage, over an amount of self-retention to be borne by the insured. Policy vary but $10,000 or $25,000 are typical amounts which the insured would have to pay himself in the case of liability from an uninsured peril. If the claim exceeded the retention, the umbrella insurer would then pay up to the policy limits.

The excess or policy limits are usually quite large, ranging from one million dollars up. The insurer requires that the insured carry a full Comprehensive General Liability Policy with relatively high limits. These required limits are typically $100,000 or $300,000. In case of loss, the basic contract will pay first and when it is exhausted, the umbrella will pay the next million or up to its particular limits. The reasons for this requirement are that the umbrella insurer has the benefits of the basic insurer’s underwriting and loss prevention activities.

For the benefits you get, umbrella policies are the best buy in insurance today. These relatively cheap policies raise your liability coverage to a million dollars or more, and are available as additions to your auto or homeowners policies. Liability insurance protects you from paying a high legal award that might be assessed against you by a jury. For example, if you have injured someone in an auto accident and you are found negligent in a court of law, the jury could award a judgement against you of hundreds of thousands of dollars. Liability insurance makes that payment the insurance company’s responsibility.

Suppose that you have auto insurance of 100/300/50, which is quite common today. That means that if you are sued and must pay as the result of an auto accident, the insurance company will only pay up to $300,000 for bodily injuries to two or more people. However, with juries routinely awarding much more than that to accident victims, many people - especially those with a higher coverages to insulate them from the possibility of a high jury award.

The umbrella policy does just that. For an additional $100 or so annually, you can be protected up to $1,000,000 or more for liability. There are umbrella policies available that offer protection up to $5,000,000 for those who really think they need it.

Before you buy umbrella coverage, most companies require that you have either $100,000 worth of liability coverage on your home or $300,000 worth of liability protection on your car. In most situations, $100 or so will buy you $1,000,000 worth of coverage.

An umbrella policy increases your liability coverage. It is not necessary to buy an umbrella that covers auto liability and another that covers your homeowners. It’s all combined in one policy.

Even though you can probably buy an umbrella policy from either your auto or homeowner’s insurer at a discount, you may get even a better deal elsewhere on an umbrella. Shop around for the best umbrella coverage you can find.

Umbrella policies then, provide a cushion against large negligence awards that could wipe you out financially. The same company that sells you your homeowners or auto policy will probably also offer umbrella coverage. If you purchase your auto and homeowners policies from the same company, you may be able to buy an umbrella policy that will cover both at a discount.

Please note that the precise coverage afforded is subject to the terms, conditions, and exclusions of the policy as issued. This explanation is intended only as a guideline. This information is not intended to be considered investment, tax or legal advice. It is provided, for your education only. This is not an insurance contract. All terms and coverages are defined solely by your policy.

For more details, please call a PaulBalep representative toll-free 1-800-964-8614 to receive a free, no-obligation quote. Like so many satisfied clients, we think you’ll be happy you did. And to set up a meeting to discuss additional insurance and financial goals: Visit us online at www.paulbalep.com, or e-mail us at info@paulbalep.com.

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