Tuesday, September 15, 2009

Insurance 101: Understanding the Basics of Liability Insurance, Part 2

By John L. Watkins and Guest Contributor Henry Shurling

This continues our series of posts on basic liability insurance issues for businesses. In our first post, we discussed the general role of the broker and the importance of obtaining a complete copy of the insurance policy. In this post, we will cover some of the basic types of liability coverage for businesses.

Please note that this post contains only general information. Although many policies are similar, they may contain different terms and conditions. Some policies may have exclusions or endorsements that limit coverage. There is no substitute for a careful review and understanding of the provisions of your policy, which is of course beyond the scope of this post.

1. Motor Vehicle Coverage. A business has motor vehicle liability exposure whether or not it owns or leases motor vehicles. Of course if a company does own or lease vehicles, it is required by law to purchase liability coverage. The statutorily-required limits required are minimal and should be evaluated carefully. However, it is imperative to purchase coverage for “Hired” and “Non-Owned” vehicles as well. This coverage protects the named insured (usually the business) should an employee have an at fault accident when either renting a vehicle on business or when driving their personal vehicle on business.

2. Commercial General Liability (“CGL”) Coverage. Most basic business coverage is provided through a commercial general liability, or “CGL” policy. This coverage typically provides coverage claims for “bodily injury” (which includes physical injury or death) and property damage resulting from an “occurrence.”

There has been litigation about what constitutes an “occurrence,” but in most instances, an occurrence can be thought of as an accident. Generally, if an occurrence happens during the policy period (the period when the policy is in force), that particular policy will respond to a covered claim that is made after the policy period. Thus, for example, if an accident happens on the last day a policy is in force, that policy will provide coverage for a claim – if it is otherwise covered – made after the policy period ends.

CGL policies may also include coverage for “personal and advertising injury.” Personal and advertising injury includes coverage under certain circumstances for claims for libel and slander, malicious prosecution, wrongful entry into a dwelling, false arrest, invasion of privacy, and some claims (in advertising) for copyright and trade dress infringement. Although “personal and advertising injury” coverage potentially includes many claims, it is also subject to substantial exclusions, and carriers may contest coverage for such claims more than for other types of coverage.

CGL coverage often includes coverage for product liability claims. This coverage is typically called “product and completed operations” coverage. If your company is a manufacturer or a distributor of products, you should carefully review this coverage with your broker or insurance lawyer and make sure that it is sufficient for your needs.

It is impossible in a short post to include all types of claims that may not be covered by a CGL policy. Policies often contain many exclusions. As a general rule, breach of contract or breach of warranty claims are not covered. However, claims for “insured contracts,” such as where one company agrees to indemnify another company for claims (as is often common in construction or equipment supply contracts) may be covered. Again, if your company needs such coverage, it should be discussed carefully with your broker.

Claims for intentional misconduct are often excluded. However, this is a complicated issue and often depends on the particular circumstances of a claim.

3. Employer’s Liability Coverage. Often just referred to as part of Workers Compensation coverage, Employer’s Liability is a separate and distinct coverage written in conjunction with Workers Compensation. Unlike Workers Compensation, Employer’s Liability has specific limits stated in the policy that serve to cap the coverage available under the policy. There are typically four areas where Employer’s Liability may respond to an action an employee may take: Care and Loss of Services, Third Party Action Over Claims, Dual Capacity and Consequential Bodily Injury. While these types of claims are much more infrequent than typical Workers Compensation claim, care should be taken in purchasing the limits. If set appropriately, any umbrella coverage would provide additional limits of liability beyond what is set forth under the Employer’s Liability Coverage section.

4. Professional Liability Coverage. Professionals, from doctors and lawyers to consultants, need to have professional liability coverage, which protects them against claims of professional negligence or malpractice. Unlike CGL coverage, which is written on an occurrence basis, most professional liability coverage is written on a claims made basis. This means that the insurance will respond only to claims that are made (and sometimes made and reported) in the policy period.

Thus, unlike an occurrence-based policy, a claims made policy will typically not respond to a claim that occurs during the policy period but is made after the policy period. If the insured has renewed or obtained a new policy, the renewal policy or policy in effect when the claim is made will respond.

Thus, a claims made policy will typically cover claims arising out of events that occur before the policy begins, but even this is subject to qualification. Many claims made policies have a “retro date.” Essentially, a retro date establishes a date that cuts off coverage for claims arising prior to that date. It is therefore important to make sure that a retro date does not unduly restrict coverage.

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