Commercial Liability Insurance Coverages
Overview
Property risks have a common characteristic—the amount of the loss is capped by the value of the property lost and any indirect loss. Unlike commercial property risks, liability exposures are not limited in amount. In this chapter we turn our attention to business liability risks and their treatment. Business enterprises and professionals face a wide variety of liability exposures developing out of premises and operations, products and completed operations, contractual liability, contingent liability, errors and omissions, and other exposures. A number of commercial liability insurance coverages have been developed to address these risks, including commercial general liability insurance, workers compensation and employers liability insurance, business auto coverage, commercial umbrella policies, professional liability insurance, and other liability coverages. A thorough understanding of commercial liability loss exposures and insurance coverages is required for a successful risk management program.
Learning Objectives
After studying this chapter, you should be able to:
• Identify the major liability loss exposures of business firms.
• Describe the basic coverages provided by the commercial general liability (CGL) policy. • Explain the coverage provided by a workers compensation and employers liability policy. • Describe the important provisions of a commercial umbrella policy.
• Identify the basic coverages provided by a businessowners policy (BOP).
• Describe the basic characteristics of a professional liability policy for physicians. • Explain the coverage provided by directors and officers (D&O) liability insurance. • Define the following:
Advertising injury Aircraft insurance
Basic extended reporting period Bodily injury or property damage Business auto coverage form Claims-made policy
Commercial general liability (CGL) policy Commercial umbrella policy
Completed operations Contingent liability Contractual liability
Damage to impaired property
Damage to the insured’s product Damage to the insured’s work
Directors and officers (D&O) liability policy Employers liability insurance
Employment-related practices liability coverage
Errors and omissions insurance Fire legal liability
Garage coverage form General aggregate limit Hull insurance
Medical payments Occurrence Occurrence policy Other-states insurance Personal injury
Physicians, surgeons, and dentists professional liability coverage form
Products-completed operations aggregate limit
Products-completed operations hazard Products liability
Retained limit
Self-insured retention (SIR) Ultimate net loss
Workers compensation and employers liability insurance
Outline
I. General Liability Loss Exposures
A. Premises and Operations B. Products Liability C. Completed Operations D. Contractual Liability E. Contingent Liability
F. Other Liability Loss Exposures
II. Commercial General Liability (CGL) Policy
A. Overview of the CGL Occurrence Policy 1. Section I—Coverages
a. Coverage A—Bodily Injury and Property Damage Liability b. Coverage B—Personal and Advertising Injury Liability c. Coverage C—Medical Payments
d. Supplementary Payments: Coverages A and B 2. Section II—Who Is an Insured?
3. Section III—Limits of Insurance
4. Section IV—Commercial General Liability Conditions 5. Section V—Definitions
B. Overview of the CGL Claims-Made Policy 1. Meaning of “Claims-Made”
2. Rationale for Claims-Made Policies 3. Retroactive Date
III. Employment-Related Practices Liability Insurance
A. Insuring Agreement B. Legal Defense C. Exclusions
IV. Workers Compensation Insurance
A. Part One: Workers Compensation Insurance B. Part Two: Employers Liability Insurance C. Part Three: Other-States Insurance
V. Commercial Auto Insurance
A. Business Auto Coverage Form 1. Liability Insurance Coverage 2. Physical Damage Coverage B. Garage Coverage Form
VI. Aircraft Insurance
A. Aircraft Insurers
B. Aircraft Insurance for Private Business and Pleasure Aircraft
VII. Commercial Umbrella Policy
A. Coverages
B. Required Underlying Coverages C. Exclusions
VIII. Businessowners Policy
A. Business Liability B. Medical Expenses C. Legal Defense D. Exclusions
IX. Professional Liability Insurance
A. Physicians Professional Liability Insurance B. Errors and Omissions Insurance
Short Answer Questions
1. What are the major general liability loss exposures that businesses face?
2. How does products liability differ from completed operations liability?
3. Coverage A of the commercial general liability (CGL) policy provides coverage for bodily injuries and property damage. What important exclusions apply to Coverage A?
5. How does claims-made coverage differ from occurrence-based coverage?
6. What three coverages are provided under workers compensation and employer liability insurance?
7. What two important coverages are provided under the business auto coverage form?
9. What are the major characteristics of physicians, surgeons, and dentists professional liability insurance?
10. What is errors and omissions insurance? Who needs to purchase this type of liability coverage?
Multiple Choice Questions
Circle the letter that corresponds to the BEST answer.
1. In some business operations, it is common to hire independent contractors to perform some activities. A business organization can be held liable in certain situations for injuries and property damage caused by these contractors. This type of liability is called:
(a) contractual liability (b) contingent liability
(c) completed operations liability (d) premises and operations liability
2. Park Rite is a business that builds and operates underground parking garages in major metropolitan areas. To provide protection against damage to or theft of a vehicle parked for a fee in a Park Rite facility, the company should purchase:
(a) garagekeepers coverage (b) completed operations insurance (c) business auto insurance
(d) commercial general liability insurance
3. Which statement(s) is(are) true with respect to the commercial umbrella policy?
I. Coverage is provided for claims exceeding the coverage limit in underlying policies. II. Personal injury is typically excluded from coverage under commercial umbrella policies. (a) I only
(b) II only (c) both I and II (d) neither I nor II
4. All of the following losses would be covered under a standard aircraft insurance policy EXCEPT: (a) The plane was destroyed while on the ground as a result of a hangar fire.
(b) The plane crashed short of the runway because of fog, and a passenger required medical attention for injuries sustained.
(c) A passenger was killed when the owner/operator made a navigational error and the plane crashed. (d) Property in the owner/operator’s custody was destroyed when the plane crashed.
5. Brenda has worked for a bank for eight years. Several times she’s been passed over for promotions that were given to less qualified coworkers. When she complained, she was demoted and given menial tasks. Brenda sued the bank and was successful in proving injury to her career by failure to promote and retaliation. Which insurance coverage would pay the damages Brenda was awarded?
(a) workers compensation and employer liability insurance (b) directors and officers liability insurance
(c) employment-related practices liability insurance (d) commercial general liability insurance
6. Which statement(s) is(are) true with respect to the commercial general liability insurance form? I. Advertising injury liability is not covered under the policy.
II. In addition to liability protection, the insurer provides for the cost of a legal defense. (a) I only
(b) II only (c) both I and II (d) neither I nor II
7. All of the following are common exclusions under workers compensation and employer liability insurance EXCEPT:
(a) intentional acts
(b) injuries that are not employment-related (c) punitive damages
(d) occupational disease
8. A wide range of professionals (e.g., accountants, architects, and lawyers) need liability insurance to provide protection in case a negligent act, mistake, or failure to perform harms a client. What type of insurance is designed to meet the needs of these professionals?
(a) difference in conditions insurance (b) errors and omissions insurance (c) commercial general liability insurance (d) directors and officers liability insurance
9. All of the following statements about the businessowners policy (BOP) are true EXCEPT: (a) The BOP provides liability and medical payments coverage.
(b) Liability arising out of workers compensation, pollution, and professional services is excluded. (c) Legal defense costs are counted against the policy limits.
(d) The BOP has two aggregate limits on the total amount of covered claims that can be paid during the policy period.
10. Which statement(s) is(are) true with respect to claims-made coverage?
I. Premiums, losses, and loss reserves can be estimated with greater accuracy under claims-made coverage than under occurrence coverage.
II To be covered under a claims-made form, occurrences must occur after the retroactive date and must be reported during the present policy term.
(a) I only (b) II only (c) both I and II (d) neither I nor II
True/False
Circle the T if the statement is true, the F if the statement is false. Explain to yourself why a statement is false.
T F 1. The “long tail” refers to the fact that years after a liability insurance policy is first written, claims may be reported.
T F 2. Personal injury is not covered under the commercial general liability policy.
T F 3. Physicians, surgeons, and dentists professional liability insurance forms always require the medical professional’s consent before the insurer can settle a claim.
T F 4. The commercial umbrella policy shares losses on a pro rata basis with any applicable underlying coverage.
T F 5. The legal liability of another party can be assumed by an oral or written contract. T F 6. Employers liability insurance is not needed if the employer has coverage for workers
compensation.
T F 7. Damage to property in the care, custody, or control of the insured is a common liability insurance exclusion.
T F 8. A loss covered under an occurrence general liability policy may not be covered under a claims-made general liability policy.
T F 9. Workers compensation insurance excludes coverage for occupational disease. T F 10. Commercial general liability insurance covers the cost of a product recall. T F 11. Aircraft insurance provides property damage liability coverage.
T F 12. Garage owners purchase business auto insurance to provide liability coverage for damage to customers’ autos while in the garage owner’s care.
Case Applications
Case 1
Kimball Manufacturing makes windows. All windows are manufactured on the premises and are shipped to wholesalers, retailers, and consumers using company vehicles. To protect against liability claims, the company bought commercial general liability insurance (with products liability and completed operations coverage), workers compensation and employer liability insurance, and business auto coverage. Are the following claims covered, and if so, under which policy?
a. A Kimball Manufacturing delivery vehicle failed to yield the right of way and hit a school bus. A lawsuit has been filed against Kimball Manufacturing on behalf of the injured children.
b. An employee sustained a severe laceration when a window shattered.
c. Kimball won the window contract for a new arena. The windows were custom-built and installed by Kimball workers. The first time the arena hosted an event, a window fell out of its frame and injured four people. A lawsuit has been filed against Kimball Manufacturing.
d. A former employee who had been fired because of repeated absenteeism and tardiness returned to Kimball Manufacturing to pick up his last paycheck. While walking down a stairway, a wooden step broke. The former employee fell and sustained a concussion, a broken arm, and a broken pelvis. He has filed a lawsuit against Kimball Manufacturing.
Case 2
Right on Target Gun Shop is a sole proprietorship located in a rural area. The store is owned and operated by Carl Gibson. The store sells a wide range of firearms, including rifles, shotguns, and handguns. Carl Gibson purchased a businessowners policy (BOP) to cover property and liability exposures. A number of coverage questions have arisen with regard to the liability coverage. Are each of the following claims covered under the policy?
a. When Carl was showing a customer a rifle, another customer called Carl’s name. As he turned to see who called his name, he hit the customer with the barrel of the gun. The customer received a severe facial laceration and is suing Right on Target.
b. Carl is required by state law to provide workers compensation coverage on his employees. An employee injured his back while stacking boxes of ammunition. The employee would like to sue Carl as a result of his injuries.
c. A lawsuit was just filed against Right on Target by a candidate running for public office. The candidate favors gun control legislation. She alleges that a Right on Target radio advertisement slandered her.
Solutions to Chapter 14
Short Answer Questions
1. The major general liability loss exposures that businesses face include: premises and operations, products liability, completed operations, contractual liability, and contingent liability. Some other general liability loss exposures include: pollution, fire legal liability, liquor liability, directors and officers liability, personal injury liability, damage to property in the insured’s care/custody/control, and employment-related practices liability.
2. Products liability refers to the legal liability of manufacturers, wholesalers, and retailers to persons who are injured by defective products or property damage from defective products. Completed operations refers to liability arising out of faulty work performed away from the premises after the work or operations are completed.
3. The major exclusions are: expected or intended injury, contractual liability, liquor liability (if the insured is in an alcohol-related business), workers compensation, employers liability, pollution, aircraft/watercraft/autos exclusion, mobile equipment, war, property in the care/custody/control of the insured, property damage to the insured’s product, property damage to the insured’s work, property damage to impaired property, the recall of products, and personal and advertising injury (excluded under Coverage A, covered under Coverage B).
4. The first limit is a general aggregate limit the insurer will pay for medical expenses and damages under Coverages A, B and C; excluding claims under products liability and completed operations. The second limit caps the amount the insurer will pay under Coverage A for the “products-completed operations hazard.” The third limit is the maximum that the insurer will pay under Coverage B for personal injury and advertising injury. Fourth, there is a per-occurrence limit on the amount the insurer will pay for the sum of damages covered under Coverage A and Coverage C for the same occurrence. Fifth, the amount the insurer will pay under Coverage A for property damage to a rented premises caused by fire is limited. Finally, there is a maximum limit placed on the amount the insurer will pay per-person for medical expenses because of bodily injury.
5. Occurrence-based coverage provides protection against occurrences that take place during the policy period, regardless of when the claim is reported. This form of coverage may create problems for insurers because they are required to pay claims on policies that have already expired. This delay makes it difficult for insurers to calculate premiums and loss reserves. To alleviate these problems, claims-made coverage was introduced. Claims-made coverage provides protection for claims that are first reported during the policy period, provided the event occurred after a retroactive date stated in the policy. Such coverage is easier to price and more accurate loss reserves can be established. 6. There are three separate coverages in the workers compensation and employer liability insurance
policy. These coverages include: Workers Compensation Insurance, Employers Liability Insurance, and Other-States Insurance.
7. The two important coverages provided by the business auto coverage form are liability coverage and physical damage insurance. The liability coverage provides protection for liability arising out of a bodily injury or property damage claim arising out of the ownership, maintenance, or use of a covered auto. The physical damage coverage protects the insured against collision and other-than-collision losses to the covered auto.
8. Although there are some variations in commercial umbrella liability policies, they do include a number of common characteristics. First, commercial umbrella policies provide high limits of liability and broad coverage in excess of underlying coverages. Second, the insured is required to carry minimum underlying limits before an insurer will write a commercial umbrella policy. Third, the umbrella policy covers some claims not covered by the underlying policies, after the insured pays a self-insured retention. Fourth, the umbrella policy provides coverage for losses attributable to bodily injury and property damage liability, personal injury, and advertising liability. Finally, there are some important exclusions typically found in umbrella policies.
9. The major characteristics of physicians, surgeons, and dentists professional liability coverage include: two insuring agreements with one for individual liability of each person and one that applies to group liability, liability not restricted to accidental acts of the physician or surgeon, a maximum limit per medical incident and an aggregate limit for each coverage, ability for the insurer to settle the claim without the physician’s or surgeon’s consent, and an extended reporting endorsement that can be added. It’s important to remember that professional liability insurance is not a substitute for other necessary liability coverages.
10. Errors and omissions insurance provides protection against losses incurred as a result of some negligent act, error, or omission by the insured. A wide range of professionals need the protection provided by errors and omissions insurance. Some examples include lawyers, accountants, employee benefit managers, insurance agents and brokers, and architects.
Multiple Choice Questions
1. (b) This form of liability is called contingent liability.
2. (a) Garagekeepers coverage will provide protection against damage to or theft of vehicles parked in a Park Rite facility.
3. (a) Commercial umbrella policies provide coverage for claims exceeding underlying coverage limits. Coverage for personal injury is provided under most commercial umbrella policies.
4. (d) Aviation insurance excludes property in the care, custody, and control of the insured, with the exception of the personal property of passengers (up to a specified limit).
5. (c) Employment-related practices liability insurance provides coverage for employment discrimination, wrongful termination, failure to promote, harassment, retaliation, and other employment-related wrongful acts.
6. (b) Only the second statement is true. Commercial general liability insurance does provide coverage for advertising injury liability. The insurer writing the coverage also provides for the cost of a legal defense.
7. (d) Occupational illness is covered under workers compensation and employers liability insurance. 8. (b) Errors and omissions insurance protects professionals from claims arising from negligence,
failure to perform, and mistakes.
9. (c) Coverage for legal defense costs is in addition to the policy limits, not counted against policy limits. The other statements are true.
10. (c) Both statements are true. Claims-made coverage reduces long-tail claims, thus premiums, losses, and loss reserves are more easily estimated. The injury need not occur during the policy period for coverage to apply. For coverage to apply, the injury must occur after the retroactive date and must be reported during the present policy term.
True/False
1. T2. F Coverage B of the commercial general liability policy provides coverage for personal and advertising injury liability.
3. F Many current medical malpractice forms permit the insurer to settle a claim without the medical professional’s consent.
4. F The underlying coverage pays first. If the underlying coverage limit is exhausted, then the umbrella policy will respond on an excess basis.
5. T
6. F Employers liability insurance is needed for a variety of reasons. For example, an injury or disease that occurs on the job may not be considered work-related. Employer liability insurance also responds in a variety of other situations.
7. T 8. T
9. F Occupational disease is covered under workers compensation insurance.
10. F Product recall expenses are specifically excluded from coverage under the commercial general liability insurance form. This coverage can be added through an endorsement.
11. T
12. F Garage owners purchase garagekeepers insurance to provide this liability coverage.
Case Applications
Case 1
a. This claim would be covered under the business auto coverage, provided the appropriate coverage had been purchased and the delivery vehicle is an insured vehicle. The commercial general liability form excludes liability arising from vehicles.
b. As the injury developed out of and in the course of employment, workers compensation coverage would respond to the claim.
c. Based on the facts presented, it appears that either the window was defective, or the installation of the window was faulty. This loss would be covered under the general liability policy as either a product liability claim or as a completed operations claim.
d. As this claim involves a former employee, workers compensation insurance does not apply and the former employee has the right to sue Kimball Manufacturing. The company’s general liability coverage will respond to this premises liability claim.
Case 2
a. The businessowners policy (BOP) provides coverage for bodily injury liability claims, so this claim would be covered.
b. The BOP excludes workers compensation claims, so there is no coverage for this claim under the BOP. Carl may be self insuring the workers compensation exposure or may have purchased workers compensation insurance which would respond.
c. This claim would be covered under the BOP. The BOP provides coverage for advertising liability and personal injury.
