A primer of commercial liability coverage fundamentals
By Larry Justice
One of the most common areas of diﬃculty during a project launch is procuring proper insurance. While on its face, this process should be as simple as providing a coverage form to your client, every supplier knows it is anything but simple. The world of commercial insurance is confusing and complicated. While volumes could be written about the complexities of this ﬁeld, this article distills some basic concepts down to an accessible and understandable reference.
The Certiﬁcate of Insurance. The most common method of evidencing coverage is through a Certiﬁcate of Liability Insurance (COI). The most common form of COI is an Association for Cooperative Operations Research and Development (ACORD) form, which is completed by your broker. While the ACORD form seems confusing at ﬁrst blush, it provides an incredibly concise summary of all the essential data necessary to audit insurance compliance.
Coverages and Limits. The most essential of the commercial insurance coverages is Commercial General Liability (CGL). CGL provides protection against claims involving property damage or personal injury that may arise out of the operations of the supplier’s employees or agents. In addition to payment for the speciﬁc monetary damages arising from the claim, CGL also provides for payment of the costs of a legal defense in the event that the injured party ﬁles a lawsuit.
Contained within the general category of CGL are specialized coverages that may be subject to diﬀerent limits than the CGL itself. The four subcoverages are:
- Damage to Rented Premises. This provides coverage for ﬁre damage caused by negligence on the part of the insured to premises rented to the insured.
- Medical Expenses. This pays medical expenses resulting from bodily injury caused by an accident on premises owned or rented by the insured when caused by the insured’s operations.
- Personal and Advertising Injury. Personal Injury refers to injury other than physical bodily injury, such as false arrest, malicious prosecution, detention or false imprisonment. Advertising Injury covers claims arising from oral or written advertisement that disparages, libels or slanders an individual or an organization.
- Products and Completed Operations. Products coverage relates to claims arising out of products manufactured, sold, handled or distributed by the insured. Completed Operations covers claims arising after business services provided by a company operations have been completed or abandoned.
Your contract will also proscribe the amounts or limits of the coverages that are required. The limit is simply the maximum amount the insurer will pay out on a policy. There are two types of insurance limits: the Occurrence Limit, which is the maximum the policy will pay for any one claim during the term, and the Aggregate Limit, which is the total amount the policy will pay all combined losses. For example, a policy may have a $500,000 occurrence limit with a $1 million aggregate limit. This would mean that the insurer will pay a maximum of $500,000 for any one claim during the policy term, and would pay $1 million total for all claims during the policy period.
Further, coverage is also categorized as either claims-made or per occurrence. A claims policy is one that covers claims that are made during the course of the policy period, regardless of when the event giving rise to the claim occurred. For example, assume that one of your workers caused an auto accident in
2011, leading to an injury. In 2013, the individual injured by your employee ﬁles a lawsuit against your company. If the insurance you have in eﬀect in 2013 is a claims-made policy, it will cover the loss even though the accident occurred in 2011 because the policy is in eﬀect at the time the claim was made against you.
Under an occurrence policy, coverage attaches when the accident occurred, not when the claim is actually made. Thus, in the auto accident example, the supplier would have to look to the policy it maintained in 2011, as that is when the accident occurred.
These issues are some of the basics of commercial liability coverage. In addition to CGL and its related coverages, a comprehensive commercial policy will include coverages for such liabilities as auto, workers’ compensation, professional liability and employment practices liability. When procuring insurance for your company, it is vital that you work with an experienced and trusted agent who can provide guidance on the coverage needs for your company, your legal counsel and your risk management personnel.
Larry Justice is general counsel for Bartech Group.