Virtually every business has commercial general liability insurance (so-called "CGL" coverage). A CGL policy provides coverage if your company incurs damages or litigation costs from a claim of injury asserted by another party. These policies contain dozens of pages of dense legalese, full of definitions, exclusions and limitations. But if you decode the language of the policy you will discover at least 10 things that could be important to your business.
1. The policy only covers a narrow class of injuries.
A standard CGL policy provides coverage only for so-called "bodily injury or property damage" claims, and for "personal injury or advertising injury." While these provisions may seem broad, many types of injuries do not qualify for coverage. Most importantly, with respect to bodily injury and property damage, the policy covers only accidental or fortuitous events. This means if the event giving rise to the injury was expected, intended, or caused by the insured, there is no coverage under the policy. Under these provisions, there would obviously be no coverage if the insured intentionally burned down its own building. However, things get trickier where the insured intended the act or omission itself, but did not intend to cause any damage. In general, courts hold that coverage is excluded in these cases if the insured knew or should have known that there was a significant probability that the act or omission would result in harm. In this case, coverage might be excluded for injuries resulting from a collapsing car jack if the company had been repeatedly informed of problems with the jack but continued to use it.
A CGL policy is equally narrow with respect to personal injury and advertising injury coverage. The standard policy limits this coverage to damages arising out of a list of offenses, including: false arrest, detention, or imprisonment; malicious prosecution; wrongful eviction or entry by a landlord; libel, slander, or disparagement of an organization; invasion of privacy; unauthorized use of an idea in advertising; or infringement of copyright, product image, or slogan. If you think your business might experience claims that fall outside these standard provisions, you should consider purchasing supplemental coverage to manage the risk.
2. The policy has limited coverage for product recalls and damage due to faulty or defective work.
Although the standard CGL policy covers injuries caused by your business's work or products, it is not a guarantor of your work. The typical policy contains a group of exclusions that bar coverage for product recalls and for faulty or defective work, which can come as an unwelcome surprise to many businesses.
First, the standard policy excludes coverage for property damage to "that particular part of any property that must be restored, repaired, or replaced because 'your work' was incorrectly performed on it." However, the policy states that this exclusion does not apply to work that falls within the so-called "products-completed operations hazard." This means the exclusion only bars coverage for work that is in progress; once the work or product has been finished or abandoned, the exclusion no longer applies. Thus, for example, if you operate a construction business and a leak develops in the roof of one of the buildings you are currently working on, the policy would exclude coverage; however, if the leak develops after you are finished with the job, the exclusion would not apply.
Next, the standard policy excludes coverage for damage to "'impaired property' or property that has not been physically injured, arising out of a defect, deficiency, inadequacy or dangerous condition in 'your product' or 'your work.'" For example, if you are an electrician and a defect is found in some wiring you installed in a house, the policy will not pay for the costs incurred to tear out the undamaged walls and floors to redo the wiring. Moreover, "impaired property" is defined to include "tangible property . . . that cannot be used or is less useful because . . . [i]t incorporates 'your product' or 'your work' that is known or thought to be defective, deficient, inadequate or dangerous." Thus, if your business manufacturers freezer components and gets sued by a customer who claims to have a warehouse full of freezers it cannot sell because of a defect in your product, the policy would not provide coverage. However, the policy would provide coverage if there was physical injury to property--for example, if the defective component caused damage to the freezers.
Finally, the standard policy excludes coverage for damages claimed for "any loss, cost or expense incurred by you or others for the loss of use, withdrawal, recall, inspection, repair, replacement, adjustment, removal or disposal of: (1) "Your product"; (2) "Your work"; or (3) "Impaired property"; if such product, work, or property is withdrawn or recalled from the market or from use by any person or organization because of a known or suspected defect, deficiency, inadequacy or dangerous condition in it." Thus, if your company makes lawn mowers and discovers that the most recent batch contains a defect that could make them catch fire, the standard policy will not pay to repair or replace the defective mowers, and will not pay for the costs of recalling the mowers from your customers. However, courts hold that coverage is excluded only if the product has not yet failed. Thus, if a lawn mower had already caught fire as a result of the defect, the policy will pay for any property damage that results, including damage to the mower itself.
If your business wants additional protection for things like product recall, such coverage is sometimes available on the market at additional cost. However, many of the common policy endorsements do not always improve things measurably. For example, some endorsements purporting to cover product recall might only cover the cost of issuing a recall notice, and not the far more significant costs of parts and labor. You should make sure your insurance agent understands your needs in this area, and may need to consult with counsel for an opinion on whether the policy you are purchasing does what you want.
3. Old policies can cover new claims.
A CGL policy is a very valuable asset because it can provide coverage to your business years after the policy period has expired. This historical coverage exists because the typical CGL policy is "occurrence" based, meaning it provides coverage for events that take place during the policy period, regardless of when the claim or suit is brought. For example, if someone slipped and fell on your property three years ago but sued your company this year, the policy in effect at the time of the fall would apply to the suit.
Unfortunately, this often creates problems when the injury is alleged to have happened many years ago--for instance, if someone claimed to have been injured by asbestos sold by your company in the 1950s. If your company purchased coverage that would cover such a claim but discarded or misplaced the policy, there is a good chance the claim will not be covered, meaning the company will have to pay the costs of defending the suit and any judgment or settlement out of its own pocket. It is therefore important to protect old insurance policies and records, as those policies could be triggered by unforeseeable claims at some time in the future. Tips on how to do this can be found on our Web site at www.wnj.com, "Insurance Policies and the Circular File: The Case For Keeping Everything."
4. The policy might not cover liabilities your company assumes through an indemnity agreement.
Indemnity agreements are a common tool in the business world, allowing companies to manage risk by determining which party to a business transaction will bear the costs in the event of a loss. But when one business takes on the liabilities of another, the standard CGL policy will not cover the liabilities. Most CGL policies exclude coverage for "'bodily injury' or 'property damage' for which the insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement." There is an exception to this general exclusion for an "insured contract," which is defined to include things like a lease of premises, an easement or license agreement, an elevator maintenance agreement, and certain agreements to assume the tort liabilities of another party. Because these provisions can vary from policy to policy and are subject to interpretation by the courts, you should consult with counsel and review your policy's definition of "insured contract" when drafting any indemnity agreements.
5. It is important to give the insurer notice of a claim as soon as possible.
The insurance company's duties under a policy are not triggered until it receives notice of a claim. This makes it important for your company (by itself or through its insurance agent) to give the insurer notice of a claim as soon as you become aware of it, or as soon as you become aware of an occurrence that could give rise to a claim. If you incur litigation costs defending a claim before providing notice, those costs will not be reimbursed. Moreover, if the insurer can demonstrate that the delay prejudiced its ability to investigate or defend the claim, then coverage for the entire claim may be precluded. To avoid this, it is advisable to have someone at your company designated as the person to whom information about new claims (or occurrences that could lead to claims) is submitted, and who has the task of ensuring that your insurers and agents are given prompt notice.
6. Your carrier will control your defense.
A CGL policy provides coverage for damages incurred from a judgment or settlement, and also covers the litigation costs incurred in defending your company from a lawsuit. This raises the question of who gets to control the defense--selecting a lawyer and making decisions regarding case strategy--if your company is sued for something that could be covered by the policy. The standard CGL policy states that the insurer "will have the right and the duty to defend the insured." This means that, although the insurance company will pay the costs of defending the suit, the defense of the case is in someone else's hands. If you want to prevent this from happening and secure your company's right to select its own attorney and have strategic control of the case, you should explore alternative coverage forms that give you more control over the selection of counsel.
7. You have to cooperate with your insurer.
A typical CGL policy requires the insured to cooperate with the insurance company in the investigation and defense of a claim brought against the insured. In general, this means providing the insurer and the attorneys it retains with the information, documents and access to witnesses they request to defend the suit. The insured's failure to meet this obligation could result in a denial of coverage.
In most cases, your company will have a shared interest in cooperating with the insurer in order to obtain a favorable outcome in the lawsuit. If that interest ever diverges, however, and the insurer demands something that your company does not wish to provide (for example, asking you to turn over documents protected by the attorney-client privilege), you should consult with counsel to decide how to respond. The duty to cooperate is not limitless, and an insurer's request could very well cross the line.
8. If you settle a claim on your own, the insurer is not liable for the settlement.
Most CGL policies give the insurance company discretion to settle claims or lawsuits against the insured. They state that "no insured will, except at the insured's own cost, voluntarily make a payment, assume any obligation or incur any expense" related to a claim. The purpose of this provision is twofold: it gives the insurer that is footing the bill control over any settlement negotiations, and prevents the insured from entering into a collusive settlement with the claimant. Under this provision, your company still has the ability to settle without the insurer's consent, but any such settlement will be paid out of the company's own pocket and will not be reimbursed.
9. A misrepresentation in your insurance application could cost you your coverage.
The typical CGL policy states that, in issuing the policy, the insurer has relied on the representations made by the insured in the application for insurance. If there is a material misrepresentation in the application, the insurance company has the right to rescind the policy and leave the insured without coverage. For instance, imagine that your insurance application contains a representation that your company is unaware of any circumstances that could give rise to a claim, but in fact, at the time the application was signed, one of your supervisors was aware of a defect in one of your products that could result in injury to a customer. In that case, the insurer may be able to rely on the misstatement to deny coverage for claims arising out of the defect, and may attempt to rescind the policy altogether. Given the risk, it is important to be meticulous and avoid any mistakes or omissions in the insurance application. This can be accomplished by discussing the application with a broad range of people at various levels of management, and by ensuring that those people review the application before it is sent to the insurer.
10. Subsidiaries (and their employees) are not automatically covered.
Coverage under a CGL policy is limited to the entities specified as "insureds" at the beginning of the policy. While the coverage automatically extends to the employees of the named insureds, it does not extend to subsidiaries of those insureds, even wholly owned subsidiaries. Thus, for example, if you run a pool cleaning business and that business owns a subsidiary that sells pool covers, the policy that covers the pool cleaning business will not automatically cover the pool cover business. If your company wants its CGL policy to cover its subsidiaries (and the employees of its subsidiaries), it needs to ensure that those subsidiaries are specifically listed in the company's policy or buy separate coverage for the subsidiaries.
If you have questions about this or any other insurance issue, contact Joe Kuiper, chair of the Insurance Practice Group, at 616.752.2481 or firstname.lastname@example.org.