Those commercials on TV for plaintiffs attorneys are a not-so-subtle reminder that we live in a litigious society and that businesses must protect themselves from lawsuits. One essential protection for employers, both large and small, is commercial general liability (CGL) insurance. CGL covers the cost of claims when a business is sued by someone for bodily injury, property damage or advertising injury.
Negligence lawsuits are on the rise
Unfortunately, lawsuits against employers for negligence are on the rise. In fact, A.M. Best, an insurance rating agency, recently gave the U.S. commercial general liability market a negative outlook, citing several legal trends that are driving up claims costs.
A.M. Best noted more frequent and severe lawsuits (known as “social inflation”) and third-party litigation financing as key reasons why CGL carriers are under pressure to increase rates and tighten policy terms and conditions.
The upshot is that it’s more important than ever for businesses to have CGL insurance and to work with an insurance professional who can help them find the best coverage at the best rates.
What CGL covers
CGL covers many of the liability situations most companies encounter during the course of their normal business activities. Coverage includes medical, property, legal, compensatory and punitive damages you must pay if you are found legally responsible for:
- Bodily injury and property damage, including emotional distress and mental trauma. CGL covers injury and damages that occur on your business premises, as a result of your operations, or from work done by an employee off-site. For example, if an electrician you employ causes a short in a customer’s wiring and there is a fire, a CGL policy would cover the claim.
- Medical expenses for someone other than an employee who is injured on your property. You need not be sued to file a medical claim. Coverage is provided on a no-fault basis and includes hospital and ambulance expenses, and even funeral expenses if someone dies as a result of an injury on your property or from your operations. Employees who are injured at your workplace are covered by your workers' compensation insurance.
- Personal and advertising injury. CGL policies also cover copyright infringement, libel and slander, invasion of privacy, wrongful eviction, false arrest, use of another company’s intellectual property and misleading advertising claims.
CGL limitations and what’s not covered
CGL policies provide some product liability coverage, too. However, if you manufacture or sell products, it may be best to purchase product liability insurance that covers product recalls. These policies cover claims associated with product defects, malicious tampering, contamination, mislabeling and deceptive marketing.
CGL doesn’t cover professional liability claims. For that, you would need a separate professional liability, or errors and omissions, policy that covers negligent professional acts.
In addition, CGL doesn’t cover workers' compensation, directors and officers liability, pollution liability or commercial auto liability. These are covered by other types of liability insurance.
CGL policies have limits on what they will pay. Most have an occurrence limit and an aggregate limit. For example, a policy may be written as a $1 million/$2 million policy, meaning it will pay up to $1 million for a single claim and up to $2 million during the term of the policy.
If a claim exceeds the policy’s limits, you must pay the excess amount yourself. Excess insurance and commercial umbrella insurance are two ways to inexpensively add additional coverage to your underlying CGL policy. Your insurance professional can advise you on limits and the best way to increase them, if needed.
Pricing and other considerations
Ask your insurance adviser about pricing a CGL policy that’s tailored to your industry and risk exposure. Your premiums will be based on the size and type of your business, annual revenue, location, number of employees, claims experience and the condition of your property. Your policy’s limits and the size of your deductible will also affect your cost. Adjusting these can save you money.
In addition, you may have the choice between a claims-made and an occurrence policy. With a claims-made policy, the loss must occur and you must file a claim within the reporting period of the policy. If the policy is no longer in force, the claim won’t be paid. Purchasing an extended reporting period (ERP) option can protect against future claims if you cancel the policy.
With an occurrence policy, you can file a claim at any time, as long as the loss occurred when the policy was in force. So if a customer files a lawsuit a year after an accident occurred on your property, it would be covered if it happened during the policy period. Often, occurrence policies cost more than claims-made policies because there is no time limit on filing claims.
Besides adjusting the limits and deductibles, there are several other ways you can save money on a CGL policy. You might consider a business owners policy (BOP) or commercial package policy (CPP), which combine into one policy many of the protections a business needs. By bundling the insurance, the overall cost is lower than if you purchased each of the policies separately. Your adviser can help you decide what coverage you might need in a BOP or CPP, including commercial property and business income insurance.
You can also reduce your costs by minimizing your risk exposure. Creating employee training and awareness programs, reducing workplace hazards, and improving security are several ways to help lower your liability insurance costs.
CGL is a key coverage, and it may be required
A CGL policy is one of several key coverages you need to protect your business. Some would argue it’s the most important commercial coverage, since businesses are so often sued and one lawsuit could bankrupt your operation.
There are instances where you may be required to have CGL insurance. These include when you are signing a lease for office space, signing a contract to do work for a client or another company, or applying for a license. For example, California requires all contractors (except handymen) to carry CGL insurance.
CGL not only makes sense from a liability protection standpoint; it also demonstrates to your customers, business partners and creditors that you have insurance and are financially secure. Contractors often will ask you to name them as an additional insured on a CGL policy. This protects them when they are doing work for you.
Today, rising medical expenses, steep legal fees, and huge jury awards are causing significant tightening in the CGL market. Carriers have raised rates and toughened their terms and conditions, making it more difficult for businesses to find affordable coverage.
These developments make it imperative that you consult an insurance professional who has expertise in business liability coverage. You want the confidence that your business is adequately covered but isn’t paying more than it has to for this essential insurance protection.