Most businesses who purchase commercial general liability insurance have little understanding of how it’s structured and what is important. Instead they focus on the amount of limits offered per occurrence and the premium being charged for those commercial general liability insurance limits for their comparison when making their purchase decision. We are here to tell you those are the last 2 data points ( coverage limit & premium) to consider when evaluating your current liability insurance program. It’s a classic price vs cost conundrum.
Over the next few paragraphs we will break down for you the critical components you should use when evaluating your commercial general liability insurance program. The goal here is not to provide a Master’s Class in understanding all of the nuance with respect to commercial general liability insurance. Instead it’s really to get you to consider engaging a Risk Advisor by clicking here to do the evaluation for you. Often times a RISK ADVISOR will not charge you to do the evaluation .
If the RISK ADVISOR is good at what they do they will first understand how you make your money, who your customers are , where you operate, and importantly the contracts that create both upstream and downstream obligations for your company. Understand, your Commercial Insurance Program is always a trailer , it never leads. It reflects and finances potential future losses more efficiently that using your own operating capital. To properly design ANY commercial insurance program both the broker and the customer need to spend time discussing in detail the operational components and risk profile of the business. Contingent on how , where and who you make your money from will determine this critical exercise. it can be fairly simple to pretty complex. You do the heavy lift once , then tweak it yearly to adjust or iterate as your business evolves.
QUICK TIP : You can tell how good the Risk Advisor is by the questions they ask, the process they put forth to understand your business. If it’s ad-hoc, only takes a few minutes that’s a big red flag. Did they analyze your loss runs, contracts, licensing agreements, laws you may be subject to in operating your business, future goals?
We say insurance is always a trailer because the real purpose of insurance is to transfer a future potential “net income loss” (defined as income you would have had except for a particular event), from YOUR balance sheet to the insurance carriers balance sheet for the lowest premium possible. Here is the key phrase AS MUCH RISK AS POSSIBLE for the LOWEST PREMIUM available. More on that later and why that is so important.
Here is the primer I promised before I went off on a tangent to frame this EXPLAINER. 
COMMERCIAL GENERAL LIABILITY INSURANCE : The best way to remember this section; there is a reason it’s called “GENERAL LIABILITY”. The reason, its general (non-specific) , kind of plain vanilla , designed mainly to cover the general public. It is NOT designed to cover for losses involving hiring , firing , management practices for your employees. It is NOT designed to cover your customers for specific errors , omissions , designated professional practices as it relates to the duties you perform.
It’s the most generic form of commercial liability insurance available to a business to insulate them from future 3rd party losses. Commercial General Liability Insurance is designed to cover losses you may be responsible to ,a 3rd party, typically the general public for a loss or injury they may have suffered. Think of a pedestrian that slips and falls outside your retail store. They litigate against you and the building owner. The building owner will have their own commercial general liability insurance as will you. Who pays will be determined by the details of the incident and your lease which covers your business obligations.
If you want to understand what your commercial general liability insurance policy covers start with what it DOESN’T COVER by going right to the EXCLUSIONS section of the policy. There you will uncover how potentially woefully inadequate the coverage truly can be.
Without getting too much into the weeds here let me highlight a few key risks & exposures you may have that will NOT be covered in your commercial general liability policy.
CLAIMS BETWEEN YOU & YOUR EMPLOYEES:
- Harassment : Could be sexual, could be gender based, could be you just have a bad egg in your midst that is a bully to their co-workers or subordinates. It’s take very little for an employee to file a harassment complaint with the Department of Labor in your State, which will trigger a very expensive Dept of Labor audit. Worse they could lawyer up as they know or have heard it’s an easy way to make a quick buck. They are right, most of these claims come to some financial settlement where your business pays the employee money instead of expensive litigation.
- Wage & Hour : These are hugely expensive to a business. Primarily because the audits are invasive, word spreads to ex-employees who want to be on the gravy train, the cost to defend (Employment Attorneys) are expensive. Finally the settlement, if it’s determined that you did not properly pay overtime or other wage related claims.
Just google WAGE & HOUR lawsuits in your industry to read some of the horror stories. It won’t take long for you to determine that having an employment practices liability policy is essential for the continuity of your business.
These are just (2) quick examples. There are far more, like discrimination. Bottom line you MUST transfer this risk to an insurance carrier for a premium as it’s too expensive to retain.
CLAIMS INVOLVING DIFFERENT TYPES OF SERVICES YOU PERFORM:
Examples here would be services that are technical and requiring licensing, specific training e.t.c. A specific example here might be a home healthcare agency that provides at home services for the elderly. If in their daily routine it’s asserted the home health aide fails in their duties or is negligent, a patient falls breaking their hip, the home healthcare agency may be held liable if they were negligent in their duties resulting in a significant injury. Even if you feel you were not negligent, the cost to defend yourself going to the matt on the suit will be crazy expensive , even if you win. Unless the Home Healthcare Agency purchased PROFESSIONAL LIABILITY INSURANCE , they are funding this very expensive loss themselves. The cost to defend such an event is easily 6 figures, say nothing of the settlement.
Many non-profits perform services for their “clients” that require specialized services that are typically excluded on a commercial general liability insurance policy . They may provide elder care, youth services, counseling, legal services, placement services e.t.c. Much care needs to be taken to properly understand your risk and exposures to loss , then decide if you want to transfer that risk or exposure to insurance carrier for a premium.
Often with non-profits we conduct a simple contract for services audit to understand what services they have been retained to deliver. Then we audit the professional liability policy to check if that exposure was contemplated . In a recent services audit for a local non-profit we determined that the non-profIt , who was providing job placement services for disadvantaged youth , did NOT have the correct coverage for those services. Their Professional Liability policy did not include molestation coverage which could be critical if they placed that youth in a situation that led to an “event”. Just the assertion of the event could wipe out years of operating budget.
In the above example they did purchase Professional Liability coverage however without that audit , understanding their true exposure to loss , there was the potential for catastrophic failure if someone pointed a finger. Too often , without an audit these non-profits or other business organizations learn of the deficiency after they get the claim denied, making their education very expensive.
CLAIMS DUE TO AN ERROR OR OMMISSION :
In many service organizations, failure to perform a certain job function may result in damages to either your customer or the general public. An example might be a construction firm that improperly installed weep holes in the masonry facade of a building. Water built up behind the masonry wall going undetected for a period of time, ultimately resulting in the façade collapsing onto the street below. This actually happen to one of our clients.
Since they purchased Construction Errors & Omission insurance from us the loss defended and the damages covered. Mostly the re-purchase of new materials and labor to install the material as well. Architectural fees, scaffolding, permits e.t.c. were also covered. The cash provided to investigate, defend and ultimately finance the repair was all paid from the construction errors & omissions policy. This had the affect of allowing the business to keep it’s cash flow, budgets and profits in tact. Errors & Omissions Liability Insurance is available to most service businesses, not just construction.
CLAIMS DUE TO A DATA BREACH :
This one can be fairly complex, with lots of potential for errors. Imagine you get an email from a Hacker stating that unless you pay them a ransom, they are going to slowly release all of your customers private information out into the web. Further they will tell your customers where they got the information and that you refused to pay the ransom which is why all their data is exposed. Imagine your a divorce attorney, a child psychologist, a financial advisor.
There are many examples I can give whereby your customers data or your customers systems are hacked due to a virus that may or may not have come from your network. The mere fact someone may point a finger at your company and make the assertion the hack started from an email your company sent is going to be a 6 figure event. Further they can be very, very expensive to defend. In States like NY where they passed the SHIELD ACT the fines alone from a State or Federal government can put you out of business as the fines are well into the 6 figures.
In this situation you need a standalone Cyber Liability Insurance policy.
QUICK TIP : NEVER think you have coverage for Cyber liability just because your carrier added an endorsement onto your policy with a $ 1 mil limit stating they are covering you for a cyber liability event. Those endorsements fall woefully short of giving you proper coverage. They are hollowed out coverage forms that give the false impression you have coverage. This will only come to light when you file the claim , resulting in a denial.
CLAIMS DUE TO A FAILURE TO COMPLY WITH GOVERNMENTAL RULES & REGS:
Sadly most companies aren’t aware that as a private company you have exposure to loss from rules , regs, codes that create obligations for your company for failure to comply. In this situation a Directors & Officers policy will help provide defense and in some cases help pay for the fines, or settlement due to these code infractions.
QUICK TIP : ON PRICING FOR ANY TYPE OF COMMERCIAL LIABILITY INSURANCE POLICY :
Pricing is predicated upon a “BASIS” ; a unit of measurement that the carrier determines best reflects their actuarial tables to determine the probability of a future loss. This is how they arrive at a premium. Some carriers are flexible with the “Basis” , others are not. They use one type of basis for determining the premiums they charge. You should determine up front what is the best possible “BASIS” for your company to yield the lowest possible premium.
Examples of “BASIS” would be :
- Payroll
- Sales
- Units
- Square Footage
- Contracts
Contingent on the basis chosen the carrier applies a formula to the chosen basis to arrive at the premiums charged. A huge variable in that formula is your company’s loss pic (loss picture). This is the ratio of historical premiums charged versus claims paid out. Essentially , how much profit has your account generated over the previous 5 years based on incurred loss. For more on LOSS PICS , CLICK HERE.
We plan on doing a future piece just on pricing of Commercial General Liability Insurance as it’s way too much to tackle here.
A final thought there are many risks and exposures that a typical commercial general liability insurance policy will disclaim. We cannot stress enough that a thorough evaluation with a qualified RISK ADVISOR of how you do business, where you make your money, how you make your money, from who you make your money is the ONLY way to properly insure the risk.
You cannot properly transfer risk or finance risk that hasn’t been indemnified. Further, unless you stress test your insurance program BEFORE a loss occurs you are setting yourself up for a very expensive lesson.
