Understanding General Liability Insurance

In today's litigious society, even small mishaps can result in large lawsuits. That's why general liability insurance, along with property and worker's compensation insurance, are essential for most companies. Liability insurance protects the assets of a business when it is sued for something it did (or didn't do) to cause an injury or property damage.

General liability insurance can be purchased separately or as part of a business-owner's policy (BOP). A BOP bundles property and liability insurance into one policy; however, the liability coverage limits are generally pretty low. Businesses that need more coverage usually purchase liability insurance as a separate policy. The amount of coverage a business needs depends on a couple of factors:

• Perceived risk.
  Business owners should first consider the amount of risk associated with their business. For example, a business that manufactures heavy machinery is at a greater risk of being sued than a company that manufactures linens, and would therefore need more liability insurance.
  
  
• The state in which you operate.
  Businesses that operate in states with a history of awarding high damage amounts to plaintiffs typically need to carry liability insurance with higher coverage limits. An insurance broker can offer guidance in this area.

How General Liability Works

Under a general liability insurance policy, the insurer is obligated to pay the legal costs of a business in a covered liability claim or lawsuit. Covered liability claims include bodily injury, property damage, personal injury, and advertising injury (damage from slander or false advertising). The insurance company also covers compensatory and general damages. Punitive damages aren't covered under general liability insurance policies because they're considered to be punishment for intentional acts.

General liability insurance policies always state a maximum amount that the insurer will pay during the policy period. Usually these policies also list the maximum amount the insurer will pay per occurrence. For example, if a company has a $1 million occurrence cap in its liability policy and it's successfully sued for $1.5 million, the insurer would pay $1 million and the business would be responsible for paying $500,000.

To cover these types of situations, many companies purchase umbrella liability insurance, which picks up where their general liability coverage ends. Umbrella liability covers payments that exceed their other policy's limits, and provides additional coverage for liabilities not covered in a standard liability insurance policy.

Most insurance companies require their policyholders to report as soon as possible any accidents that could lead to a liability claim. The insurer may then require the business owner to document the situation, forward all summonses and legal notices, and cooperate fully in any investigations.

Taking precautions before an accident can help keep your liability and insurance rates down. All businesses can take certain steps to lower the chance of a liability insurance claim:

• Set a high standard for product quality control;
• Make sure all company records are complete and up-to-date;
• Be sure employees are properly trained;
• Get safety tips for your type of business from your insurance company.

Checklist of Issues to Review for General Liability Insurance

Following is a checklist of key issues for a business to review in analyzing the terms and conditions of a liability insurance policy:

• Is the dollar amount of the coverage sufficient?
• Is the insurer financially strong?
• Are the premium payments competitive?
• Is the deductible too large?
• Does the policy cover bodily injury to customers and guests on the company's premises?
• Does the policy cover property damage caused by employees and third parties?
• Does the policy cover personal injuries?
• Does the policy cover advertising injury?
• Does the policy cover problems stemming from the company's products, or is a special policy needed?
• Does the insurer have a solid history of paying claims on time?
• When does a claim have to be made?
• Are the exclusions from coverage too broad?
• Are there special endorsements that may be appropriate?

Frequently Asked Questions Regarding General Liability

It is our hope that providing answers to some of the most commonly asked questions will help you in making an informed decision regarding your own insurance needs.

Q: WHY SHOULD I HAVE LIABILITY INSURANCE?
A: No person, however careful, can have real assurance that they will not be the defendant in a lawsuit alleging negligence that causes injury to another party or damages another person's property. Whether the person is found guilty or innocent, the cost of defense can be astronomical. In our system, it is important to insure against these costs. Keep in mind, we live in a very litigious and claims-conscious society.

Q: WHAT IS PROD/COMP OPS?
A: Product and completed operations refer to claims that arise out of the installation of a defective product.

Some examples are:

• A structural beam that fails and collapses.
• A ceiling fan that breaks apart and injures someone.
• An electrical switch that shorts out and burns down a house.

Q: WHAT IS MED PAY?
A: Medical Payments provide payment of medical expenses of someone injured at your jobsite (someone other than yourself or your employees), regardless of fault or legal liability. Med Pay is like accident insurance, payable in addition to any other sums the injured party is entitled to collect. Many times, the injured will accept the payment without pursuing any claims for damage.

Q: WHAT IS AN ADDITIONAL INSURED?
A: An endorsement used to attach your coverage to another party, typically a client who may have liability exposure arising out of your activities as a contractor.

Q: WHAT IS CONTRACTUAL LIABILITY?
A: This provides protection against the liability assumed under specific types of written agreements, such as construction contracts.

Q: WHAT IS AGGREGATE? WHAT IS OCCURRENCE?
A: Aggregate is the maximum amount payable for one policy year. Occurrence is the maximum amount payable for one claim.