A common mistake that most new business owners (and some experienced ones) have is thinking that a General Liability (“GL”) policy is just that – a generalized policy that will cover the business for most things that could happen. While, in a way, that statement could be construed as truth; a general liability policy is fairly specific.
This misconception happens because insurance contracts are long and detailed. Most business owners will read the insuring agreement, which states that “We (the insurance company) will pay those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’ to which this insurance applies.”, and stop there. The insuring agreement seems to say that if the business owner becomes legally obligated to pay money to a claimant, the policy will pay out. This is not always the case.
In a GL policy, the insuring agreement will go on to state that the loss must take place inside the policy territory, during the policy term, and must involve an “insured”. The policy contract will then define what would be considered bodily injury or property damage. After that, it will list the exclusions to the policy – under what conditions a GL policy would not pay out. It will then list policy conditions which are things that must happen before and after a claim for the policy to pay out. Finally, a standard GL policy will have pages of definitions for everything from “insured” to “company” to “occurrence” to “your work” and beyond.
Insurance companies are like any other business in that after a fiscal year, there will be profits and there will be losses. The more losses a company has, the more money it must take in by charging premium. Insurers figured out that a way to mitigate risk is to be very specific as to what they are insuring. They do this by narrowing the scope of the insuring agreement with exclusions. GL policy is meant to be a “slip, trip and fall” policy. They accomplish this by making a broad (bodily injury and property damage) insuring agreement – We (the insurance company) will pay those sums that the insured becomes legally obligated to pay as damages – and then narrowing the scope of the agreement by excluding expected injury, contractual liability, liquor liability, workers compensation, employers liability, pollution, aircraft, automotive vehicles, watercraft, mobile equipment, war, damage to property, damage to your product, damage to your work, damage to impaired property, recall of products, personal and advertising injury, electronic data, and recording and distribution of material. After all the exclusions, the policy will basically only pay out if someone slips, trips or falls on a business’s premises. By making a broad statement and excluding certain risks, the insurance company can more accurately predict the losses they will incur and therefore stay solvent.
The good news is that for nearly every exclusion, there can be endorsements adding back that coverage. For example, a pollution endorsement is common in the trucking industry. Pollution coverage is vital for a company hauling hazardous materials. If a truck were to overturn, not only would they need pollution coverage of they were hauling hazardous materials, but for the diesel fuel on which every truck runs. When there is a chemical spill (diesel fuel), there are state officials that need to be called and special chemicals must be used to clean up the spill. The pollution endorsement would pay the cost of this loss.
The importance of having an insurance professional verify the coverages on a policy in ANY industry cannot be overstated. There are 70+ pages of conditions, exclusions, and definitions in an ISO GL policy. A business owner can’t be blamed for not knowing what each of these pages say. A business owner’s job is to run his or her business, not to study insurance. A piece of advice that business owners typically hear is to “hire smart people and stay out of their way.” This advice should extend beyond their employees to their accountants, lawyers, and insurance agents as well. A quality insurance agent should be able to analyze a business, determine the risks involved, and educate the business owner about different ways to mitigate these risks. Insurance is only a tool, not an overall solution for risk. A good agent will tell a business owner when an insurance policy is not the answer to his risk problem.