(July 2023)
Underwriting commercial
general liability exposures begins with reviewing and understanding the
Insurance Services Office (ISO) Commercial General Liability Coverage Forms.
Each has three different and separate insuring agreements. The exposures
presented by a particular risk must be identified and evaluated within each
insuring agreement.
All coverage centers on
the insured. Therefore, the most important part of underwriting this coverage
part is determining WHO is covered. The most obvious insured is the Named
Insured. Every entity listed in the policy is a named insured. From a legal
standpoint it is the same as if a policy had been issued to each named insured
as a separate policy. The first named insured is important in that they have
special responsibilities and privileges regarding premium and cancellation, but
these differences do not extend to coverages.
From the
underwriting standpoint, the first thing to do is to determine what each named
insured does and why it is combined with every other named insured. A specific person
or entity that does not have a relationship to or is not legally combinable
with the named insured should not be included. That person or entity should be
insured separately.
Each
named insured is an entity. Entity drives Section II–Who is an Insured in the
coverage form. Because each named insured is considered separately, each has its
own "Who is an Insured" section. If one entity is an individual, only
that part of the section applies. If another entity is a partnership, only that
part of the section applies. This can be very important when an individual is
added to a policy initially issued to a corporation. The individual is suddenly
covered for the corporation’s business but is also covered for any business
operation the individual solely owns. In addition, that individual’s spouse is
added as an insured for any of the individual’s business operations.
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Example: An application comes in for commercial general liability
coverage on Gratzy Manufacturing LLC and Herman Gratzy. Referring to Section
II–Who is an Insured in the coverage form, each of the following is an
insured:
There
is no requirement that Herman Gratzy’s activities be related in any way to
Gratzy Manufacturing LLC. |
Once it
is established WHO is insured, then WHAT must be established. What does each of
the insureds do that could cause an occurrence or an offense? Notice that in
the insuring agreements there is no requirement that occurrences or offenses be
due to any particular business operations, only that the insured must be
legally obligated to pay. Therefore, any and all activities by an insured must
be discovered. Once discovered, those exposures must be evaluated in order to
determine acceptability.
A risk
survey related to the specific business or operations may be helpful. A regular
application or general questions may not be enough to fully develop the
information needed. The insured may simply forget certain aspects of its
operations. Such a survey may jog its memory.
Note: The Rough Notes Company, Inc.
Producer’s Commercial Lines Risk Survey is an excellent resource for
identifying operations.
Other
documents used to develop the business or operations total identity are its
annual financial report, profit and loss statements, balance sheets, and other
financial records. Tracking the business's finances is an example of a risk
management method of asset protection.
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Example: Continuing the example
above, Gratzy Manufacturing LLC makes a variety of small plastic office
supplies. Herman Gratzy individually agrees to sell some auto parts his
family in Germany makes. Herman and his wife also make and sell jewelry from
their home. It is clear that what seemed like a very simple and innocuous
non-operating plastic parts manufacturing exposure is now also an auto parts
manufacturer, jewelry manufacturer, and jewelry retailer. These additional
operations must be investigated and evaluated more thoroughly. In this case,
simply adding Herman Gratzy individually without asking any further questions
could lead to missing some important potential hazards and exposures. |
This is the first of the
three insuring agreements. It states that the insurance company agrees to pay amounts the insured is legally
obligated to pay as damages for bodily injury and property damage that this
insurance covers. It also has the right and duty to defend the insured against
any suit that seeks those damages but only suits that seek damages that this
insurance covers. Coverage applies to bodily injury and property damage
that takes place during the policy period. The bodily injury and property damage
must be caused by an occurrence that takes place in the coverage territory.
After
determining the nature and extent of all business activities and operations, the
next question is HOW. HOW can injury or damage occur and HOW can it be
prevented? This requires knowledge of operations, information regarding
products and services provided and experience of similar type operations. Loss
control or loss prevention departments can supply excellent information to aid
in this evaluation.
The
question WHERE is a very important because the
insuring agreement is broad. Coverage applies anywhere, subject to only the
coverage form's definition of coverage territory. As a result, coverage is not
limited to only named or listed locations or operations. New locations or
operations are covered without them being added to the coverage form. A question will arise regarding a location that is
in existence at the time of the policy application, but the insured does not
list it on the application - is it covered? According to the insuring
agreement, the answer is a conditional yes because it is limited somewhat by
Section IV-Commercial General Liability Condition. If an insured intentionally
misrepresented factual information, it is not covered. If the location was left
off due to an oversight or mistake, there is a possibility that it is covered.
This
insuring agreement states that the insurance company agrees to pay amounts the insured is legally obligated to pay as damages
because of personal and advertising injury that this insurance covers. It also
has the right and duty to defend the insured against any suit that seeks those
damages but only suits seeking damages that this insurance covers. Coverage applies to personal and advertising
injury caused by an offense that arises out of the named insured's business.
The offense must be committed in the coverage territory and during the policy
period.
The WHO and WHERE questions are the
same as with the Coverage A but the WHAT and HOW questions are different. The
most important part of this risk analysis is knowing what the insured does that
could cause a personal injury or advertising injury loss.
Some
business operations are so prone to such losses they may need to be excluded
and covered under a professional coverage form. These include lawyers,
advertising agencies, publishers, security firms and similar type occupations.
However, it is important to evaluate a business that would appear to do none of
the above and determine if the exposure might exist in a department of the
company. Retailers with paid security staff have significant exposure for
evasion of privacy and false imprisonment. Any company that publishes an “in
house” newsletter or customer newsletter has an exposure to libel and
plagiarism claims. A company that provides product evaluations has a defamation
suit potential. Even religious organizations are not exempt from suit because
of release of information that could be considered libelous. It is important to
determine how the offenses could take place and then how they can be prevented.
One point that must be emphasized is the defense
cost. Personal and advertising injury cases are very contentious, and many
plaintiffs demand a “day in court” even when pre-trial settlement might be
financially advantageous. Because the insurance company bears the full cost of
the defense, it can become very expensive. Therefore, in underwriting personal
and advertising injury it is important to consider the potential for lawsuits
even when it would appear that the insured would always win the case.
If the exposure is too great, the Personal and
Advertising Injury exclusion, CG 21 38 is always an option.
Related
Article: ISO Commercial General Liability Coverage Forms Available
Endorsements and Their Uses
This
insuring agreement states that the
insurance company pays certain medical expenses for bodily injury an accident
causes. The accident must occur on premises the named insured owns or rents, on
ways adjoining such premises, or because of the named insured's operations.
Coverage applies if the accident occurs in the coverage territory and during
the policy period. Payments are made without regard to fault.
Underwriting
this coverage is identical to underwriting Coverage A because the exposures are
essentially the same. However, Coverage A requires negligence on the insured's
part and this coverage does not. This means that if an accident occurs and it
can be linked to the insured’s premises or operations, there is coverage. One
simple way to underwrite this coverage is to exclude it for businesses and operations
that regularly produce these kinds of injuries. Athletic participation
activities, day care centers, and schools are some examples of operations or
classes of business where medical payments coverage is usually excluded. The
classification footnotes for these and similar classes of business require
attaching an endorsement that excludes medical payments coverage. However,
other operations with similar exposures to loss may be less obvious, and
underwriting must determine if it will provide coverage. It is important to
note that providing this coverage is a good way to potentially eliminate
lawsuits because the injured party is cared for (and his or her medical-related
expenses paid) promptly. However, problems arise if this coverage is used as a
substitute for health insurance or accidental injury coverage.
Contractual liability is
excluded except for obligations made under insured contracts as defined in the
coverage form. It is important to be aware of each contractual obligation and whether
or not it is covered as a defined insured contract. This is significant because
contracts are normally written to shift obligations from one party to another, so
it is important to know exactly what burdens the insured has agreed to shoulder
for another.
There are several
additional insured endorsements available. These are normally added due to a
contractual requirement. The named insured is providing its insurance policy
limits to the additional insured for a loss that may be brought against the
additional insured because of a relationship to the named insured. Many of the
additional insured endorsements were changed in the 04 13 edition to not permit
contractual transfer of liability when anti-indemnification statutes or similar
regulations prohibit it.
Related
Article: ISO Commercial General Liability Coverage Forms Available
Endorsements and Their Uses
Before any loss history evaluation can begin it is necessary to obtain the
loss history of the applicant. The loss history should be for a minimum of five
years. Ten or more years’ experience may be needed for larger risks or high
risk operations. At a minimum, loss history should include loss dates
and descriptions, whether the losses are open or closed, and the amount paid or
the current reserve amount. Some insurance companies do not provide reserve
information because they are only estimates that may change at any time.
Frequent
small losses may not result in an unacceptable loss ratio, but their number may
indicate unresolved problems. Slips and falls may suggest housekeeping problems
or structural conditions that could lead to a sizeable loss. Small property
damage claims may indicate quality problems or lack of attention to detail that
suggests morale hazard issues on the insured's part. The key to evaluating a
series of small losses is to determine if there is an identifiable and
quantifiable pattern that can be measured and corrected.
The
claims-handling costs for both the insurance company and the insurance agency
on small and frequent losses must be considered in addition to the amount paid for
the losses themselves. While the overall loss ratio may be acceptable, it may
be much worse when claims handling costs are added up and included.
Liability
deductibles may solve some problems but disguise other more serious ones.
Deductibles should be used cautiously and sparingly and only after determining
and thoroughly evaluating the reason for the frequency.
It is a
mistake to disregard a single large or severe loss as a fluke, aberration, or
exception. The fact is that multiple significant losses can occur unless and
until appropriate steps are taken to prevent them. Loss details and the
insured’s actions after the loss to prevent it from happening again are
important and may determine the risk’s acceptability. Post loss autopsies are
important for any insured and insurer to make sure all processes are reviewed
and understood.
Pricing should start only once it is determined that
the risk is acceptable from an underwriting standpoint. Underwriters
must determine the correct classification and identify any rate loss costs that
might apply, in that order. An error at the beginning of the process carries through
the rest of it and results in an incorrectly priced risk.
Related
Articles:
Classifying Risk–Why Proper Risk Classification Is Important
ISO Commercial General Liability Coverage Forms Rating Considerations
Simple endorsement change
requests from the insured can be anything but simple. Underwriters and others
should review endorsement change requests from the underwriting standpoint. A
simple name change can mean a change in ownership that has important
implications on the operations conducted. A simple address change should lead
to questions with respect to new locations and activities. Unusual insurance
certificate language requests should be challenged and questioned with respect
to changes in operations. Many change requests contain hints that suggest
possible changes in operations or emerging issues and exposures that must be
evaluated.