10.1 Legal Liability Exposures
Every business faces legal liability exposures that may result in financial loss if the business is held responsible for injury or damage to others. A Commercial General Liability (CGL) policy is designed to help protect businesses against many of these common liability risks. These exposures often arise from the business premises, the products the business makes or sells, its ongoing operations, and certain contractual obligations.
A Commercial General Liability (CGL) policy does not provide coverage for every type of liability exposure a business or its professionals may face. Some risks are more specialized in nature and require coverage under other types of commercial liability policies designed for those specific exposures.
Premises and Operations Exposures
Businesses may conduct operations both on their own premises and at locations away from the business premises. For example, an accountant may meet clients at the accounting office, but may also conduct business away from the office when visiting clients, going to the bank or post office, or attending networking events. If the business, or a person acting on behalf of the business, causes bodily injury or property damage to another party during these operations, the business may be held legally liable for the resulting injury or damage.
A Commercial General Liability (CGL) policy provides coverage for the insured’s legal liability when bodily injury or property damage arises from the insured’s premises or from the insured’s business operations conducted away from the premises. To be covered, the occurrence must happen during the policy period and within the policy’s coverage territory.
An Insurance Story
A customer is shopping at one of The Furniture Company’s retail locations when they trip over a rug and hit their head on a coffee table. Because the injury occurred on the business premises, The Furniture Company may be legally liable for the customer’s bodily injury under its premises exposure.
In a separate situation, an employee of The Furniture Company is delivering furniture to a customer’s home. While carrying a heavy armoire, the employee drops it and damages the customer’s hardwood flooring. Because the damage occurred while the business was performing work away from its premises, The Furniture Company may be legally liable for property damage under its operations exposure.
Products Exposure
Product liability is based, in part, on the principle that a seller makes an implied warranty that its product is safe and suitable for its intended use. In insurance, the term product refers to goods or merchandise that are manufactured, sold, handled, distributed, or disposed of by the insured, or by others operating under the insured’s business name. Under a Commercial General Liability policy, goods or merchandise are generally considered products only after they have been sold and are no longer in the insured’s possession or control.
A manufacturer, wholesaler, or retailer may be held legally liable for injuries or damage caused by a product. Product liability may arise from negligence, breach of warranty, or strict liability. This means businesses may face legal liability when a product has a defect in its design or manufacture. A business may also be liable if it fails to provide adequate warnings, instructions, or explanations about the proper use of the product.
Under a Commercial General Liability (CGL) policy, product liability coverage applies to bodily injury or property damage caused by the insured’s product. The coverage is intended to protect the insured when the product causes harm to others or damages property other than the product itself. The CGL does not cover the cost to repair or replace the defective product. In addition, the bodily injury or property damage must occur away from the insured’s premises for products-completed operations coverage to apply.
An Insurance Story
The Furniture Company assembles some of its own furniture at a factory before delivering the finished products to customers. A customer orders a kitchen table, which is assembled at the factory and delivered two weeks later.
One week after delivery, one of the table legs splits. A sharp piece of wood cuts the customer’s leg, causing bodily injury. Because the injury was caused by The Furniture Company’s product after it had been sold, delivered, and was no longer in the company’s possession or control, The Furniture Company may be legally liable under its products exposure.
Completed Operations Exposure
When a business performs services or work for others, such as installation, construction, or repair, it may face liability claims arising from improper or defective workmanship. This type of exposure is known as a completed operations exposure. A completed operations exposure begins after the insured’s work has been finished and the insured has left the job site. For this coverage to apply, the work must have been performed away from premises the insured owns or rents.
A Commercial General Liability (CGL) policy may provide coverage for bodily injury or property damage caused by the insured’s negligent or faulty workmanship. However, the policy does not pay the cost to repair, replace, or redo the defective work that caused the loss. CGL policies commonly combine completed operations exposure with the insured’s products exposure. Together, these exposures are referred to as the products-completed operations hazard.
An Insurance Story
The Furniture Company sells and installs appliances. One of its appliance technicians delivers and installs a refrigerator in a customer’s home. During the installation, the technician accidentally damages the water line connected to the ice maker while pushing the refrigerator against the wall.
A few days later, the ice maker stops working, and the customer notices water coming from under the refrigerator. After pulling the refrigerator away from the wall, the customer discovers damage to the kitchen floor, as well as damage to the ceiling and drywall in the basement below the kitchen.
Because the property damage occurred after the installation was completed and The Furniture Company had left the job site, the business may be legally liable under its completed operations exposure. The CGL policy may cover the resulting property damage to the customer’s home. However, coverage would generally not apply to damage to the refrigerator itself or to the cost of correcting the faulty installation work.
Contractual Liability Exposure
A business may also become legally liable because of the terms of a contract or legal agreement. This type of exposure is known as contractual liability. Contractual liability may arise when a business agrees to assume responsibility for certain actions, failures to act, losses, or damages involving another party. Common examples of contracts or agreements that may create contractual liability include a lease of premises, a service contract, a hold harmless agreement, or an indemnification agreement. A hold harmless agreement is a legal agreement in which one party agrees not to hold another party responsible for certain risks, losses, or damages. An indemnification agreement is an agreement in which one party agrees to pay for certain losses or damages that may be caused by, or arise from, the actions of another party.
Under a Commercial General Liability (CGL) policy, contractual liability coverage is not unlimited. The policy provides coverage only for liability assumed under certain contracts that meet the policy’s definition of an insured contract. These qualifying contracts are specifically listed and explained in the Definitions section of the policy. If the contract does not qualify as an insured contract, the insured’s contractual liability is generally excluded from coverage.
Contingent Liability Exposure
Contingent liability occurs when a business is held legally responsible for the actions or failures to act of another party. This may include liability arising from the work of subcontractors, independent contractors, or other parties hired to perform work on the business’s behalf. One example of coverage for this exposure is Owners and Contractors Protective (OCP) liability coverage. OCP coverage protects a project owner or contractor, such as a general contractor, when that party is held legally liable for the actions of a contractor it hired. For example, a general contractor may be held responsible for the work of a subcontractor on a construction project. Although OCP coverage protects the hiring entity as the named insured, the policy is typically purchased by the hired contractor.
Example
ABC Contracting is a general contractor overseeing the construction of an office building. ABC Contracting hires P’s Plumbing, a subcontractor, to install the plumbing for the project.
During the plumbing installation, P’s Plumbing damages part of the building frame and accidentally injures another worker at the job site. Because ABC Contracting hired P’s Plumbing and is responsible for overseeing the project, ABC Contracting may be held legally liable for the subcontractor’s actions.
To address this exposure, P’s Plumbing should purchase Owners and Contractors Protective (OCP) Liability coverage to protect ABC Contracting. Under the OCP policy, ABC Contracting would be listed as the named insured, even though the policy is purchased by P’s Plumbing.
A Commercial General Liability (CGL) policy may provide some coverage for owners and contractors protective liability exposures. However, this coverage may be limited. More complete protection is generally available through a separate Owners and Contractors Protective (OCP) Liability policy. Protection may also be provided through a hold harmless agreement written in favor of the owner or contractor, in which another party agrees to assume responsibility for certain liability exposures.