Unfortunately, insurance requirements in contracts are not easy to understand. The language used in insurance requirements is not always intuitive, but we all know that the consequences of not having the right insurance can be severe. This article will focus on the language used to describe Commercial General Liability or “CGL” policies. CGL is a type of insurance that insures a business for bodily injury, personal or advertising injury, or property damage lawsuits. The insurance is for third-party claims, so it does not usually cover damages to the insured’s own property, but it does usually require that the insurer pay for a defense from lawsuits against the insured that seek damages of the type that are covered.
The terms “bodily injury,” “personal or advertising injury,” and “property damage” all have specific meanings in CGL policies. Typically, bodily injury is the coverage that responds when someone is hurt or killed, but does it also cover someone who is not physically injured but claims to have been emotionally distressed? The answer is maybe—it depends on the wording of the policy. How does bodily injury differ from personal injury? In CGL language, “personal or advertising injury” coverage is a defined list of things like false arrest, libel/slander, or wrongful eviction (when committed by a landlord). The advertising coverage extends to lawsuits claiming publication of materials that slander or libel, using someone else’s idea or copyright in your advertisement, or publication of information that violates a person’s right of privacy. Property damage means physical injury to tangible property. It also usually covers damages caused by the loss of use of property. These are broad categories of coverage, and the next dozen pages or so of policy language limit or exclude coverage from these “grants” of coverage.
In contractual insurance requirements parties try to describe the coverage they want. The first thing we ask for is a standard CGL policy form written by a reputable insurer that will still be solvent if there is a lawsuit. Usually we see something like “a CGL policy written on an ISO form”; sometimes the ISO form is even specified, like “CG 00 01 10 01.” ISO (Insurance Services Office, Inc.) is an organization that drafts forms for the insurance industry. Not all insurers use these forms, but they are the closest thing to a standard in the industry. The next requirement may say that the insurer has to be rated by Best’s Insurance Guide with some minimum rating. This rating is intended to rate the insurer’s ability to pay claims and meet its financial obligations. Usually we want something better than a B+ rating. This is usually followed by a roman numeral that categorizes the size of the insurer in millions of dollars of worth.
Next, we focus on the limits of insurance required. The “limit” is the maximum that the insurance policy will pay. Limits come in different types. There are “general aggregates,” which express the maximum amount of money the insurance company will ever have to pay under the policy. There is usually a “per occurrence” limit, which is the most the insurer has to pay for each separate “occurrence,” another defined term in the policy. Then there is the “ongoing operations” versus “completed operations” issue. Think of it as the distinction between accidents that happen while the contractor is still working and those that happen after the work has been done. To cover accidents that occur after the contractor has driven away, we seek coverage for “products, completed operations,” which expresses limits for bodily injury and property damages that may arise away from the insured’s premises and after the insured has completed its work. . While the standard ISO form does provide coverage for completed operations, companies that are looking for a deal sometimes buy policies with no completed operations coverage. You can also get a per-project limit so that the contractor’s insurance is not used up on one of the contractor’s other projects.
Then there is frequently a medical expense limit. Why is there a separate limit for medical expenses when the policy provides for a separate bodily injury limit? Because the medical expense coverage is a “no-fault” coverage for third-party bodily injury that occurs on the business’s premises or arises from the business’s operations. If there is fault and a lawsuit ensues, the loss falls under the bodily injury coverage.
There are also additional insurance issues that specify who will be named as an additional insured and what the scope of that coverage will be. Will it go to ongoing operations only, or will it extend to claims arising after the contractor’s work is done?
You should always be on the lookout for “endorsements” to your policy. We frequently see insurance endorsements that exclude what you, as the insured, wouldn’t want to see excluded from your policy. For example, insurance companies frequently add endorsements to policies limiting coverage for residential work, work on buildings of more than two stories, or work on condominiums—we have even seen roofers with polices that have endorsements excluding coverage for any damage arising out of roofing operations and general contractor’s policies that do not cover construction operations.
It’s also important to consider how long coverage is needed. Since only the damage that occurs during the policy year is covered, contracts requiring insurance typically specify the number of years that insurance must be maintained to account for the possibility of a lawsuit to be filed years after the project is substantially complete.
It is important to understand what coverages are available and what exclusions may be in the fine print and to recognize this language in the contract, but once you do, you can do a better job of managing risk on your projects.
"Don’t Neglect to Understand Insurance Jargon" was originally published April 16, 2014, by the Daily Journal of Commerce.