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 What Is Commercial General Liability Insurance?

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Commercial General Liability (CGL) insurance protects business owners against claims of liability for bodily injury, property damage, and personal and advertising injury (slander and false advertising). Premises/operations coverage pays for bodily injury or property damage that occurs on your premises or as a result of your business operations. Products/completed operations coverage pays for bodily injury and property damage that occurs away from your business premises and is caused by your products or completed work.

Excess liability insurance pays for covered losses that exceed your CGL policy's dollar limit.

Umbrella liability insurance is excess liability insurance coverage above the limits of automobile liability and CGL policies. The umbrella policy also provides liability coverage for exposures not covered under the primary CGL insurance policies and not excluded by the umbrella liability insurance policy.

Claims-Made Versus Occurrence Policies

Occurrence policies cover claims arising from injury or damage occurring while the policy is in force, regardless of when the claim is first made.

Claims-made policies cover claims that arise from injury or damage occurring during the policy period and reported to the insurer during the policy period. Claims arising from events outside the policy period or claims reported to the insurer outside the policy period are not covered unless special coverage is purchased or arranged with the insurer. This special coverage comes in two forms:

Prior acts ("nose") coverage covers claims that arise from injury or damage occurring before the policy period, but reported to the insurer after the policy period begins.

Prior acts coverage is provided by establishing a "retroactive date" covering injury or damage occurring after the retroactive date. The retroactive date usually appears in the declarations page accompanying your policy. It may be the effective date of the policy or an earlier date. Prior acts coverage does not cover claims that were known at the time your policy began.

Run-off ("tail") coverage, also called extended reporting period, pays for residual claims made after your policy expires. A typical claims-made policy provides a short reporting period of 30 or 60 days after the policy's expiration date to file claims that arose too late to report before the policy expired. Run-off coverage starts when the 30- or 60-day period ends and is provided for an additional premium. The extended reporting period may be one, three, or five years, or even unlimited.

If a claims-made policy does not continue (expires, cancels, or nonrenews), you should purchase either run-off coverage from your previous insurer or prior acts coverage from your new insurer to prevent coverage gaps. Generally, claims-made policies may be less expensive in their early years as the potential for claims increases as policy years accumulate.

The differences between claims-made and occurrence policies are best illustrated by the following examples:

Assume you operate a business located in a building that you own. Your customers may enter the building and shop for merchandise in a showroom. On April 15, 2010, a customer slips and falls in your showroom. The customer reports the incident to you but says he does not believe he is injured. On December 15, however, you receive notice that the customer has filed a claim for injuries sustained in the fall.

Occurrence Policy: An occurrence policy with a policy period from June 1, 2009, to May 31, 2010, will cover the claim because the incident occurred during the policy period.

Claims-Made Policy: A claims-made policy with a policy period from June 1, 2009, to May 31, 2010, will not provide coverage because the claim was made after the policy expired. If, however, you purchased an extended reporting period from your insurer when your policy expired, the claim may be covered.

Examples of Exclusions in a CGL Policy

Following are some examples of exclusions commonly contained in a CGL policy. Coverage varies by insurer and will include additional exclusions other than the examples below. You should carefully review your policy and any endorsements to know exactly what your policy does – and doesn't – cover. Talk to your agent if you have any questions about your policy, its coverages, or policy limits.

Damage to Your Work - Generally, CGL policies exclude coverage for property damage to your work (see Example No. 1 below). There is an exception to the exclusion for damaged work if a subcontractor working for you caused the damage (see Example No. 2 below).

Example 1: You own a homebuilding business that recently constructed a new residence with a garage. After the home is sold and the homeowner moves in and parks her vehicle in the garage, the roof on the garage collapses because of faulty construction. The collapsed roof damages the homeowner's vehicle. The policy may provide coverage for the repair or replacement of the vehicle but may not pay to repair the collapsed roof because the roof is your work.

Example 2: The situation is the same as in Example 1, except the work to construct the roof was performed by subcontractors working on your behalf. The policy may cover the damage to the vehicle and also may pay to repair or replace the roof constructed by your subcontractor.

Damage to Your Product - CGL policies don't cover property damage to your product arising out of the product or any part of the product.

Example: If you install a propane-powered appliance that malfunctions and causes a fire that damages a home, your CGL policy may pay to repair the home. It will not pay to repair or replace the appliance if the malfunction was caused because the appliance was faulty.

Contractual Liability - CGL policies exclude coverage for bodily injury or property damage that you are obligated to pay because you assumed liability in a contract or agreement. The exclusion contains the following two exceptions:

Liability for damages that you would have assumed in the absence of the contract or agreement; and

Liability assumed in a contract or agreement defined in the policy as an insured contract, if the bodily injury or property damage occurs after the contract or agreement is executed.

Example 1: You sign a contract to complete the construction of a building within a specified amount of time. The contract requires you to pay damages if you breach the contract. Your CGL policy will not provide coverage for any damages you have to pay because you failed to meet the deadline.

Example 2: You sign a contract to hold harmless and indemnify another party for the other party's negligence if that negligence results in bodily injury or property damage. Your CGL policy may provide coverage to indemnify the other party depending on the wording of the indemnity agreement.

Recall of Products, Work, or Impaired Property - CGL policies will not pay the cost to recall faulty products, work, or impaired property. However, this coverage may be added to the policy by endorsement for an additional premium charge.

Workers' Compensation and Employer's Liability - CGL policies are not intended to provide coverage for workers' compensation or employer's liability. This exclusion prohibits such coverage.

Pollution Exclusions in the CGL Policy

The pollution exclusion eliminates coverage for injuries or damages to a third party resulting from a pollution event arising from your business operations.

The exclusion applies to the actual, alleged, or threatened discharge, dispersal, seepage, migration, release, or escape of pollutants.

A pollutant is typically defined as any solid, liquid, gaseous, or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals, and waste. Waste includes materials to be recycled, reconditioned, or reclaimed.

The pollution exclusion included in most general liability policies may contain some of the following exceptions that could provide limited coverage for:

Injuries sustained within a building and caused by smoke, fumes, or vapors produced by equipment that is used to heat, cool, or dehumidify the building or equipment used to heat water for personal use.

Your products or completed operations.

Injuries or damage arising out of heat, smoke, or fumes from a hostile fire. (Hostile fire is defined as a fire that becomes uncontrollable or breaks out from where it was intended to be.)

Injuries or damage that an insured contractor may be held liable for if the owner of the premises has been added as an additional insured to the contractor's policy.

Injuries or damage arising out of the escape of fuels or lubricants necessary for the operation of mobile equipment.

Injuries or damage sustained within a building and caused by the release of gases, fumes, or vapors from materials brought into the building in connection with operations performed by you or a contractor or subcontractor working on your behalf.

Total pollution exclusions eliminate all coverage, including coverage for premises/operations and products/completed operations.

If your businesses has a significant pollution exposure, you may choose, in conjunction with your insurer, to include a total pollution exclusion and purchase a separate pollution liability policy that may provide coverage better suited to the risk and is easier to rate based on the nature of your business.

What is a Premium Audit?

Most CGL policies are auditable policies and contain a condition commonly called "Premium Audit." The premium that is paid at the inception of the policy is a deposit (estimated) premium. Auditable policies usually use estimated payroll, sales, or units sold as the premium base to calculate the deposit (estimated) premium.

The insurer is entitled to examine your books and records to determine whether the actual payroll, sales, or units sold are greater or less than what was estimated. This is usually done after the expiration of the policy, but may also be done during the policy period. If the actual payroll, sales, or units sold is greater than was estimated, you may owe additional premium. If the actual payroll, sales or units sold is less than what was estimated, you may be due a return premium. Therefore, it is important to provide an estimate of the payroll, sales, or units to be sold that is as accurate as possible to avoid having to pay an additional premium.

What Kinds of Insurers Offer CGL Insurance?

The Texas Department of Insurance (TDI) recognizes the following four types of insurers that may offer commercial general liability insurance in Texas. To check on whether a carrier is licensed, eligible, or registered in Texas, call TDI's Consumer Help Line at 1.800.252.3439, or use the Company Lookup feature on the TDI website at https://apps.tdi.state.tx.us/pcci/pcci_search.jsp.

Licensed Insurers

TDI regulates the policy forms and rates of licensed insurers.

CGL policies offered by licensed insurers must contain the following legislatively mandated provisions:

Coverage may not be cancelled by the insurer after 60 days from the effective date of the policy except for the following reasons:

fraud in obtaining coverage;

failure to pay premiums when due;

an increase in hazard within your control that would produce a rate increase;

loss of the insurer's reinsurance covering all or part of the risk covered by your policy; or

at any time if the insurer is placed in supervision, conservatorship, or receivership and the cancellation or nonrenewal is approved or directed by the supervisor, conservator, or receiver.

The insurer must provide at least 60 days notice of nonrenewal and must tell you in writing why it will not renew your policy.

Policyholders obtaining insurance from licensed insurers are protected by the Texas Property and Casualty Insurance Guaranty Association for up to $300,000 per claim if the insurer becomes insolvent.

Surplus Lines Insurers

Insurance not available through licensed insurers may be placed with eligible surplus lines insurers. To be eligible to write surplus lines coverage in Texas, the insurer must meet certain requirements and be on TDI's "eligible list." Before selling a surplus lines policy, an agent must make a diligent effort to find a licensed insurer to issue the policy.

It is common for surplus lines insurers to retain a significant portion of the premium in the event the insured cancels the policy midterm.

Texas laws regarding notice of cancellation and nonrenewal do not apply to surplus lines insurers.

Defense costs could be included within the limit of liability, and prior acts or run-off coverage may not be available.

In some cases, a surplus lines insurer can cancel before a policy's renewal date.

Surplus lines insurers are not required to file rates and policy forms with TDI. Policy forms may be more restrictive than those that are subject to TDI review.

TDI does not audit the finances of surplus lines insurers.

If a surplus lines insurer becomes insolvent, its policyholders are not protected by the Texas Property and Casualty Insurance Guaranty Association.

Risk Purchasing and Risk Retention Groups

Risk purchasing groups are formed under the provisions of the federal Liability Risk Retention Act (LRRA) of 1986. A purchasing group consists of individuals or firms of like characteristics who share similar insurance needs. The eligibility criteria for members of a purchasing group are set by LRRA. Once formed and registered with the State of Texas, the group may use its purchasing power to obtain liability insurance and benefits at prices that may be lower than individuals or businesses could negotiate separately.

If a purchasing group buys insurance from a licensed insurer, it may be protected by the Texas Property and Casualty Insurance Guaranty Association if the insurer has capital and surplus of $25 million or more. If the purchasing group is not protected by the Texas Property and Casualty Insurance Guaranty Association, then it must disclose this to its members.

Licensed insurers that provide coverage to members through a purchasing group must file policy forms and rates with TDI. The policies and rates must comply with all statutes that apply to licensed insurers.

TDI does not regulate the policy forms and rates offered to members through a purchasing group by surplus lines insurers. In addition, surplus lines insurers are not protected by the Texas Property and Casualty Insurance Guaranty Association.

Risk Retention Groups also are formed under the provisions of the federal Liability Risk Retention Act (LRRA) for the purpose of providing insurance. These groups do not buy commercial insurance policies, but "retain" the risk within the group. In effect, the members insure each other against liability claims and lawsuits. However, because a risk retention group is an insurer, it may purchase reinsurance. Reinsurance is a form of insurance that insurance companies buy for their own protection.

The rates and policy forms of risk retention groups are not regulated, and policyholders are not protected by the Texas Property and Casualty Insurance Guaranty Association in the event the risk retention group becomes insolvent.