Chapter 14

Commercial Liability Insurance Coverages

Overview

Property risks have a common characteristicthe amount of the loss is capped by the value of the property
lost and any indirect loss. Unlike commercial property risks, liability exposures are not limited in amount.
In this chapter we turn our attention to business liability risks and their treatment. Business enterprises and
professionals face a wide variety of liability exposures developing out of premises and operations, products
and completed operations, contractual liability, contingent liability, errors and omissions, and other
exposures. A number of commercial liability insurance coverages have been developed to address these
risks, including commercial general liability insurance, workers compensation and employers liability
insurance, business auto coverage, commercial umbrella policies, professional liability insurance, and
other liability coverages. A thorough understanding of commercial liability loss exposures and insurance
coverages is required for a successful risk management program.

Learning Objectives

After studying this chapter, you should be able to:

Identify the major liability loss exposures of business firms.
Describe the basic coverages provided by the commercial general liability (CGL) policy.
Explain the coverage provided by a workers compensation and employers liability policy.
Describe the important provisions of a commercial umbrella policy.
Identify the basic coverages provided by a businessowners policy (BOP).
Describe the basic characteristics of a professional liability policy for physicians.
Explain the coverage provided by directors and officers (D&O) liability insurance.
Define the following:
Advertising injury
Aircraft insurance
Basic extended reporting period
Bodily injury or property damage
Business auto coverage form
Claims-made policy
Commercial general liability (CGL) policy
Commercial umbrella policy
Completed operations
Contingent liability
Contractual liability
Damage to impaired property

Damage to the insureds product

Damage to the insureds work
Directors and officers (D&O) liability policy
Employers liability insurance
Employment-related practices liability
coverage
Errors and omissions insurance
Fire legal liability
Garage coverage form
General aggregate limit
Hull insurance
Long-tail claims

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Medical payments
Occurrence
Occurrence policy
Other-states insurance
Personal injury
Physicians, surgeons, and dentists
professional liability coverage form
Products-completed operations aggregate limit

Commercial Liability Insurance Coverages

Products-completed operations hazard

Products liability
Retained limit
Self-insured retention (SIR)
Ultimate net loss
Workers compensation and employers
liability insurance

Outline
I. General Liability Loss Exposures
A. Premises and Operations
B. Products Liability
C. Completed Operations
D. Contractual Liability
E. Contingent Liability
F.

Other Liability Loss Exposures

II. Commercial General Liability (CGL) Policy

A. Overview of the CGL Occurrence Policy
1. Section ICoverages
a. Coverage ABodily Injury and Property Damage Liability
b. Coverage BPersonal and Advertising Injury Liability
c. Coverage CMedical Payments
d. Supplementary Payments: Coverages A and B
2. Section IIWho Is an Insured?
3. Section IIILimits of Insurance
4. Section IVCommercial General Liability Conditions
5. Section VDefinitions
B. Overview of the CGL Claims-Made Policy
1. Meaning of Claims-Made
2. Rationale for Claims-Made Policies
3. Retroactive Date
4. Extended Reporting Period

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III. Employment-Related Practices Liability Insurance

A. Insuring Agreement
B. Legal Defense
C. Exclusions
IV. Workers Compensation Insurance
A. Part One: Workers Compensation Insurance
B. Part Two: Employers Liability Insurance
C. Part Three: Other-States Insurance
V. Commercial Auto Insurance
A. Business Auto Coverage Form
1. Liability Insurance Coverage
2. Physical Damage Coverage
B. Garage Coverage Form
VI. Aircraft Insurance
A. Aircraft Insurers
B. Aircraft Insurance for Private Business and Pleasure Aircraft
VII. Commercial Umbrella Policy
A. Coverages
B. Required Underlying Coverages
C. Exclusions
VIII. Businessowners Policy
A. Business Liability
B. Medical Expenses
C. Legal Defense
D. Exclusions
IX. Professional Liability Insurance
A. Physicians Professional Liability Insurance
B. Errors and Omissions Insurance
C. Directors and Officers Liability Insurance

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Short Answer Questions

1. What are the major general liability loss exposures that businesses face?

2. How does products liability differ from completed operations liability?

3. Coverage A of the commercial general liability (CGL) policy provides coverage for bodily injuries
and property damage. What important exclusions apply to Coverage A?

4. What six limits of liability apply under the commercial general liability (CGL) policy?

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5. How does claims-made coverage differ from occurrence-based coverage?

6. What three coverages are provided under workers compensation and employer liability insurance?

7. What two important coverages are provided under the business auto coverage form?

8. What are the basic characteristics of a commercial umbrella policy?

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9. What are the major characteristics of physicians, surgeons, and dentists professional liability
insurance?

10. What is errors and omissions insurance? Who needs to purchase this type of liability coverage?

Multiple Choice Questions

Circle the letter that corresponds to the BEST answer.

1. In some business operations, it is common to hire independent contractors to perform some activities.
A business organization can be held liable in certain situations for injuries and property damage
caused by these contractors. This type of liability is called:
(a) contractual liability
(b) contingent liability
(c) completed operations liability
(d) premises and operations liability
2. Park Rite is a business that builds and operates underground parking garages in major metropolitan
areas. To provide protection against damage to or theft of a vehicle parked for a fee in a Park Rite
facility, the company should purchase:
(a) garagekeepers coverage
(b) completed operations insurance
(c) business auto insurance
(d) commercial general liability insurance
3. Which statement(s) is(are) true with respect to the commercial umbrella policy?
I. Coverage is provided for claims exceeding the coverage limit in underlying policies.
II. Personal injury is typically excluded from coverage under commercial umbrella policies.
(a)
(b)
(c)
(d)

I only
II only
both I and II
neither I nor II
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4. All of the following losses would be covered under a standard aircraft insurance policy EXCEPT:
(a) The plane was destroyed while on the ground as a result of a hangar fire.
(b) The plane crashed short of the runway because of fog, and a passenger required medical attention
for injuries sustained.
(c) A passenger was killed when the owner/operator made a navigational error and the plane crashed.
(d) Property in the owner/operators custody was destroyed when the plane crashed.
5. Brenda has worked for a bank for eight years. Several times shes been passed over for promotions
that were given to less qualified coworkers. When she complained, she was demoted and given menial
tasks. Brenda sued the bank and was successful in proving injury to her career by failure to promote
and retaliation. Which insurance coverage would pay the damages Brenda was awarded?
(a) workers compensation and employer liability insurance
(b) directors and officers liability insurance
(c) employment-related practices liability insurance
(d) commercial general liability insurance
6. Which statement(s) is(are) true with respect to the commercial general liability insurance form?
I. Advertising injury liability is not covered under the policy.
II. In addition to liability protection, the insurer provides for the cost of a legal defense.
(a)
(b)
(c)
(d)

I only
II only
both I and II
neither I nor II

7. All of the following are common exclusions under workers compensation and employer liability
insurance EXCEPT:
(a) intentional acts
(b) injuries that are not employment-related
(c) punitive damages
(d) occupational disease
8. A wide range of professionals (e.g., accountants, architects, and lawyers) need liability insurance to
provide protection in case a negligent act, mistake, or failure to perform harms a client. What type of
insurance is designed to meet the needs of these professionals?
(a) difference in conditions insurance
(b) errors and omissions insurance
(c) commercial general liability insurance
(d) directors and officers liability insurance
9. All of the following statements about the businessowners policy (BOP) are true EXCEPT:
(a) The BOP provides liability and medical payments coverage.
(b) Liability arising out of workers compensation, pollution, and professional services is excluded.
(c) Legal defense costs are counted against the policy limits.
(d) The BOP has two aggregate limits on the total amount of covered claims that can be paid during
the policy period.

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10. Which statement(s) is(are) true with respect to claims-made coverage?

I. Premiums, losses, and loss reserves can be estimated with greater accuracy under claims-made
coverage than under occurrence coverage.
II To be covered under a claims-made form, occurrences must occur after the retroactive date and
must be reported during the present policy term.
(a)
(b)
(c)
(d)

I only
II only
both I and II
neither I nor II

True/False

Circle the T if the statement is true, the F if the statement is false. Explain to yourself why a statement
is false.
T

1. The long tail refers to the fact that years after a liability insurance policy is first written,
claims may be reported.

2. Personal injury is not covered under the commercial general liability policy.

3. Physicians, surgeons, and dentists professional liability insurance forms always require the
medical professionals consent before the insurer can settle a claim.

4. The commercial umbrella policy shares losses on a pro rata basis with any applicable
underlying coverage.

5. The legal liability of another party can be assumed by an oral or written contract.

6. Employers liability insurance is not needed if the employer has coverage for workers
compensation.

7. Damage to property in the care, custody, or control of the insured is a common liability
insurance exclusion.

8. A loss covered under an occurrence general liability policy may not be covered under a
claims-made general liability policy.

9. Workers compensation insurance excludes coverage for occupational disease.

F 10. Commercial general liability insurance covers the cost of a product recall.

F 11. Aircraft insurance provides property damage liability coverage.

F 12. Garage owners purchase business auto insurance to provide liability coverage for damage to
customers autos while in the garage owners care.

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Case Applications

Case 1
Kimball Manufacturing makes windows. All windows are manufactured on the premises and are shipped
to wholesalers, retailers, and consumers using company vehicles. To protect against liability claims, the
company bought commercial general liability insurance (with products liability and completed operations
coverage), workers compensation and employer liability insurance, and business auto coverage. Are the
following claims covered, and if so, under which policy?
a.

A Kimball Manufacturing delivery vehicle failed to yield the right of way and hit a school bus.
A lawsuit has been filed against Kimball Manufacturing on behalf of the injured children.

b.

An employee sustained a severe laceration when a window shattered.

c.

Kimball won the window contract for a new arena. The windows were custom-built and installed by
Kimball workers. The first time the arena hosted an event, a window fell out of its frame and injured
four people. A lawsuit has been filed against Kimball Manufacturing.

d.

A former employee who had been fired because of repeated absenteeism and tardiness returned to
Kimball Manufacturing to pick up his last paycheck. While walking down a stairway, a wooden step
broke. The former employee fell and sustained a concussion, a broken arm, and a broken pelvis. He
has filed a lawsuit against Kimball Manufacturing.

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Case 2
Right on Target Gun Shop is a sole proprietorship located in a rural area. The store is owned and operated
by Carl Gibson. The store sells a wide range of firearms, including rifles, shotguns, and handguns.
Carl Gibson purchased a businessowners policy (BOP) to cover property and liability exposures. A
number of coverage questions have arisen with regard to the liability coverage. Are each of the following
claims covered under the policy?
a.

When Carl was showing a customer a rifle, another customer called Carls name. As he turned to see
who called his name, he hit the customer with the barrel of the gun. The customer received a severe
facial laceration and is suing Right on Target.

b.

Carl is required by state law to provide workers compensation coverage on his employees. An
employee injured his back while stacking boxes of ammunition. The employee would like to sue
Carl as a result of his injuries.

c.

A lawsuit was just filed against Right on Target by a candidate running for public office. The
candidate favors gun control legislation. She alleges that a Right on Target radio advertisement
slandered her.

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Solutions to Chapter 14

Short Answer Questions

1. The major general liability loss exposures that businesses face include: premises and operations,
products liability, completed operations, contractual liability, and contingent liability. Some other
general liability loss exposures include: pollution, fire legal liability, liquor liability, directors and
officers liability, personal injury liability, damage to property in the insureds care/custody/control,
and employment-related practices liability.
2. Products liability refers to the legal liability of manufacturers, wholesalers, and retailers to persons
who are injured by defective products or property damage from defective products. Completed
operations refers to liability arising out of faulty work performed away from the premises after the
work or operations are completed.
3. The major exclusions are: expected or intended injury, contractual liability, liquor liability (if the
insured is in an alcohol-related business), workers compensation, employers liability, pollution,
aircraft/watercraft/autos exclusion, mobile equipment, war, property in the care/custody/control of
the insured, property damage to the insureds product, property damage to the insureds work,
property damage to impaired property, the recall of products, and personal and advertising injury
(excluded under Coverage A, covered under Coverage B).
4. The first limit is a general aggregate limit the insurer will pay for medical expenses and damages
under Coverages A, B and C; excluding claims under products liability and completed operations.
The second limit caps the amount the insurer will pay under Coverage A for the products-completed
operations hazard. The third limit is the maximum that the insurer will pay under Coverage B for
personal injury and advertising injury. Fourth, there is a per-occurrence limit on the amount the
insurer will pay for the sum of damages covered under Coverage A and Coverage C for the same
occurrence. Fifth, the amount the insurer will pay under Coverage A for property damage to a rented
premises caused by fire is limited. Finally, there is a maximum limit placed on the amount the insurer
will pay per-person for medical expenses because of bodily injury.
5. Occurrence-based coverage provides protection against occurrences that take place during the policy
period, regardless of when the claim is reported. This form of coverage may create problems for
insurers because they are required to pay claims on policies that have already expired. This delay
makes it difficult for insurers to calculate premiums and loss reserves. To alleviate these problems,
claims-made coverage was introduced. Claims-made coverage provides protection for claims that are
first reported during the policy period, provided the event occurred after a retroactive date stated in
the policy. Such coverage is easier to price and more accurate loss reserves can be established.
6. There are three separate coverages in the workers compensation and employer liability insurance
policy. These coverages include: Workers Compensation Insurance, Employers Liability Insurance,
and Other-States Insurance.
7. The two important coverages provided by the business auto coverage form are liability coverage and
physical damage insurance. The liability coverage provides protection for liability arising out of a
bodily injury or property damage claim arising out of the ownership, maintenance, or use of a covered
auto. The physical damage coverage protects the insured against collision and other-than-collision
losses to the covered auto.

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8. Although there are some variations in commercial umbrella liability policies, they do include a number
of common characteristics. First, commercial umbrella policies provide high limits of liability and
broad coverage in excess of underlying coverages. Second, the insured is required to carry minimum
underlying limits before an insurer will write a commercial umbrella policy. Third, the umbrella policy
covers some claims not covered by the underlying policies, after the insured pays a self-insured
retention. Fourth, the umbrella policy provides coverage for losses attributable to bodily injury and
property damage liability, personal injury, and advertising liability. Finally, there are some important
exclusions typically found in umbrella policies.
9. The major characteristics of physicians, surgeons, and dentists professional liability coverage include:
two insuring agreements with one for individual liability of each person and one that applies to group
liability, liability not restricted to accidental acts of the physician or surgeon, a maximum limit per
medical incident and an aggregate limit for each coverage, ability for the insurer to settle the claim
without the physicians or surgeons consent, and an extended reporting endorsement that can be
added. Its important to remember that professional liability insurance is not a substitute for other
necessary liability coverages.
10. Errors and omissions insurance provides protection against losses incurred as a result of some negligent
act, error, or omission by the insured. A wide range of professionals need the protection provided by
errors and omissions insurance. Some examples include lawyers, accountants, employee benefit
managers, insurance agents and brokers, and architects.

Multiple Choice Questions

1. (b) This form of liability is called contingent liability.
2. (a) Garagekeepers coverage will provide protection against damage to or theft of vehicles parked in
a Park Rite facility.
3. (a) Commercial umbrella policies provide coverage for claims exceeding underlying coverage limits.
Coverage for personal injury is provided under most commercial umbrella policies.
4. (d) Aviation insurance excludes property in the care, custody, and control of the insured, with the
exception of the personal property of passengers (up to a specified limit).
5. (c) Employment-related practices liability insurance provides coverage for employment discrimination,
wrongful termination, failure to promote, harassment, retaliation, and other employment-related
wrongful acts.
6. (b) Only the second statement is true. Commercial general liability insurance does provide coverage
for advertising injury liability. The insurer writing the coverage also provides for the cost of a
legal defense.
7. (d) Occupational illness is covered under workers compensation and employers liability insurance.
8. (b) Errors and omissions insurance protects professionals from claims arising from negligence,
failure to perform, and mistakes.
9. (c) Coverage for legal defense costs is in addition to the policy limits, not counted against policy
limits. The other statements are true.

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10. (c) Both statements are true. Claims-made coverage reduces long-tail claims, thus premiums, losses,
and loss reserves are more easily estimated. The injury need not occur during the policy period
for coverage to apply. For coverage to apply, the injury must occur after the retroactive date and
must be reported during the present policy term.

True/False
1. T
2. F Coverage B of the commercial general liability policy provides coverage for personal and
advertising injury liability.
3. F Many current medical malpractice forms permit the insurer to settle a claim without the medical
professionals consent.
4. F The underlying coverage pays first. If the underlying coverage limit is exhausted, then the
umbrella policy will respond on an excess basis.
5. T
6. F Employers liability insurance is needed for a variety of reasons. For example, an injury or disease
that occurs on the job may not be considered work-related. Employer liability insurance also responds
in a variety of other situations.
7. T
8. T
9. F Occupational disease is covered under workers compensation insurance.
10. F Product recall expenses are specifically excluded from coverage under the commercial general
liability insurance form. This coverage can be added through an endorsement.
11. T
12. F Garage owners purchase garagekeepers insurance to provide this liability coverage.

Case Applications
Case 1
a.

This claim would be covered under the business auto coverage, provided the appropriate coverage
had been purchased and the delivery vehicle is an insured vehicle. The commercial general liability
form excludes liability arising from vehicles.

b.

As the injury developed out of and in the course of employment, workers compensation coverage
would respond to the claim.

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c.

Based on the facts presented, it appears that either the window was defective, or the installation of the
window was faulty. This loss would be covered under the general liability policy as either a product
liability claim or as a completed operations claim.

d.

As this claim involves a former employee, workers compensation insurance does not apply and the
former employee has the right to sue Kimball Manufacturing. The companys general liability
coverage will respond to this premises liability claim.

Case 2
a.

The businessowners policy (BOP) provides coverage for bodily injury liability claims, so this claim
would be covered.

b.

The BOP excludes workers compensation claims, so there is no coverage for this claim under the BOP.
Carl may be self insuring the workers compensation exposure or may have purchased workers
compensation insurance which would respond.

c.

This claim would be covered under the BOP. The BOP provides coverage for advertising liability
and personal injury.

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