By Jay M. Rosen, Esquire
CATASTROPHE: We have recently been involved in a significant lawsuit regarding an incident that occurred to one of our business clients. The client believed his business had the appropriate liability coverage, but it appears it may not have. Damages will be in the millions and legal fees will exceed $100,000. The claim could put the client out of business and puts their assets at significant risk. What we found was that this particular type of incident was carved out of his company's liability policy as an exclusion, unbeknownst to him. Too often, our business owners direct their insurance broker to obtain the least expensive liability policy for their business, not realizing what they have purchased because of one unfortunate certainty: Clients don't read or understand their policy. You should not rely on your broker to provide you the right coverage. The purchase of appropriate insurance can be a difficult task. For this reason, it is essential that you, as a business owner, take a more aggressive role in developing a liability insurance program for your business, the goal being the purchase of the appropriate coverage for the risk presented with sufficient limits to protect you appropriately at an affordable price. To assist you in this effort, this article presents five key tips from a lawyer's perspective that every business owner should consider in searching for the right liability insurance policies for one's business and in re-examining the adequacy of one's current coverage. Again, we don profess to be insurance experts but are only trying to stimulate our clients into reviewing their policies:
In choosing the best policy, you must first understand what types of liability insurance are offered and which of those apply to you. General liability insurance is the most common form, is often part of a larger insurance package, and protects you from claims arising from bodily injury and property damage to others. Typically, it provides coverage for the most common liabilities, including liability arising from accidents on the business premises, from products sold by you, from operations completed by you, and certain contractual liability. Some liability coverage will also include libel, slander and/or infringement of certain intellectual property rights. Automobile liability is very similar coverage for operation of a motor vehicle. If you are a professional, such as an accountant, realtor, mortgage broker, banker, attorney, architect, consultant, or doctor, you also need to purchase professional liability insurance, which protects professionals from claims made against them and their firms for errors made in the performance of their services. If you own a manufacturing business, product liability insurance protects you in the event that an item manufactured or developed by your company is responsible for an accident, injury or death. You may also want to consider foreign liability if you have operations or sales outside of the country, and your existing general liability policy isn't truly global. Another, newer type of liability coverage, employment practices liability insurance, insures a business from claims arising from its status as an employer, where employees may claim wrongful termination, sexual harassment and/or discrimination. Higher standards coupled with more stringent federal and state laws governing employer-employee relationships has resulted in increased claim activity and fueled the need for employment practices liability insurance. Additionally, there is also directors and officers (D & O) liability coverage and pollution liability coverage. Since all of the liability policies mentioned protect you for your legal liability, the costs of legal defense are often times included.
You should also be aware that when buying liability insurance, you may be offered an "occurrence-based policy" or a "claims-made policy." An occurrence-based policy covers claims made months or even years after the incident occurred. The insurance company is obligated to review and, if warranted, pay for any claims made resulting from an incident that took place during the coverage period, even if the claim is reported at a later date, regardless if they are still the carrier when the claim is made. The less commonly used "claims-made policy", typically not used for general liability coverage for most businesses, provides protection in accordance with the policy terms in force at the time the claim is made for accidents occurring after the inception date of the policy or retroactive date, whichever is earlier. Further, if you are concerned about claims being made against your business after you sold it or have retired, you should consider purchasing an extension to the claims-made policy, commonly known in the industry as "tail" coverage.
Every business is different. And so, once you have an understanding of what type of coverage your business needs, you now need to determine how much needs to be covered under your particular policy. To gain a better perspective of the amount of coverage your small business needs, take a look at your industry. Review the recent legal actions and settlements in your field and talk to peers about their level of coverage. Use your peer feedback from these sources as one guide to set your coverage limits. Also, take stock of what and who in your particular business you want or need to protect. Remember, you may need to be protecting others, including landlords, lessors and vendors of your products in addition to your business. Also in determining acceptable limits of coverage, remember that defense costs incurred in a claim may reduce the limit available for settlement or judgment. Generally, the right amount of coverage is an amount that meets your obligations to others, will allow you to sleep easy at night, and ultimately, one that you can afford. You should also be taking steps to manage the risks your business has. Review each risk and work out what you can do to reduce them, such as better procedures, safer conditions, and better labeling of safety precautions. Lower risks will lead to a lower premium on your policy. There are risk assessment advisors who can assist you.
While many policies are similar, all policies are not created equal. There is simply no substitute for reading and understanding each individual policy, paying attention to what risks are being insured, definitions, and what types of claims are excluded. Many policy forms have a very broad statement of coverage. Therefore, you should pay particular attention to the listing of Exclusions in the policy indicating what type of claims or risks are not included in the coverage. Many excluded risks are uninsurable or insurable through different policy types. Therefore, you must read the entire policy, paying particularly close attention to the coverage section, the common terms and conditions, and the Exclusion section. After reading the policy, ask yourself whether any of these exclusions or conditions serve to restrict the operation of your business and discuss your concerns with your attorney and broker. If so, seek another or additional type of policy or determine if there are endorsements (an alteration to your policy which may decrease, increase, limit or render void your coverage) which can be added to the policy to counteract the exclusion or condition. Again, if adequate coverage is not available at a reasonable price, lessening your exposure to risk is always an option.
Once you have determined what type of and how much coverage you want or need, it is advisable to work with your broker to review options of types of policy forms that may be the best for you. Smaller clients with relatively low risk profiles can usually benefit premium-wise from a multi-peril package or a business owners policy (BOP), combining property, liability and other types of coverage
Higher risk or larger businesses may need to purchase several policies, often from different carriers, to provide the type of limits of coverage needed, such as purchasing umbrella liability over your general liability and auto liability policies or separate professional liability coverage.
Your business and industry has unique needs and risks. To get the best available coverage and rates, consider working with an insurance broker who knows your business and has experience in your industry. A professional insurance broker will shop around for the best prices for the package which fits your needs. Discuss the exclusions and conditions which exist on the policies of the insurance companies the broker recommends. Also, find a broker who can advise you on managing the risks in your business, as discussed above. Most of all, be involved with your broker in finding the right coverage to ensure that (i) you are covered in the manner you desire; (ii) you avoid paying for coverage that is not necessary; (iii) you understand the coverage that you have; and (iv) the carrier providing coverage is reputable and financially sound. Put another way, a business owner would never hand over the reins to his or her business to someone else, and choosing the right liability insurance is a part of your business, so treat it accordingly. In choosing a broker, don't simply flip through your local Yellow Pages. Instead, engage a broker based on recommendations from your business peers who deal in your particular business and have specialist capabilities in your area. In general, unless the savings are significant or you have been dropped due to your claim history or the carrier is no longer interested in your type of business or industry, it is wise to develop long-term relationships with both your broker and carrier.
To conclude, the focus of this article is not the procedures you should adopt after you have a claim against you. Instead, we mean for you to address this concern before the claim arises. You cannot always assume a claim will be covered by your policy without reservation of rights or that your carrier will act in your best interest. You may have exposure greater than the limits of the policy even if the incident is covered. It is another minefield to be concerned about. We urge you, therefore, to take a more proactive role in choosing the right liability coverage for your business with sufficient limits to protect you appropriately at an affordable price.