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Commercial General Liability: Some Business Models Fit, Others Require More Flexibility

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It is early morning and a big truck pulls up to the company gate. A large portable fence is quickly installed and almost immediately, a dozen sheep emerge from the truck and are herded onto the property that will be their pasture for a few hours. When the grass is sufficiently short, the fencing and the sheep will be moved to the next area. The job of shepherd may never again reach the stature it held in biblical times, but running a herd of sheep to “mow” lawns without polluting the air or relying on fossil fuels is one of a growing number of businesses emerging from the Green movement.

“Sheep mowing also requires commercial general liability coverage,” said George Cvengros, underwriting supervisor of the Burns & Wilcox Special Risk Division. He has considered and quoted insurance for about six of these businesses, and his main concern is an animal getting loose and either damaging property or causing a car to swerve to avoid hitting it. Either could create liability, so the coverage is needed.

Commercial general liability (CGL) is one so-called “vanilla coverage” that has been around for a long time. Almost everyone needs it and they buy the coverage. The standard market handles a great deal of coverage for premises operations, products, personal injury and completed operations, but when the risk is unusual—as a sheep fed lawn care business—or one that simply requires more flexibility in rates and terms, it usually finds a home in the non-standard market.What Commercial General Liability Covers

What Commercial General Liability Covers

As its name suggests, the CGL policy provides coverage for most generic types of third-party claims against a commercial entity. It was introduced by the Insurance Services Offices (ISO) as a standard policy in 1986 to replace the comprehensive general liability policy that by the word “comprehensive” seemed to promise everything to everyone. Standard and non-standard CGL policies contain the following basic coverage:

• Premises – This covers third-party bodily injury or property damage when there is proven negligence by the insured. For example, it could protect a mall owner who failed to salt his walkway in the winter and was sued by a customer who slipped and broke her arm. Or the independent contract forklift operator who uses his own machinery to move crates but drops one, damaging his client’s property.

• Products – This covers damage caused by an insured’s product, such as restaurant food improperly handled that makes customers ill.

• Personal injury and advertising injury – This coverage is usually together. The personal injury provisions most often address cases of libel, slander and invasion of privacy but the provisions will work for other unanticipated claims. In a highly publicized case where a bouncer’s restraint of an unruly bar patron resulted in death and the bar-owner’s policy contained an assault and battery exclusion, the insured successfully claimed coverage under the personal injury provision. An advertising injury addresses issues such as a lawsuit from insured’s unwillingness to honor a publicized guarantee, or not carrying enough merchandise to meet demand created by advertising.

• Completed operations – Coverage usually stops when the work is finished, but this extends coverage for defects that are not discovered until after the policy period. For instance, if a home contractor fails to use the proper materials in building a garage and a year later, the wood warps and foundation sinks, he would look to this portion of the policy for coverage.

• Medical payments – This provides a limited amount of insurance to pay medical and funeral expenses of third parties accidents that occur at the insured’s premises or because of the insured’s operations. It is a relatively small and less-restrictive coverage, since the insured does not need to be legally liable for payout. For example, a mother and child are in a drug store waiting for a prescription. While the mother is occupied talking with the pharmacist, the child runs around and falls over his own toy, requiring a visit to the emergency room to check out his cut. Though there may be coverage under the premises provision of the policy if the insured is liable for the injury, there is definitely coverage under medical payments and the prompt treatment without worry over who will pay the bill can keep both the wound and the claim from worsening.

Challenging Risks and Business Climate

One particularly challenging risk that Cvengros once considered involved a 12′ x 84′ mobile-home-type building with glass walls on all sides that would sit atop a 15-story building. A crane would be permanently fixed atop the same building and would lift the glass building and suspend it in the air for several hours. Customers would rent the building to host a catered dinner party, complete with a spectacular view of the city.

While Burns & Wilcox insures many unusual operations, “this risk was a bit too spectacular for my taste,” said Cvengros, who passed up the chance to provide CGL coverage for that business.

The bread and butter GLC policy handled by the excess and surplus market more typically covers the operations of a residential or commercial building contractor, but current economic issues have complicated this business, particularly in the construction trades.

During much of the decade, construction has been a booming business, but in 2007 the economy went into a tailspin, driving down demand for new housing and to some extent commercial buildings, and drying up financing sources. To make a living, many general contractors have returned to their original trades. Some contractors with stellar reputations as carpenters or plumbers and good contacts continue to find work and carry insurance, but others are in a tough place. They may get hired as a subcontractor for a few months, followed by months with no work. Still, as subcontractors, they need to show the contractor that they have general liability insurance, so they purchase a yearly policy, pay the premium and then cancel the policy once the work is done to reclaim unused premium. If and when they find another few months of work, the process begins again.

This is an expensive problem for everyone. It costs carriers and agents time and money to sell and underwrite the policy—even for a brief period—and returning the unearned portion of the premium and commission is painful for all the insurance entities involved. Meanwhile, tradesmen have to find insurance and lay out or finance the premium before they can recover a portion of it. This cycle has become so widespread that some carriers will no longer write a policy for a risk who has canceled a policy mid-year more than a couple of times. Still, the on-again, off-again tradesman likely will continue to find new coverage as the prolonged soft market stretches underwriting discipline.

The Soft Market Impact

Managing Director, Casualty, Joe Hucker, of Markel Corporation in Glen Allen, Va., said that some insurers are compromising their underwriting integrity in ways that are unhealthy for themselves and also tend to destabilize the market.

“It is difficult for an educated, experienced underwriting team to compete against aggressive companies with little or no underwriting expertise or talent…individuals who don’t know what a policy is worth and have not experienced losses,” Hucker said.

When continually cutting premiums, some carriers compensate by reducing the coverages provided. This is often not a healthy situation for clients who expect claims to be properly handled only to find a limitation in their coverage impacting the resolution of claims. The dramatic decrease in premiums by some insurers is leading some clients to believe they may have been overcharged in the past. “Some have gone so far as to request refunds for premium they paid in previous years,” Hucker said.

Kendall Grubbs, senior underwriterwestern region for IFG Burlington Insurance Group in Scottsdale, Ariz., also is concerned. “With some E&S carriers broadening coverage and dropping premium, it is very difficult to compete and maintain a good loss ratio. Everything is drying up,” Grubbs said. “A common practice is to combine common policy extensions into a blanket and add them to the policy at no additional charge. Thus the $1,000 premium the entity paid last year now brings in $550 this year due to $450 in free extensions, but the exposure remains the same. When you combine these risks in a book of business, there are bound to be losses and claims and defense costs that will hurt the carrier. The agent’s loss ratio will also suffer, which translates to lower contingency income,” Grubbs said.

Another trend in CGL is toward higher limits. Lew Bolitho, contract underwriting manager for property and casualty with Scottsdale Insurance, is seeing stronger demand for high limits, with most seeking at least $1 million per occurrence, rather than the $100,000, $300,000 or $500,000 commonly requested a few years ago. “While not a new trend, it keeps snowballing in response to the litigious climate and increasing settlement numbers,” Bolitho said.

Businesses will see juries giving large awards for seemingly trivial injuries— especially in places like California, Cook County, (Chicago) Ill., and Philadelphia. And juries in a few less-wealthy states like Alabama and West Virginia also tend to be very generous. As news of large awards is broadcast across the country, the demand for more protection through the higher limits goes up.

“The limits for CGL protection can be increased further by adding either an excess layer—generally sold in increments of $1 million up to $10 million—to the general liability policy, or adding a separate, broader umbrella policy over multiple commercial coverages. The choice depends on what assets the client needs to protect and what it can afford,” said Tom Ryder, director of the excess casualty for Burns & Wilcox.

One new industry with assets to protect is medical marijuana dispensaries, and Cvengros has been writing a lot of coverage. Now most are in the western part of the country, but they will spread as more states legalize dispensaries. Each company underwrites these differently. Burns & Wilcox will write the premises and will cover injuries like slip and fall in their nurseries, but leaves products and completed operations to other carriers. Cvengros is not ready to underwrite for the possibility of addiction.

But do bring on the sheep.

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