Commercial General Liability: When is an option not an option? When it is not optional, of course.
It is not a joke. In the world of liability, a handful of the so-called options or add-ons to the commercial general liability (CGL) policy may still be called “options,” but for a significant portion of businesses, they really are must-have coverages.
CGL remains a fundamental part of every business’ asset-protection plan, but “it was designed in and for a simpler era,” said Marla Donovan, vice president for product development at Burns & Wilcox.
“As the world has become more complicated, a lot of new exposure hazards have arisen. We look for liability insurance to protect against slips and falls, but we also look to it for coverage when a customer accuses an employee of harassment, or the business’s computer system is hacked,” Donovan said.
When that happens, the extra coverages that once seemed so unnecessary can take center stage in protecting the business—but only if they were purchased. In addition, the agent or broker who sold the policy is a hero if the need was properly explained and the coverage sold. If the coverage was not presented to the client, the agent could face an errors and omissions (E&O) claim.
“It is a particularly difficult for agents to successfully introduce these optional coverages to cashstrapped clients facing the worst economic downturn of their business lives. Most businesses are looking for ways to spend less, yet the options add more premium,” Donovan said. Nevertheless, the issues are more prominent, the claims more frequent and there is no letup in jury awards.
“Professional lines coverage has emerged over the past 40 years as a reaction to new types of claims,” said Professional Lines Underwriter Jordan Kurkowski, who is also head of the Professional Lines Center of Excellence for Burns & Wilcox. The CGL policy initially was silent on issues like professional malpractice, age discrimination and sexual harassment, but when carriers rejected claims and the cases made their way through the courts, carriers were often required to pay for coverage. “Primary and non-standard carriers responded by specifically excluding these specialized claims from the general liability policy, and the E&S market decided to fill the gap by underwriting the exposures and making coverage available as add-ons for additional premium,” Kurkowski said.
“The field began with errors & omissions (E&O), evolved with employment practices liability insurance (EPLI), a reintroduced directors and officers (D&O), and fiduciary, and more recently, expanded with data privacy protection,” Kurkowski said. The choice is often a difficult one.
“Ideally, a business should carry all the professional lines coverage, but if they are in a field with an E&O exposure and can only pick one, the choice usually should be the E&O,” Kurkowski said. “A business consultant, lawyer or accountant who fails to perform up to the standards of their profession can bring about a sizeable financial loss for a client, which can then turn into a very large claim.”
Data privacy is the newest of the optional coverages–about six to seven years old—and can affect organizations of any size. And when a breach is suspected, it can be costly to investigate, determine its scope, notify potentially affected clients, pay for clients’ credit-monitoring and possibly credit- restoration services and make expeditures to restore the good name of the business—and that is before any lawsuit is filed.
“Though the issue has come to light through well-publicized hacking into computers, the problem is not just with technologically stored data,” said Laura McCormick, professional lines underwriter at Burns & Wilcox of Dallas/Ft. Worth.
“A Texas school found that to be true after fraudulent credit cards were taken out in the names of a group of former students,” McCormick said. They tracked the problem to a three-ring binder that was thrown into a dumpster. Information on all the children in a particular class: the children’s names, addresses, parents’ names and social security numbers were breached. Also, since there was no way to tell exactly how many binders had been improperly tossed and might have fallen into the wrong hands, the school had to notify nearly every student who had ever been in the school of the possibility of identity theft.
“Underwriters report a lot of interest in coverage for data privacy, but the price keeps many businesses from purchasing it. Some carriers offer sub-limits, within CGL policies, that are reasonably priced and based on the number of transactions or clients, and this may be the best deal for some clients,” McCormick said. The price for stand-alone products is starting to coming down as underwriters gain more experience.
Employment Practices Liability
“It is generally acknowledged that one in four companies will experience an employment practices liability (EPL) action and that the complaint is often set off by hiring or layoffs,” Kurkowski said. With a large company, lots of employees mean lots of claim opportunities, but even a smaller company could have a $50,000 loss because someone believes a job or promotion was denied because of age or ethnicity.
Third-party EPL coverage for employee interactions with vendors or clients has become the norm. Coverage is evolving to handle a hot issue: situations where an insured unknowingly hires workers who are illegal immigrants. Immigration wrongful act coverage addresses actual or alleged violations of the Immigration Control Act of 1986, and immigration claim coverage addresses a governmental criminal investigation of any insured for hiring or harboring illegal aliens.
“Carriers are adding this on to all EPL quotes,” Kurkowski said. “Most will have a sub-limit of $100,000, but some of the riskier classes, like agriculture and restaurants, will have a lower sub-limit of $25,000.”
“Since so many businesses have environmental exposure, it helps that today’s coverages are far broader and less expensive than they used to be,” said Gina Jones, director of environmental programs for Burns & Wilcox. The oil spill in the Gulf of Mexico has focused a lot of attention on environmental liability, and she saw many applications from unfortunate people who own property on beaches or golf courses where oil was obviously heading. “Unfortunately, you cannot insure a burning building, but we will find them coverage going forward,” Jones said.
Attention also has resulted from the U.S. Environmental Protection Administration’s (EPA) lead paint law, the so-called “Renovation, Repair and Painting Rule,” which requires all contractors working in buildings constructed before 1978 to be certified in lead-safe work practices. The regulation went into effect in April. “With this awareness has come an uptick in demand for environmental coverage,” Jones said. Nevertheless, this remains an underutilized coverage, and Jones spends a lot of time educating agents on its value.
An agent must understand his clients’ risk exposures and the assets that need to be protected, then suggest reasonable coverage to accomplish those goals. Ultimately, though, it is the client who decides which coverage and what limits to buy. At the end of the day, agents who have done their homework and presented the appropriate optional coverages can rest easier. As can the agent’s E&O insurer. And that peace of mind is not optional