This article explores what businesses and organizations should consider for the scope and mechanics of their commercial general liability (CGL) insurance policies. First, we will look specifically at some common scenarios where an organization might have an expectation of coverage but where coverage might not exist. Second, we will discuss ways to gauge whether your organization has sufficient policy limits for each area of potential risk. Finally, we will explain why it is important to keep records of all the policies that have been in effect during the course of your organization’s operation.

First: When Coverage Might Not Exist

Exclusions to Coverage

1. Expected or Intended Injury

The standard CGL Coverage Form¹ issued by the Insurance Services Office (ISO), the organization that drafts standardized provisions for insurance policies, includes a list of several exclusions to its general coverage for bodily injury and property damages. The very first exclusion listed in the Coverage Form is that of “bodily injury or property damage expected or intended from the standpoint of the insured.” This exclusion is consistent with the laws of most states, which prohibit as against public policy the insuring of acts undertaken intentionally with the intent to cause harm.

Per this exclusion, the personnel or agents of an organization will not be insured if they take any action with an intent to cause bodily injury or property damage and such injury or damage results. However, this exclusion will not apply to bar coverage for claims against an employer for negligent hiring, retention, or training of an employee who intentionally harms another’s person or property. For example, if a delivery driver texts while driving and causes a collision resulting in the injury of another motorist, there will be coverage for negligence claims against both the driver and her employer. But if the delivery driver, in a fit of road rage, intentionally strikes and injures another motorist, then the exclusion applies and there will be coverage neither for the driver’s individual liability nor for any vicarious liability that might attach to her employer. However, coverage will exist for negligent hiring or retention claims against the employer.

Insurers will sometimes try to invoke this exclusion for various scenarios in order to avoid coverage, including at times unexpected harms such as sexual abuse. If your organization is engaged in activities that run a unique risk for provoking claims for intentional torts, it would be wise to confirm that you have insurance in place that will provide coverage in any contingency.

2. Abuse or Molestation

In addition to the standard exclusions set forth in the CGL Coverage Form, the ISO also uses exclusionary endorsements. Endorsements (sometimes called riders) are amendments or modifications to the general coverage form policies. Carriers include them to limit, modify, or expand the coverage set forth in the general policy. An exclusionary endorsement that the ISO first introduced in 1987, and which has become common in many CGL policies, is entitled “Abuse or Molestation Exclusion.”² This endorsement excludes coverage for injuries and damages arising out of “the actual or threatened abuse or molestation by anyone of any person while in the care, custody or control of any insured.” The endorsement also excludes coverage for claims of negligent employment, investigation, or retention of any abuser or molester for whom the insured was legally responsible, as well as the negligent reporting or failure to report such person to proper authorities.

If your organization or its employees work with children or incapacitated persons and also has a CGL policy with this exclusionary endorsement, sexual abuse litigation could mean bankruptcy or dissolution. Churches, schools, childcare facilities, nursing homes, and other such organizations want to ensure that they have coverage in place for this kind of occurrence. The standard exclusion leaves your organization wide open to exposure if any employee or agent of the organization is accused of abusing children or infirmed persons. So you have to negotiate for an additional endorsement that includes this coverage—for a price.

3. Employment-Related Practices

Another common exclusionary endorsement found in many CGL policies is an exclusion of coverage for “employment-related practices.”³ This exclusion provides that coverage does not extend to injuries to a person arising out of any:

Refusal to employ that person;
Termination of that person’s employment; or
Employment-related practices, policies, acts or omissions, such as coercion, demotion, evaluation, reassignment, discipline, defamation, harassment, humiliation, or discrimination directed at that person.

If your business or organization has employees and also has a CGL policy that includes this exclusionary endorsement, there is a tremendous risk of exposing the organization’s assets to judgments or settlements from employment discrimination, harassment, or retaliation claims. It is crucial to confirm that your organization either has a CGL policy that does not exclude coverage for employment claims or else has a supplemental policy that provides such coverage with adequate policy limits.

Circumstances Voiding Coverage

1. Material Misrepresentations

In addition to exclusions of coverage, there are mistakes that insured parties can make that will result in voiding coverage, even when damage at issue is a covered occurrence. When an insured makes a material misrepresentation on its application for insurance, the misrepresentation might be grounds for rescission of (taking back) the insurance contract, thus voiding coverage. For example, if an insurance application asks if the applicant’s facilities have functioning fire alarms and sprinklers, a false response might void coverage for persons injured in a building fire. Material misrepresentations in the context of a claims process might also lead to voiding coverage, such as where an insured reports a claim but misrepresents the facts of its own role in causing the occurrence. Think of it as the insurer being allowed to cancel coverage without paying up.

The law regarding whether a misrepresentation is sufficiently “material” to void coverage varies from state to state. Under Colorado law, a misrepresentation is considered material if it “affected either the risk accepted or the hazard insured against such that the insurer would not have included the coverage provision had it been truthfully informed.”⁴ Jurisdictions also differ as to whether coverage is voided when the misrepresentation was an insured’s honest mistake. Some jurisdictions take a hardline approach under which any misrepresentation, whether intentional or unintentional, can be grounds for avoidance,⁵ while others require proof of an insured’s intent to deceive the insurer.

2. Failure to give prompt notice

Many CGL policies, including all policies based on the ISO’s CGL Coverage Form, require the insured to report claims or occurrences to the insurer “as soon as possible” or “as soon as practicable” as a condition for coverage of such claim or occurrence. Businesses and organizations often naively let issues go unreported to their insurers and thereby deprive their insurer of the opportunity of taking timely steps to mitigate the risk of liability. Some examples: an employer receives a demand letter from the attorney of an aggrieved former employee and discounts the threat of litigation, only to have litigation or a public relations crisis on its hands months later; a business knows that a patron was injured on its premises, but dismisses the extent of the patron’s injuries, only to face a personal injury lawsuit down the road; the overworked director of a non-profit organization is served with a summons and complaint for a legal action and assumes it’s simply a gesture of intimidation, only to be slapped with a default judgment after failing to respond. In each of these cases, the insured failed to notify its insurer of a potential claim or occurrence within a reasonable time.

Under most insurance policies, the insured’s prompt notice of the claim or occurrence is a condition precedent to the insurer’s obligation to indemnify or defend the insured. This means that if the insured fails to notify its insurer of a possible claim, it may be grounds for the insurer to deny coverage. While some jurisdictions require an insurer to show that it was materially prejudiced by an insured’s delay in giving notice in order to deny coverage,⁶ other jurisdictions will allow insurers to deny coverage when notice is not given as soon as practicable.⁷

The points discussed above demonstrate the importance of understanding the scope of your insurance coverage. In the next installment of this series, we will discuss ways to gauge whether your organization has sufficient policy limits for each area of potential risk.

Second: Protection Where You Need It Most

In the first installment, we discussed commercial general liability (CGL) policies. CGL is a common type of insurance coverage, and all organizations vitally need it. These policies cover a broad assortment of loss categories and provide coverage from everything to customer injuries on your business premises to defense costs in litigation to electronic data loss. However, as discussed in the first installment of this series, CGL policies do not cover everything and they need to be supplemented with other policies.

In addition to a CGL policy, your business will likely need policies that cover other loss areas, depending on its activities. For instance, if your business or organization engages in activities that might be considered professional services or advising clients, you will need professional liability insurance. Often called an “Errors and Omissions Policy” (or “E&O” for short), a professional liability policy will provide coverage for instances when your business or its professional employees are sued for negligently providing services. Examples of businesses that need professional liability coverage include consulting firms, law offices, insurance agents, real estate agents, and financial advisors.

If your organization has employees, you will also need workers’ compensation insurance to compensate workplace injuries. This area of insurance is highly regulated and is usually required by state law, so you will want to ensure that your workers’ compensation insurance complies with applicable law.

If your organization owns valuable tangible or real estate assets that are subject to damage, it may be a good idea to get property insurance. Coverage for an insured’s property damage is generally not included in CGL policies. If your organization requires employees to operate company-owned motor vehicles on the road, you will also need a commercial auto policy.

As discussed in the first installment, CGL policies often specifically exclude coverage for things like employment practices, abuse and molestation, and intentional injuries. Therefore, if the activities of your business or organization risk events of loss that might fall under these exclusions, you will need a specific policy that covers such categories with adequate coverage.

These are just a few examples of the various kinds of insurance policies your business or organization might need, depending on the nature and scope of its activities.

How Much is Enough?

In the world of insurance, there are two dimensions: breadth and depth. Both are crucially important. A business may have a broad base of coverage in terms of the various policies that it has to cover a multitude of different loss categories. However, if that business has coverage limits that are insufficient to cover losses when they arise, then the coverage is not “deep” enough. Just having an applicable policy that provides coverage for a given category of loss is of little use if the limits on those policies are not enough to provide meaningful coverage.

When assessing the amount of coverage your business needs under a given policy, you need to evaluate the risk that faces your business. Like insurance, risk itself is something that can be understood in two dimensions: probability of loss and magnitude of loss. Probability of loss is the likelihood that a given event might occur. Magnitude of loss is the severity of damage that will result if that event does occur. An event might have a low likelihood of happening, but a high magnitude of loss if that event happens.

For example, hurricanes often result in catastrophic damages to retail establishments, but if you run a store in southern New Mexico, it’s fair to say that your business is unlikely to get wiped out by a hurricane. This is an instance where the magnitude of potential loss is very high, but the probability of loss is negligible. A high-premium policy for flood insurance with $5 million in coverage might not be reasonable for such a business under most circumstances. However, if you were to open a new location on the Gulf Coast, that’s a different story.

To evaluate the amount of coverage your business needs for a particular category of loss, you must take into account the likelihood that an event would happen as well as the severity of loss that would occur if it did. To use a more concrete example, if you operate a daycare, you certainly hope and pray that no serious harm would come to any of the children under your care and control. Such a tragedy may be very unlikely, especially if you take significant steps to screen employees, monitor children, and implement safety measures at your facility. Nevertheless, if serious harm such as death, bodily injury, abuse, or molestation were to occur (or even allegations of such things), the magnitude of loss would simply be astronomical. This is why a childcare facility could justify paying higher premiums for insurance that not only provides coverage for those loss categories but provides such coverage with substantial policy limits.

Balancing Coverage and Costs

Insurance, of course, is not free, and the more coverage you get, the more it costs. Higher coverage limits equal higher premiums. The cost of insurance is a significant operating expense for most businesses, but the cost of being underinsured is much higher. There are at least three factors to consider when ensuring you have sufficient insurance in place: (1) having coverage for all the areas you need; (2) having sufficient policy limits to cover losses when they arise, and (3) costs. Balancing these three factors may take a greater investment of your time and attention than a simple internet search or deference to your insurance agent, though a good insurance agent will be enormously helpful as you do the analysis. Businesses and organizations must be smart, efficient, and well-informed when it comes to the insurance policies they obtain.

Third: Why Past Policies Matter

The ancient Chinese philosopher Confucius once said: “Needing insurance is like needing a parachute. If it isn’t there the first time, you most likely won’t be needing it again.” That quote may be dubiously sourced, but the principle is a true one. Not having sufficient insurance can be an existential threat to your business or organization in the event of litigation.

“But ah,” you may say, “My family’s business has been adequately insured since my 9x-great-grandparents started it! They brought their policy over with them on the Mayflower and even made sure to secure winter famine coverage with their Plymouth Mutual agent shortly after making landfall.”

That’s well and good. But if historical claims arise against your organization, chronicled annals of insurance documented by no more than oral tradition will not be enough to trigger coverage. While you do not necessarily need to archive vellum parchment policies dating back to the Colonial Period, this installment of our series on insurance explains why it is important to keep records of all the policies that have been in effect during the course of your organization’s operation.

Occurrence vs. Claims-Made: Coverage Periods Explained

If you became stranded on a desert island, the first person likely to find you would likely be someone trying to sell you insurance. Whether it’s your postal mailbox or your LinkedIn messenger inbox, it seems that the barrage of insurance sales pitches is inescapable. As a result of the proliferation of customizable policies, businesses are constantly upgrading their policies and switching carriers to get coverage that fits their exact needs. This may result in a chronological succession of policies, each of which may vary in the scope and amount of coverage. While it can be wise to upgrade coverage, a claim based on events in the past may raise the question of which past policy, if any, is triggered.

For each policy you purchase, your insurance carrier will issue you a copy of the policy, which sets forth the terms and conditions of coverage, the scope of coverage for each category of loss, and the exclusions to coverage. The insurance company will also issue you a declarations sheet that will specifically spell out the policy limits under your policy for each category of loss described in the policy. Towards the top of the declarations sheet, it will generally provide a “coverage period,” or a range of dates between which the coverage as set forth in the declarations sheet is in effect.

In terms of how coverage is triggered, there are two types of liability policies: Occurrence policies and claims-made policies. Under an occurrence policy, coverage is triggered by an injury or loss event that occurs during the coverage period stated on the declarations sheet. Under a claims-made policy, coverage is triggered by a claim that is filed during the coverage period. Unlike most errors and omissions (E&O) policies and professional liability policies, which trigger coverage on a claims-made basis, almost all commercial general liability (CGL) and commercial umbrella policies are occurrence-based. This means that if an event gave rise to an injury that occurred in June of 2007, coverage for that loss would likely depend on what policy was in place in June of 2007 and not on the policy currently in place.

Historical Liability: How Past Policies are Triggered

Public policy disfavors the litigation of injuries alleged to have happened many years before they were asserted as claims. Records may not have been kept from that long ago and witnesses’ memories may not be as sharp. Moreover, it’s difficult for businesses to have to worry about claims that might come up from things that happened decades ago. This is why all jurisdictions have statutes of limitation for most types of lawsuits. These statutes limit the amount of time that plaintiffs have to assert claims against a tortfeasor. For most personal injury claims, this period is typically no more than three years. If a plaintiff sits on his claims for a period longer than the applicable limitations period, the claims are time-barred regardless of how meritorious they may have been.

However, there are still instances where older injuries can still give rise to liability. One exception to most statutes of limitation is the so-called “discovery rule,” under which the clock on the limitations period does not begin to run until the plaintiff discovers the injury or at least should have discovered the injury. For example, a person may have retired from a long career at a factory ten years ago but was unaware of her exposure to toxic chemical until the recent diagnosis of a disease caused by that exposure. In this case, the claim did not arise until the injury was discoverable. Even though the applicable statute of limitations might be two years, the clock on the two-year period only started running after the plaintiff’s diagnosis and her claims are not time-barred.

Another basis on which older claims are still justiciable is through so-called “revival statutes,” which are laws that amend or suspend the statute of limitations for a particular category of claims to allow plaintiffs to sue for historic injuries. After the #MeToo movement, a current trend in several states has been to pass revival statutes for sexual abuse claims, allowing plaintiffs to sue for abuse that occurred in the past.

These are just a couple examples of how events in the distant past might give rise to claims now. In such instances, the insurance coverage available to defend your organization and pay any judgments or settlements will be that which existed at the time the injury occurred. This is why it is crucial to keep extensive records of past insurance policies so that the existence, scope, and amount of historical coverage can be easily determined.

Insurance Archeology

“Oh no,” you may say, “neither I nor my predecessors have kept records of our organization’s past insurance policies!” This is common. Many organizations, especially ministries and small businesses, neglect to keep such records. However, through an inquiry known as “insurance archeology,” it is often possible to identify historic coverage in spite of a lack of policy records on hand. Yes, “insurance archeology” is a real thing. It may not be as exciting as Raiders of the Lost Ark, or as scholarly as an academic symposium on antiquarian artifacts, but it can save your organization a substantial amount of money if litigation arises from past events.

The first source to consult is your organization’s insurance agents, carriers, and brokers. If your organization has switched policies all while still using the same carrier or even the same broker, those parties will often have archived records of past policies. Indeed, in some states, they are required by law to do so for a specified number of years.

You can also contact any attorneys or law firms who have represented your organization in the past. Even if the matter for which they represented your organization was not litigation, there’s still a likelihood that their file for your organization might contain some reference to past insurance coverage. Even if just sparse information such as policy numbers or agent information could be retrieved, that data alone could aid in the discovery of historical policies.

Should your own efforts to ascertain historical coverage come up empty, there are professional insurance archeologists who perform extensive forensic inquiries to determine the existence of any historical coverage. While these archeologists may not be as entertaining as Indiana Jones or Laura Croft, their services can be invaluable in the midst of threatened or impending litigation where substantial sums of money are at issue.

Conclusion

Certain industries and fields have higher risk of liability arising from historic acts or omissions than do others. For instance, companies that have engaged in the long-term use of industrial chemicals may encounter claims arising from contamination or exposure that occurred decades ago. Organizations that have worked with children are particularly at risk for historic abuse claims in states where the applicable statute of limitations has been extended or suspended. But businesses and organizations of all stripes should make every reasonable effort to be able to trigger coverage under past policies if the need arises.

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¹Accessible at: https://www.northstarmutual.com/

² Accessible at: https://public2.capspecialty.com/

³ Accessible at: https://www.uuinsurance.com/

⁴ Nationwide Mut. Ins. Co. v. Mrs. Condies Salad Co., Inc., 141 P.3d 923, 925 (Colo. App. 2009).

⁵ See, e.g., Nationwide Mut. Fire Ins. Co. v. Nelson, 912 F. Supp. 2d 452, 454 (E.D. Ky. 2012), (“[A]n insurance company may void a policy based on a material misrepresentation regardless of the applicant's intent”).

⁶ See, e.g., Prodigy Commc'ns Corp. v. Agric. Excess & Surplus Ins. Co., 288 S.W.3d 374, 382 (Tex. 2009)

⁷ See, e.g., Templo Fuente De Vida Corp. v. Nat'l Union Fire Ins. Co. of Pittsburgh, 129 A.3d 1069, 1071 (N.J. 2016).