AAIS COMMERCIAL LIABILITY COVERAGE FORMS UNDERWRITING CONSIDERATIONS

(December 2018)

INTRODUCTION

Underwriting the commercial liability exposures of a business requires a properly completed application and knowledge of the coverages that will be provided.

NAMED INSURED

The most important part of underwriting general liability coverages is the insured because the insured is being protected by the coverage provided. For this reason, the first named insured is the most obvious covered party. However, every person or entity listed on the declarations is a named insured. Each is treated as though a separate coverage form is issued to each insured named. While the first named insured has special responsibilities and privileges with respect to premium and cancellation, these differences do not affect or apply to the coverages provided.

After evaluating all listed named insureds, it is important to determine the relationship of each to the other. If a particular person or entity does not have a relationship to or is not legally combinable with others on the list, it should be removed and insured under a separate coverage form.

Each named insured is an entity. Entity drives the definition of insured. Because each named insured is considered separately, each one has its own section in the insured definition. If one entity is an individual, only that part of the definition applies. If another entity is a partnership, only that part of the definition applies. When an individual appears on a policy that includes a corporation, that individual is covered with respect to corporation business, any business operation solely owned by that individual and to any of the individual’s business operations.

Example: An application comes in for commercial general liability coverage on First in Line Corporation and Pamela Oblong. Referring to the definition of insured in the coverage form, each of the following is an insured:

First In Line Corporation
First In Line’s executive officers and directors, but only to the extent of their duties as such
First In Line’s stockholders, but only such liability imposed as stockholders
First In Line’s employees, but only within the scope of their employment
Pamela Oblong, individually, and/or her spouse are covered for any business operation she owns
Pamela Oblong's employees, but only in the scope of employment for Pamela

There is no requirement that Pamela Oblong’s activities be related to First In Line Corporation.

Once it is established WHO is insured, then WHAT must be established. What does each of the insured’s do that could cause an occurrence or an offense? Notice that in the insuring agreements there is no requirement that occurrences or offenses be due to any particular business operations, only that the insured must be legally obligated to pay. Therefore, any and all activities by an insured must be discovered. Once discovered, those exposures must be evaluated to determine acceptability.

A risk survey related to the specific business or operations may be helpful. A regular application or general questions may not be enough to fully develop the information needed. The insured may simply forget certain aspects of its operations. Such a survey may jog its memory.

Note: The Rough Notes Company, Inc. Producer’s Commercial Lines Risk Evaluation System is an excellent resource for identifying operations.

Other documents used to develop the business or operations total identity are its annual financial report, profit and loss statements, balance sheets, and other financial records. Tracking the business's finances is an example of a risk management method of asset protection.

COVERAGE L–BODILY INJURY LIABILITY - PROPERTY DAMAGE LIABILITY INSURING AGREEMENT

This is the first of the five insuring agreements. It provides coverage for premises and operations exposures that are not part of the Coverage N–Product/completed operations coverage. Coverage applies to bodily injury and property damage occurring during the policy period. The occurrence must take place within the coverage territory.

Example: Continuing the example above, First In Line Corporation inspects and evaluates other corporations and makes recommendations as to how they become more effective and efficient. Pamela Oblong individually writes books on consulting theory; hosts a popular website; and breeds, trains and sells corgis. These additional operations must be investigated and evaluated more thoroughly. In this case, simply adding Pamela Oblong individually without asking any further questions could lead to missing some significant exposures.

After determining the nature and extent of all business activities and operations, the next question is HOW. HOW can injury or damage occur and HOW can it be prevented? This requires knowledge of operations, information regarding products and services provided and experience of similar type operations. Loss control or loss prevention departments can supply excellent information to aid in this evaluation.

The question of WHERE is a very important question because the insuring agreement is very broad. Coverage applies anywhere, subject to only the coverage form's definition of coverage territory. As a result, coverage is not limited to only named or listed locations or operations. New locations or operations are covered without them being added to the coverage form. A question will arise regarding a location that is in existence at the time of the policy application, but the insured does not list it on the application - is it covered? If an insured intentionally misrepresented factual information, it is not covered. If the location was left off due to an oversight or mistake, there is a possibility that it is covered.

COVERAGE M–MEDICAL PAYMENTS

This insuring agreement states that the insurance company pays certain medical expenses for bodily injury caused by an accident. The accident must occur on premises the named insured owns or rents, on ways adjoining such premises, or because of the named insured's operations. Coverage applies if the accident occurs in the coverage territory and during the policy period. Payments are made without regard to fault.

Underwriting this coverage is virtually identical to underwriting Coverage L because the exposures are essentially the same. The big difference is that Coverage L requires negligence on the insured's part and this coverage does not. This means that coverage applies if an accident occurs in connection with the insured’s premises, adjacent ways, or operations. A good start in underwriting this coverage is to exclude it for businesses and operations that regularly produce these kinds of injuries. Athletic participation activities, day care centers, and schools are some examples of operations or classes of business where medical payments coverage is often excluded. The exclusion built into this coverage form accomplishes this for the easily identifiable classifications. However, other operations may have similar exposures that are less obvious and require underwriting to determine whether to provide coverage. Keep in mind that providing this coverage is a good way to potentially eliminate lawsuits because the injured party is cared for (and his or her medical-related expenses paid) promptly. However, problems arise if this coverage is used as a substitute for health insurance or accidental injury coverage.

COVERAGE N–PRODUCTS/COMPLETED WORK

Injury or damage caused by products is covered only when the injury or damage occurs after the product has left the premises and been relinquished to another party. Adhering to best practices that include multiple quality assurance inspections is vital. Appropriate instructions and warnings are very important. Age-appropriate information is particularly important. Retailer and wholesalers can refer many claims back to the manufacturer unless they make modifications to the products after they receive them or if they directly import the products. In those cases, retailers and wholesalers must be underwritten as manufacturers.

Underwriting completed operations is similar to products because the loss or damage will occur after the named insured has stepped away from the project. The most important factor is experience. How long has the named insured been doing this particular type of work? It must be anticipated that the types of project handled in the past will be similar to those handled in the future. If the named insured starts going into new areas, more investigation is needed.

COVERAGE O–FIRE LEGAL LIABILITY

This exposure is minor for most. However, there may be times when a request is made to increase the limit beyond the $50,000 coverage. When that occurs, a more in-depth analysis should be made. In such situations, a commercial property coverage form may be more appropriate.

COVERAGE P–PERSONAL INJURY LIABILITY - ADVERTISING INJURY LIABILITY

Coverage applies to personal injury and advertising injury caused by an offense that arises out of the named insured's business. The offense must be committed in the coverage territory and during the policy period.

The most important point is to know what the insured does that could cause a personal injury or advertising injury loss. Some business operations are much more prone to these types of losses than others and this coverage must be excluded and written under a specialty or professional liability coverage form. Certain professions are usually written this way, including lawyers, advertising agencies, radio and television broadcasters, publishers, and security firms.

It is always important to evaluate each business with respect to this coverage. However, such exposures are not necessarily limited to only high-profile occupations like those listed above. For example, retail businesses that have paid security staff may have significant exposures to charges of invasion of privacy and false imprisonment. Any company that publishes newsletters has possible exposures to libel or plagiarism claims. A company that evaluates products can be a target for defamation lawsuits. Religious organizations can be sued if they release information that could be considered libelous. The important point is to first determine how an offense can take place and then determine the steps to take or measures and procedures to implement to prevent the offense from happening at all.

It is also important to draw attention to defense costs. Personal and advertising injury cases are usually highly contentious, and many plaintiffs demand their “day in court,” even when settling out of court might be financially more advantageous to them. The insurance company pays the full cost to defend these cases and they can become very expensive.

CONTRACTUAL EXPOSURES

The coverage forms insure liability obligations due to specific, listed written contracts or agreements. All others are excluded. It is important to be aware of every contractual obligation and determine if they are or are not covered. Because written contracts normally shift obligations and requirements from one party to another, it is important to know the responsibilities or obligations assumed as well as what has been transferred contractually or avoided completely.

ADDITIONAL INSURED ENDORSEMENTS

Several additional insured endorsements are available that respond to certain requirements that additional interests impose. Additional interests are normally included because of contractual requirements. The named insured makes its limits available to the additional insured for claims for loss that may be brought against the additional insured because of its relationship to the named insured.

EVALUATING LOSS HISTORY

This requires adequate information on previous losses. The loss history should have a reasonably recent valuation date and include at least five full years of experience in addition to the current year. Ten or more years of loss experience may be required on larger risks or those engaged in high-risk operations. It should include, as a minimum, loss dates and descriptions, whether the losses are open or closed, and the amount paid or the current reserve amount. Reserve information is often not provided because they provide an estimate that may or may not be accurate.

Example: Pamela was not paying attention when she suddenly looked up and fell right into Marsha. Pamela was in the wrong. She asked if Marsha was hurt and offered to call an ambulance, but Marsha demurred and proceeded on her way. Pamela notified her insurance company of the incident and thought nothing more of the incident. Approximately, 18 months later Pamela received a call from a claims adjuster and then from an attorney notifying her that Marsha was suing Pamela for $1,000,000 because of a severe back injury that resulted from their collision. The insurance company has been in negotiations but to no avail, so the case is going to trial, and Pamela will be required to testify. Should this case be considered a $1,000,000 reserve because that is the demand, or should it be reserved at $25,000 because the insurance company believes that is the actual liability?

Frequency

Small losses that occur frequently may not result in an unacceptable loss ratio, but they may indicate unresolved problems. Slips and falls may suggest housekeeping problems or structural conditions that could lead to a sizeable loss. Small property damage claims may indicate quality problems or a morale hazard. The key to evaluating a series of small losses is to determine if there is an identifiable and quantifiable pattern that can be evaluated and corrected.

The claims-handling costs for both the insurance company and the insurance agency on small and frequent losses must be considered, in addition to the money paid on the losses themselves. While the overall loss ratio may be acceptable, it may be much worse when claims handling costs are added up and included.

Liability deductibles may solve some problems but disguise other more serious ones. Deductibles should be used cautiously and sparingly and only after the reason for the frequency is determined and thoroughly evaluated.

Severity

It is a mistake to disregard a single large or severe loss as a fluke. The fact is that multiple significant losses can occur unless and until appropriate steps are taken to prevent them. Loss details and what the insured did after the loss to prevent or minimize it happening again is important and may determine whether a risk is acceptable. Thorough post-loss evaluations by both the insured and the insurance company are important to ensure that everything related to the loss is reviewed, evaluated, and understood, and any outstanding matters resolved satisfactorily.

PRICING

Underwriters must review the manual premium calculations to be sure they are accurate and complete. They apply additional judgment pricing credits or debits based on the risk's individual characteristics and features, subject to the carrier's schedule rating plans. Judgment is based on specific factors that can be identified and evaluated.

ENDORSEMENTS

Underwriters should review endorsement requests. A simple name change may mean a change in ownership that could affect operations. An address change should lead to questions concerning new locations and activities. Unusual insurance certificate language requests should be challenged concerning changes in operations. Many change requests contain hints that suggest possible changes in operations or emerging issues and exposures that must be evaluated.