(April 2019)
Underwriting commercial general liability exposures begins with reviewing and understanding the Insurance Services Office (ISO) Commercial General Liability Coverage Forms. Each has three different and separate insuring agreements. The exposures presented by a particular risk must be identified and evaluated within each insuring agreement.
All coverage centers on the insured.
Therefore, the most important part of underwriting this coverage part is
determining WHO is covered. The most obvious insured is the Named Insured.
Every entity listed in the policy is a named insured. From a legal standpoint
it is the same as if a policy had been issued to each named insured as a
separate policy. The first named insured is important in that they have special
responsibilities and privileges regarding premium and cancellation, but these
differences do not extend to coverages.
From the underwriting standpoint, the first thing to do is to determine what each named insured does and why it is combined with every other named insured. A specific person or entity that does not have a relationship to or is not legally combinable with the named insured should not be included. That person or entity should be insured separately.
Each named insured is an entity. Entity drives Section II–Who is an Insured in the coverage form. Because each named insured is considered separately, each has its own "Who is an Insured" section. If one entity is an individual, only that part of the section applies. If another entity is a partnership, only that part of the section applies. This can be very important when an individual is added to a policy initially issued to a corporation. The individual is suddenly covered for the corporation’s business but is also covered for any business operation the individual solely owns. In addition, that individual’s spouse is added as an insured for any of the individual’s business operations.
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Example: An application comes in for commercial general liability coverage on Gratzy Manufacturing LLC and Herman Gratzy. Referring to Section II–Who is an Insured in the coverage form, each of the following is an insured:
There is no requirement that Herman Gratzy’s activities be related in any way to Gratzy Manufacturing LLC. |
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 in order 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.
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Example: Continuing the example above, Gratzy Manufacturing LLC makes a variety of small plastic office supplies. Herman Gratzy individually agrees to sell some auto parts his family in Germany makes. Herman and his wife also make and sell jewelry from their home. It is clear that what seemed like a very simple and innocuous non-operating plastic parts manufacturing exposure is now also an auto parts manufacturer, jewelry manufacturer, and jewelry retailer. These additional operations must be investigated and evaluated more thoroughly. In this case, simply adding Herman Gratzy individually without asking any further questions could lead to missing some important potential hazards and exposures. |
This is the first of the
three insuring agreements. It states that the insurance company agrees to pay amounts the insured is legally
obligated to pay as damages for bodily injury and property damage that this
insurance covers. It also has the right and duty to defend the insured against
any suit that seeks those damages but only suits that seek damages that this
insurance covers. Coverage applies to bodily injury and property damage
that takes place during the policy period. The bodily injury and property damage
must be caused by an occurrence that takes place in the coverage territory.
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 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? According to the insuring
agreement, the answer is a conditional yes because it is limited somewhat by
Section IV-Commercial General Liability Condition. 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.
This insuring agreement states that the insurance company agrees to pay amounts the insured is legally obligated to pay as damages because of personal and advertising injury that this insurance covers. It also has the right and duty to defend the insured against any suit that seeks those damages but only suits seeking damages that this insurance covers. Coverage applies to personal 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 WHO and WHERE questions are the same as with the
Coverage A but the WHAT and HOW questions are different. The most important part
of this risk analysis is knowing what the insured does that could cause a
personal injury or advertising injury loss.
Some business operations
are so prone to such losses they may need to be excluded and covered under a
professional coverage form. These include lawyers, advertising agencies,
publishers, security firms and similar type occupations. However, it is
important to evaluate a business that would appear to do none of the above and
determine if the exposure might exist in a department of the company. Retailers
with paid security staff have significant exposure for evasion of privacy and
false imprisonment. Any company that publishes an “in house” newsletter or
customer newsletter has an exposure to libel and plagiarism claims. A company
that provides product evaluations has a defamation suit potential. Even
religious organizations are not exempt from suit because of release of
information that could be considered libelous. It is important to determine how
the offenses could take place and then how they can be prevented.
One point that must be emphasized is the
defense cost. Personal and advertising injury cases are very contentious, and
many plaintiffs demand a “day in court” even when pre-trial settlement might be
financially advantageous. Because the insurance company bears the full cost of
the defense, it can become very expensive. Therefore, in underwriting personal
and advertising injury it is important to consider the potential for lawsuits
even when it would appear that the insured would always win the case.
If the exposure is too great, the Personal and Advertising Injury
exclusion, CG 21 38 is always an option.
Related Article: ISO Commercial General Liability Coverage Forms Available Endorsements and Their Uses
This insuring agreement states that the insurance company pays certain medical expenses for bodily injury an accident causes. 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 identical to underwriting Coverage A because the exposures are essentially the same. However, Coverage A requires negligence on the insured's part and this coverage does not. This means that if an accident occurs and it can be linked to the insured’s premises or operations, there is coverage. One simple way to underwrite 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 usually excluded. The classification footnotes for these and similar classes of business require attaching an endorsement that excludes medical payments coverage. However, other operations with similar exposures to loss may be less obvious and underwriting must determine if it will provide coverage. It is important to note 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.
Contractual liability is excluded except for obligations made under insured contracts as defined in the coverage form. It is important to be aware of each contractual obligation and whether or not it is covered as a defined insured contract. This is significant because contracts are normally written to shift obligations from one party to another, so it is important to know exactly what burdens the insured has agreed to shoulder for another.
There are several additional insured endorsements available. These are normally added due to a contractual requirement. The named insured is providing its insurance policy limits to the additional insured for a loss that may be brought against the additional insured because of a relationship to the named insured. Many of the additional insured endorsements were changed in the 04 13 edition to not permit contractual transfer of liability when anti-indemnification statutes or similar regulations prohibit it.
Related Article: ISO Commercial General Liability Coverage Forms Available Endorsements and Their Uses
Before any loss history evaluation can begin it is necessary to obtain the loss history of the applicant. The loss history should be for a minimum of five years. Ten or more years’ experience may be needed for larger risks or high risk operations. At a minimum, loss history should include loss dates and descriptions, whether the losses are open or closed, and the amount paid or the current reserve amount. Some insurance companies do not provide reserve information because they are only estimates that may change at any time.
Frequent small losses may not result in an unacceptable loss ratio, but their number 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 lack of attention to detail that suggests morale hazard issues on the insured's part. The key to evaluating a series of small losses is to determine if there is an identifiable and quantifiable pattern that can be measured 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 amount paid for 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 determining and thoroughly evaluating the reason for the frequency.
It is a mistake to disregard a single large or severe loss as a fluke, aberration, or exception. The fact is that multiple significant losses can occur unless and until appropriate steps are taken to prevent them. Loss details and the insured’s actions after the loss to prevent it from happening again are important and may determine the risk’s acceptability. Post loss autopsies are important for any insured and insurer to make sure all processes are reviewed and understood.
A good risk priced inadequately can become a bad one. However, it does not necessarily follow that adequately pricing a bad risk makes it a good one. Insurance companies occasionally surcharge the premium on a bad risk hoping that it "goes away" instead of doing the right thing and declining it outright. Unfortunately, that price may be the best one the insured gets, the effort backfires, and the insurance company gets an order on a risk it really does not want. The appropriate response is to decline such new business submissions and non-renew or cancel in-force business that becomes unacceptable. That risk might be a perfect fit for another insurance company that has the coverage form, pricing, and underwriting appetite for it.
Pricing should start only once it is determined that the risk is acceptable from an underwriting standpoint. Underwriters must determine the correct classification and identify any rate loss costs that might apply, in that order. An error at the beginning of the process carries through the rest of it and results in an incorrectly priced risk.
Related Articles:
Classifying Risk–Why Proper Risk Classification Is Important
ISO Commercial General Liability Coverage Forms Rating Considerations
Underwriters must review 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 insurance company's schedule rating plans. Judgment is based on specific factors that can be identified and evaluated.
Simple endorsement change requests from the insured can be anything but simple. Underwriters and others should review endorsement change requests from the underwriting standpoint. A simple name change can mean a change in ownership that has important implications on the operations conducted. A simple address change should lead to questions with respect to new locations and activities. Unusual insurance certificate language requests should be challenged and questioned with respect to changes in operations. Many change requests contain hints that suggest possible changes in operations or emerging issues and exposures that must be evaluated.