A better understanding of General Liability Coverage

Most clients who contact an insurance agent usually start their conversation with “I need insurance”. That does not really tell us what type of insurance they’re looking for, and they actually mean to ask for general Liability Coverage.

General liability is the foundation of any business insurance program, and can sometimes be the only insurance small businesses purchase.

General liability provides coverage for bodily injury or property damage as a result of the work that you do or the product that you sell.  This is an extremely broad description, and general liability covers many things, but not everything.

As you would expect, policies have limitations and outright exclusions, which means that you need to bundle other types of insurance policies to cover other aspects of your life or property.

Here are a few things that general liability does not cover:

• Property Damage

One thing that general liability does not cover is property damage, when the property belongs to you or is in your business’ care or control.  Property damage to business property or (sometimes) damage to your customers’ property can be covered by property insurance.

• Bodily Injury

Bodily injury for anyone related to your business e.g. employees, volunteers, owners, partners etc. is not covered.   Other means of covering for these types of claims include Workmens’ Compensation or accidental coverage.

• Professional Exposure

General liability does not cover your professional exposure.   This means if you’re a lawyer, doctor, architect, realtor or other licensed or accredited professional, you need to purchase professional liability insurance.  This is also known as Malpractice or Errors-and-Omissions insurance.

You would still need general liability coverage for non-professional claims such as a slip-and-fall in your office, or a fire caused by your presence on a project site, but your work is more likely to be covered by a professional liability policy.

There are a few other standard exclusions under general liability coverage that are a bit more self-explanatory.  Expected or intended injury, contractual liability, liquor liability, employer’s liability, pollution liability, aircraft liability, auto liability and watercraft liability are included here.  Many general liability policies also have endorsements to the policy that can further restrict or exclude some of these situations.

Enough about what’s not covered…let’s look at what is covered with a few examples.

• Probably the most common example of insurance is general liability and it functions in this way: a customer comes into your office for a meeting and while there, they trip over a chair that one of your employees had accidently left in the way. The customer needs medical attention due to the fall, and those medical costs are likely to be covered by your general liability policy, since it likely occurred due to your employee’s negligence.  Negligence must then be proven to enable you to submit a claim against your general liability policy.

Another example is: say, you’re a clothing manufacturer and one of the machines you should’ve maintained last month overheated and caused a fire which spread through to your neighbour’s warehouse destroying their stock, machinery, materials and office equipment.  The damage to your neighbour’s property will likely be covered despite your negligence.  Remember that your property will NOT be covered by the general liability policy.

Those are a few examples of the financial losses that can be transferred to an insurance company with a general liability policy.

The standard general liability policy is made up of several parts:

General aggregate – this is the maximum amount the policy will pay in any policy period.  If the general aggregate has been depleted, the policy will no longer provide any coverage.

Products aggregate – this is the maximum amount of coverage that the policy will pay from a loss resulting from a product or service that you sold after the product has been delivered or the service  completed.

Personal & Advertising injury – one of the most misunderstood parts of the policy, this section provides coverage for losses resulting in slander or false arrest.  The “each occurrence limit” is the maximum payable due to any one occurrence of this nature claimed against the policy, and may be smaller than the general aggregate so you may have multiple losses that combine to reach the general aggregate.  No single loss may go over the “each occurrence” limit.  You could raise the “each occurrence” limit and the general aggregate with the purchase of an Umbrella insurance policy or an Extended Liability policy.

Damage to Rented Premises or Fire Damage Liability limit is also misunderstood but the easiest to explain because it only covers one very specific situation.  If you rent a space, that space that you rent is in your care and control.  This is not covered by the general liability policy, and gives back some part of your coverage due to a loss of fire, and only fire that is due to your negligence.

“Medical payments” is a sub-limit usually N$5000 or N$10 000 of the general aggregate that will provide coverage for medical expenses resulting from your products, services or operations without the burden of negligence needing to be proven.  Keep in mind this would solely be for medical bills, so any claims for additional compensation such as loss of earnings or property damage would not be included in the medical payments sub-limit.

There are two types of general liability policies.  The first “on-occurrence” policy is the type of policy that would respond to claims based on the occurrence of an accident, as in the example of the slip-and-fall, and the occurrence is likely, since the accident occurs instantly.

The other type of general liability policy is the “Claims Made” policy.  This is a rarer type of general liability policy that responds to the claims based on when a claim is made, and not when the incident  occurred.  Imagine that the (claimed) incident occurred last year but the claim was made this year.  Your current policy is the one that would pay the claim.  I usually discourage my clients from purchasing “Claims Made” policies, because once the policy is started it is imperative that there be continuous coverage without lapses for the policy to respond.

“Claims Made” policies have two dates that are particularly important for the coverage to apply.  The first date is the retro-active date, which is the date on which the policy starts to provide coverage for occurrences.   This means any occurrences that result in loss prior to the retro-active date will not be covered regardless of the date the claim was made.  The other date is the extended reporting period date.   “Claims Made” policies have a definite number of days after the policy has lapsed in which the policy owner can report a claim.   If the claim is reported after that date, there would be no coverage even if the occurrence happened during the policy period.

The cost of general liability insurance is calculated using one of five kinds of information called the Premium Basis.

Area – This method is used for businesses whose operations are confined to a space (or area) they work in.   Examples of these include being a landlord of a commercial building or offices for professional services like those provided by a doctor, lawyer, or architect.  Other types of businesses can also be rated on the area they operate in (measured in square feet or metres) when the policy is limited to providing coverage solely to satisfy the landlord’s requirements and the “Products and Completed Operations” cover is excluded.

Gross Sales – This is the method most commonly applied to calculate the cost of insurance for business operations generally based around the sale of a product.  Some examples include retail stores, manufacturers, importers, distributors, restaurants etc.

Units – This premium basis is most often used for residential businesses or non-profit organisations like apartment buildings or homeowners’ associations.

Payroll – The second most used premium basis after Gross Sales, Payroll is used for services or construction industries where the amount of work performed by an employee is the biggest risk of insurance claims.  Businesses like landscapers, carpenters, tree trimmers, boat repairs or maintenance, information technology consultants, programmers etc. are often subject to this method of calculation.

When none of the options mentioned above are appropriate, ‘’Other’ ’is basically the one that is used.  It’s more personalised and fits the type of business, so examples will include childcare or adult care centers, and is based on the number of children or adults they take care of.  Beauty salons, nail salons, massage parlors or any other beauty businesses are often based on the number of technicians performing the different services.  Private school tutoring or instructional programs are rated by the number of students.

Keep in mind that not all insurances are created equal, so this was a very broad and general explanation of the different parts and types of general liability policies.  Some policies have endorsements that either take away or add more coverage.  No matter what you may see on tv or the internet, all policies are not the same, so I recommend you spend time with your insurance broker to discuss your needs and assess cover that best suits them.  Make sure that the insurance cover that you want is what you get, based on your general liability policy.

If you don’t have an insurance broker or would like to have a second opinion, feel free to call or email me, and I will be glad to discuss your needs or policy with you.

Carilita Albertse