Commercial general liability insurance

What is commercial general liability insurance?

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Commercial General Liability (CGL) insurance protects business owners against claims of liability for bodily injury, property damage, and personal and advertising injury (slander and false advertising). Premises/operations coverage pays for bodily injury or property damage that occurs on your premises or as a result of your business operations. Products/completed operations coverage pays for bodily injury and property damage that occurs away from your business premises and is caused by your products or completed work.

Excess liability insurance pays for covered losses that exceed your CGL policy's dollar limit.

Umbrella liability insurance is excess liability insurance coverage above the limits of automobile liability and CGL policies. The umbrella policy also provides liability coverage for exposures not covered under the primary CGL insurance policies and not excluded by the umbrella liability insurance policy.

Claims-made versus occurrence policies

Occurrence policies cover claims arising from injury or damage occurring while the policy is in force, regardless of when the claim is first made.

Claims-made policies cover claims that arise from injury or damage occurring during the policy period and reported to the insurer during the policy period. Claims arising from events outside the policy period or claims reported to the insurer outside the policy period are not covered unless special coverage is purchased or arranged with the insurer. This special coverage comes in two forms:

Prior acts coverage is provided by establishing a "retroactive date" covering injury or damage occurring after the retroactive date. The retroactive date usually appears in the declarations page accompanying your policy. It may be the effective date of the policy or an earlier date. Prior acts coverage does not cover claims that were known at the time your policy began.

If a claims-made policy does not continue (expires, cancels, or nonrenews), you should purchase either run-off coverage from your previous insurer or prior acts coverage from your new insurer to prevent coverage gaps. Generally, claims-made policies may be less expensive in their early years as the potential for claims increases as policy years accumulate.

The differences between claims-made and occurrence policies are best illustrated by the following examples:

Assume you operate a business located in a building that you own. Your customers may enter the building and shop for merchandise in a showroom. On April 15, 2010, a customer slips and falls in your showroom. The customer reports the incident to you but says he does not believe he is injured. On December 15, however, you receive notice that the customer has filed a claim for injuries sustained in the fall.

strong>Occurrence Policy: An occurrence policy with a policy period from June 1, 2009, to May 31, 2010, will cover the claim because the incident occurred during the policy period.

Claims-Made Policy: A claims-made policy with a policy period from June 1, 2009, to May 31, 2010, will not provide coverage because the claim was made after the policy expired. If, however, you purchased an extended reporting period from your insurer when your policy expired, the claim may be covered.

Examples of exclusions in a CGL policy

Following are some examples of exclusions commonly contained in a CGL policy. Coverage varies by insurer and will include additional exclusions other than the examples below. You should carefully review your policy and any endorsements to know exactly what your policy does – and doesn't – cover. Talk to your agent if you have any questions about your policy, its coverages, or policy limits.

Damage to Your Work - Generally, CGL policies exclude coverage for property damage to your work (see Example No. 1 below). There is an exception to the exclusion for damaged work if a subcontractor working for you caused the damage (see Example No. 2 below).

Example 1: You own a homebuilding business that recently constructed a new residence with a garage. After the home is sold and the homeowner moves in and parks her vehicle in the garage, the roof on the garage collapses because of faulty construction. The collapsed roof damages the homeowner's vehicle. The policy may provide coverage for the repair or replacement of the vehicle but may not pay to repair the collapsed roof because the roof is your work.

Example 2: The situation is the same as in Example 1, except the work to construct the roof was performed by subcontractors working on your behalf. The policy may cover the damage to the vehicle and also may pay to repair or replace the roof constructed by your subcontractor.

Damage to Your Product - CGL policies don't cover property damage to your product arising out of the product or any part of the product.

Example: If you install a propane-powered appliance that malfunctions and causes a fire that damages a home, your CGL policy may pay to repair the home. It will not pay to repair or replace the appliance if the malfunction was caused because the appliance was faulty.

Contractual Liability - CGL policies exclude coverage for bodily injury or property damage that you are obligated to pay because you assumed liability in a contract or agreement. The exclusion contains the following two exceptions:

Example 1: You sign a contract to complete the construction of a building within a specified amount of time. The contract requires you to pay damages if you breach the contract. Your CGL policy will not provide coverage for any damages you have to pay because you failed to meet the deadline.

Example 2: You sign a contract to hold harmless and indemnify another party for the other party's negligence if that negligence results in bodily injury or property damage. Your CGL policy may provide coverage to indemnify the other party depending on the wording of the indemnity agreement.

Recall of Products, Work, or Impaired Property - CGL policies will not pay the cost to recall faulty products, work, or impaired property. However, this coverage may be added to the policy by endorsement for an additional premium charge.

Workers' Compensation and Employer's Liability - CGL policies are not intended to provide coverage for workers' compensation or employer's liability. This exclusion prohibits such coverage.

Pollution exclusions in the CGL policy

What is a premium audit?

Most CGL policies are auditable policies and contain a condition commonly called "Premium Audit." The premium that is paid at the inception of the policy is a deposit (estimated) premium. Auditable policies usually use estimated payroll, sales, or units sold as the premium base to calculate the deposit (estimated) premium.

The insurer is entitled to examine your books and records to determine whether the actual payroll, sales, or units sold are greater or less than what was estimated. This is usually done after the expiration of the policy, but may also be done during the policy period. If the actual payroll, sales, or units sold is greater than was estimated, you may owe additional premium. If the actual payroll, sales or units sold is less than what was estimated, you may be due a return premium. Therefore, it is important to provide an estimate of the payroll, sales, or units to be sold that is as accurate as possible to avoid having to pay an additional premium.

What kinds of insurers offer CGL insurance?

The Texas Department of Insurance (TDI) recognizes the following four types of insurers that may offer commercial general liability insurance in Texas. To check on whether a carrier is licensed, eligible, or registered in Texas, call TDI's Consumer Help Line at 800-252-3439, or use the Company Lookup feature on the insurance company look-up page.

Licensed insurers

TDI regulates the policy forms and rates of licensed insurers.

CGL policies offered by licensed insurers must contain the following legislatively mandated provisions:

Policyholders obtaining insurance from licensed insurers are protected by the Texas Property and Casualty Insurance Guaranty Association for up to $300,000 per claim if the insurer becomes insolvent.

Surplus lines insurers

Insurance not available through licensed insurers may be placed with eligible surplus lines insurers. To be eligible to write surplus lines coverage in Texas, the insurer must meet certain requirements and be on TDI's "eligible list." Before selling a surplus lines policy, an agent must make a diligent effort to find a licensed insurer to issue the policy.

Risk purchasing and risk retention groups

Risk purchasing groups are formed under the provisions of the federal Liability Risk Retention Act (LRRA) of 1986. A purchasing group consists of individuals or firms of like characteristics who share similar insurance needs. The eligibility criteria for members of a purchasing group are set by LRRA. Once formed and registered with the State of Texas, the group may use its purchasing power to obtain liability insurance and benefits at prices that may be lower than individuals or businesses could negotiate separately.

If a purchasing group buys insurance from a licensed insurer, it may be protected by the Texas Property and Casualty Insurance Guaranty Association if the insurer has capital and surplus of $25 million or more. If the purchasing group is not protected by the Texas Property and Casualty Insurance Guaranty Association, then it must disclose this to its members.

Licensed insurers that provide coverage to members through a purchasing group must file policy forms and rates with TDI. The policies and rates must comply with all statutes that apply to licensed insurers.

TDI does not regulate the policy forms and rates offered to members through a purchasing group by surplus lines insurers. In addition, surplus lines insurers are not protected by the Texas Property and Casualty Insurance Guaranty Association.

Risk Retention Groups also are formed under the provisions of the federal Liability Risk Retention Act (LRRA) for the purpose of providing insurance. These groups do not buy commercial insurance policies, but "retain" the risk within the group. In effect, the members insure each other against liability claims and lawsuits. However, because a risk retention group is an insurer, it may purchase reinsurance. Reinsurance is a form of insurance that insurance companies buy for their own protection.

The rates and policy forms of risk retention groups are not regulated, and policyholders are not protected by the Texas Property and Casualty Insurance Guaranty Association in the event the risk retention group becomes insolvent.

Shopping for CGL coverage

Getting help

If you have questions, call our Consumer Help Line at 800-252-3439, Monday to Friday, 8 a.m. to 5 p.m. Central time.

If you would like to file a complaint, read our Get help with an insurance complaint webpage.

For more information, contact: PropertyCasualty@tdi.texas.gov