1. COMPREHENSIVE GENERAL LIABILITY INSURANCE (CGL)
Businesses usually have what is called Comprehensive General Liability (CGL) Insurance. This type of insurance is typically written on what is called an “occurrence” basis. Occurrence insurance exists for claims which arise from acts which were taken or “occurred” during the policy period.
A. Coverage Under a CGL Policy
A common misconception is that CGL insurance will cover a broad range of claims. You may believe that because you have CGL insurance you are insulated from liability for most claims which can arise when you conduct your business.
Damages for economic losses due to breach of contract, or to defend parties for claims for defective work are generally not covered under a CGL policy. Major exclusions in CGL policies are for work product, or for liability assumed under a contract. Claims commonly covered under a CGL policy are those for property damage, personal injury, or death.
Example: you build a cabinet for a client which contains computer equipment in 2015, and a person is injured in 2017 due to your negligent construction of the cabinet. Coverage should exist under a CGL policy which existed in 2017. This would ordinarily be the case even if you do not have CGL insurance in 2017 when the claim for damages due to your negligent work is presented and the claimant was damaged.
2. ERRORS AND OMISSIONS INSURANCE
A. Coverage Under an E & O Policy
Professionals such as engineers, architects, accountants, doctors, and attorneys may have Errors and Omissions Insurance (“E & O”). Contractors doing design-build work may also have this type of insurance. This is also called Malpractice Insurance. E & O insurance is nearly exclusively written on a “claims-made” basis. This is very different from the “occurrence” basis for CGL insurance. Under a E & O policy, coverage exists only if the policy is in force when the claim is made.
E & O insurance is specifically designed to cover mistakes made by a professional. If a claim is presented for professional negligence, the primary issues are: (1) Did the professional act below the applicable standard of care? (2) If so, did that act cause damage to the claimant?
Same Example: You make a mistake in doing work for a client in 2015, but the claim is presented in 2017. If you have no E & O Insurance in 2017, the claim will not be covered under an E & O policy in place in 2017. This is true even if you had E & O coverage in 2015, when you made the mistake.
3. FORMAL SUBMISSION OF CLAIM TO INSURANCE COMPANY
If you receive a claim and have insurance of either or both of the above types, you should notify the insurance company or companies in writing as soon as possible. Get a statement in writing from the company on whether it is willing to cover your claim, and whether it is willing to hire an attorney to defend your claim. Do not accept an oral statement from your insurance broker or a claims adjuster that the claim is not covered and fail to submit the claim in writing for a formal response to your tender of the claim.
Under insurance law, the duty of the insurance company to defend claims is broader than the duty to cover claims. This means that even if the claim may not be covered by your CGL policy, the insurance company may have duty to defend the claim. The value of the defense may exceed the value of coverage, because legal fees incurred in defending claims may be higher than the amount of the claim.
4. CONTRACT CLAUSES ADDRESSING INSURANCE
A client for whom you do work may include in your contract insurance provisions requiring you to carry CGL, E & O, and other types of insurance at specified limits. Make sure you review the contracts you are asked to execute, and carefully review the insurance provisions to ensure you have the proper insurance coverage given the type of business you conduct, and the dollar value of claims which may result.
If necessary, consult with your attorney or insurance broker to be certain that you understand the risks your business faces, and what steps you have taken to protect your assets from exposure to those risks.
Claims are a real risk and danger to the assets you have carefully accumulated. Ensuring that you understand the risks which may be presented by claims, and that you have adequately covered those risks by insurance or other legal means is critical.