Know What You're Getting In Your Insurance Policy


Operating a business requires an acceptance of certain risks. While efforts should always be made to minimize the risks attendant to running a business, it will simply never be possible to fully eliminate all of those risks. For that reason, there is insurance.

Unfortunately, not all business owners appreciate the need for adequate insurance coverage until it is too late, often with devastating results. In today's litigious society, one uninsured incident can cost hundreds of thousands of dollars and may not only destroy a business, but may well also lead to personal liability for the business owner. Therefore, we cannot overemphasize how important it is for business owners to maintain sufficient coverage through general liability, workers compensation, employment practices liability, commercial auto, and other policies appropriate for their respective businesses.

That being said, it is also important for business owners to fully understand the policies that they are purchasing and the coverage being afforded under those policies. Just a few important words in a policy can mean the difference between being afforded coverage for a claim and being denied coverage. Here are just a few basic, but critical issues to understand when buying a policy.

"Claims Made" v. "Occurrence" Policies

One of most important distinctions to understand is that between a policy that covers risks on a "claims made" basis and a policy that covers "occurrences" or accidents.

A "claims made" policy only provides coverage when the incident or loss occurs during the policy period and the claim is actually made during the same policy period. So, for example, let's assume you have a general liability policy with a term that runs from January 1 through December 31. If a "covered event" (e.g., an incident that would normally be covered by your policy) occurs on December 30, but the claim is not made until January 1 of the following year, after the policy has expired, then it will not likely be covered under that policy because the claim was not made until after the policy period expired.

An "occurrence" policy, in contrast, provides coverage for any covered event or loss that occurs during the policy period, regardless of when the claim is made. So, if you had an occurrence policy in the prior example, because the covered event occurred during the policy term, then the policy would provide coverage even if the claim was not made until after the policy period expired.

Aggregate, Per Occurrence, and Per Project Coverage Limits

All insurance policies will indicate a policy limit. Let's assume that a business has a $1,000,000 general liability policy. That does not necessarily mean that the insured has $1,000,000 for each claim or occurrence. Rather, it means that the total amount of all payments under the insurance policy – for any and all claims that are made – will not exceed $1,000,000. Therefore, one significant claim against the insurance policy could leave a business underinsured for any other claim that might arise during the policy term. Some policies also have a "per occurrence" limit that is lower than the aggregate limit. In that case, the total amount paid out on any single claim will be capped at the "per occurrence" limit.

Aggregate policy limits can be especially problematic for contractors or similar businesses, where work is performed on several different projects concurrently, and any one claim could exhaust the policy limits. In those situations, it is worth investigating a "per project" policy that will provide coverage for each particular project separately.

"Your Work" Exclusion

Finally, general liability policies contain a broad range of exclusions. One that is often overlooked is the "your work" exclusion, which excludes coverage for the actual work performed by the insured. This is known as the "workmanship" exclusion, and precludes coverage for any claim that would normally be covered by a business' warranty for its own work since the contractor has control over the quality of the work performed and the general liability policy is not intended to guarantee satisfactory workmanship or completion of the project.

Assume a contractor is hired to build an addition onto a house. If the homeowner claims that the workmanship is substandard, then a general liability policy with a "your work" exclusion would not provide coverage for the claim. However, if the claim is based on damage to other parts of the property or on personal injuries caused by the contractor's work (e.g., a newly-installed chimney collapses and causes personal injuries and/or damage to another's property) then the claim would be covered by the general liability policy.

Ultimately, obtaining appropriate insurance coverage is both critical and complicated. Make sure you find a broker or agent that you trust and, most importantly, don't be afraid to ask questions before you buy the policy. When shopping for insurance coverage, be sure you know exactly what a policy will – and will not – cover.

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