CHAPTER 23
Commercial Liability Insurance
I. SUGGESTED CLASSROOM TIME: 120 MINUTES
II. CHAPTER OVERVIEW
The chapter describes commercial legal liability by providing a discussion of the liability
coverage business firms may need. Among the key points that should be stressed is the
idea that judges and/or juries determine facts and render judgments. Also, the role of
liability insurance must be clarified for some students who sometimes forget why the
doctrines associated with negligence (tort) law are included in an insurance textbook.
Instructors of an introductory course in risk management and insurance should
Some of the topics discussed in this chapter, such as professional, products, nuclear,
and environmental liability, receive attention by the news media regularly. Employment
III. LECTURE OUTLINE
A. Categories of Liability Insurance
1. Individuals most often acquire their personal liability insurance when they
purchase their Homeowners policy that contains the equivalent of the
2. Business firms are seeing several causes of increasing costs of liability insurance.
a. There are expanding areas of liability exposure, e.g., employment liability and
professional liability.
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3. Business firms typically purchase the Commercial General Liability (CGL) policy
for their liability coverage. Sometimes this policy is included in a commercial
4. Claims made versus occurrence-based contracts
a. Claims made—pays for claims made during the policy period where the injury
occurred after the retroactive date—exposures that have long-tail
B. CGL Contract—Five Sections
1. Insuring agreement—pays for claims alleging: Coverage A—bodily injury or
property damage; B—personal or advertising injury; C—medical payments to non-
insureds
C. Business Liability Umbrella Policies
1. Pay for liability losses exceeding the underlying limits
2. Can cover some exposures not covered in the underlying coverage
D. Commercial Auto Liability Insurance
1. Traditional tort liability auto claim:
E. Environmental Impairment Liability (EIL)
1. The problem of pollution and resulting toxic-tort liability. Who is responsible may
2. An incomplete list of federal laws to protect air, water, and land
a. Clean Air and Water Acts
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3. Insurance coverage
a. Pre-1986 Comprehensive General Liability (CGL) policy and EIL coverage are
important sources of coverage. CGL policy excluded pollution that was not
sudden and accidental. Subsequent court decisions eroded the exclusion so the
new CGL excludes all pollution losses unless endorsed to include them.
F. Products Liability Insurance
1. These claims arise when consumers are injured as the direct result of using a
product negligently designed or manufactured, or one accompanied by insufficient
directions for use.
2. Product liability cases make the news because of large awards (over $125 million in
4. Social inflation: Increasingly high jury awards and greater burdens on producers
mean the costs are probably borne by the consumer.
5. Suggested solutions
a. Statute of limitations
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G. Professional Liability
1. These claims arise when a person having special skills or knowledge negligently
provides a service and injures someone. Examples include individuals such as
physicians, hospitals, pharmacists, and directors and officers.
4. Types of coverage (not all inclusive)
a. Physicians’, surgeons’, and dentists’ liability
b. Hospital liability
6. Suggested solutions
a. Limitation on awards
b. New definition of “negligence”
H. Employment Practices Liability
1. Federal government has created rights for certain classes of citizens creating the
right to sue organizations that violate these rights.
2. Laws protecting women, minorities, disabled, and aged
a. The Civil Rights Act of 1964
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3. Laws used to sue employers
a. Negligent hiring
4. Complaints filed with the U.S. Equal Employment Opportunity Commission
(EEOC) have increased dramatically over the past decade.
a. The employee files a claim.
I. Americans with Disabilities Act (ADA) of 1990
1. Passed in 1990—Protects citizens with disabilities in an attempt to place them in
positions more equal to the nondisabled.
J. Nuclear Liability
1. Claims arising from the negligent operation of a nuclear facility are potentially
catastrophic. Example: March 1979—Three Mile Island.
2. Recognizing the above possibility, the U.S. government passed the Price-Anderson
Act in 1957 in order to encourage nuclear power generation. The Act limited the
3. In 1988 the Price-Anderson act was renewed for 15 years and was amended. $160
million of insurance is available from the two nuclear pools (Mutual Atomic Energy
IV. ANSWERS TO REVIEW QUESTIONS
1. Explain why the replacement of contributory negligence rules with
comparative negligence rules leads to an increase in the frequency at
which firms are sued. Contributory negligence in common law is a “perfect
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2. Why are class action lawsuits a particularly challenging risk management
exposure? Class action suits, involving multiple plaintiffs and often multiple law
3. Describe the completed operations risk. In your answer, provide an
example of the completed operations risk for an electrician. The completed
4. Explain contractual liability and the nature of a hold-harmless agreement.
Contractual liability is liability assumed in a contract. A tenant in a shopping mall
5. Does the CGL Policy cover the following liability costs for a policyholder: a
slip-and-fall jury award for $20,000; a $5,000 out-of-court settlement for
a customer badly cut on a shelf; and $3,000 in payment to an attorney
representing the named insured in a lawsuit? All of these are payable in the
6. What is the retroactive date in a claims-made CGL form? Why is the
retroactive date important? The retroactive date relieves the insurer from paying
7. How can tail coverage help an attorney who has just retired from active
practice? When a claims-made policy is written, there is no coverage for claims made
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8. What are the requirements for coverage for an incident to be covered
under a claims-made liability policy? How do these requirements differ
from an occurrence-based policy? To have a claim covered under a claims-made
9. How does the retroactive date differ from the tail period in a claims-made
liability policy? The retroactive date is a date set equal to or before the inception
10. Explain why claims may still be filed under CGL policies written before
11. Does an umbrella liability policy require other insurance policies to cover
an insured loss first? By its very nature, an umbrella liability contract is an excess
12. List several types of organizations needing EIL coverage. Discuss the
reasons why the insurance industry designed this type of protection. Any
organization that releases substances that are not natural to the environment or are
13. What is products liability insurance designed to do? Products liability
coverage provides coverage for those who manufacture, distribute, or sell products.
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14. Describe the insurance companies held liable in the Keene case. How did
the court reach this decision? The court ruled that if several insurance policies are
15. Identify some of the major federal laws affecting employment practices.
The following are some of the major federal laws affecting employment practices. The
Americans with Disabilities Act of 1990 (ADA) (Public Law 101-336). The following
16. List some of the reasons employers have been sued with respect to the
managing of their employees. Some of the reasons employers have been sued with
17. How do the insurer’s interests sometimes conflict with the professional’s
interest with respect to the opportunity to settle malpractice suits?
Malpractice or errors and omissions problems are difficult to settle. The insurer wants
18. Give some reasons why each of the following might be sued for profes–
sional malpractice: a lawyer, an accountant, an architect, and an
insurance agent.
1) Lawyer—negligently writes a will, trust, or contract resulting in financial harm to a
client
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19. What are some of the major costs from healthcare professionals’ errors
and omissions? There are a series of costs associated with medical liability. These
20. Several suggestions have been made to improve the current tort liability
system as it relates to medical malpractice. Explain some of these
suggestions. 1) Limitations on for such noneconomic injuries as pain and suffering.
V. ANSWERS TO OBJECTIVE QUESTIONS
1. Dr. Xavier Self, M.D., purchases a one-year, claims-made, professional liability policy
on June 1, 2003. It has a retroactive date of June 1, 2000. It also has two years of tail
coverage that ends on June 1, 2006. Which of the following incidents would be covered
by this policy?
2. Which of the following categories would not be covered by business CGL policies?
3. An umbrella policy
4. Firms engaged in the automobile business must purchase ________ to cover their
liability exposure.
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5. Professional liability insurance policies would not include which of the following?
6. A(n) ____________ policy requires the insurance company providing the coverage
at the time of the negligence to pay the claim.
7. Insurers call claims filed many years after the alleged negligence
8. Jan is injured by Dan while driving when Dan fails to stop at a stop sign. Jan sues Dan
for $50,000 in damages. The court finds Dan 90 percent responsible for the accident
and Jan 10 percent responsible. Under the doctrine of contributory negligence, Jan will
collect
VI. IDEAS FOR INSTRUCTORS AND TEACHING METHODS
1. Have the students clip news articles from local or national newspapers describing a
2. Design a controversial liability incident such as an automobile or industrial accident.
Split the class into three groups. One group will represent the interest of the plaintiff,
3. Select legal liability cases out of a reporting service such as Commerce Clearing House:
Property and Liability Cases. Provide only the facts to the students. Have the students
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4. Have students make a list of liability exposures where the claims-made contract would
6. Find out and discuss your university’s or college’s policy on discrimination based on
age, gender, race, religion, sexual orientation, or other factors. Does this policy seem
sufficient? Fair? Does it leave a means to have any complaint heard?