Commercial General Liability Policy Gaps (CGL)

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Commercial General Liability Policy Gaps (CGL)

Do you assume your commercial general liability policy covers pretty much everything since it says “we will pay those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’ to which this insurance applies?” You may be headed for trouble if you don’t keep reading beyond this broad statement in your policy. Read on to learn more about some of the common exclusions found in most policies. Armed with this information, you can make wise decisions about your insurance coverage and add coverage to fill in any gaps you may have.

Scenario one—Your product
You manufacture a forklift. During operation, the brakes fail causing it to collide with a delivery truck. The forklift itself is damaged, as well as the delivery truck. Any resulting damage to the delivery truck is covered; however, there is no coverage under the CGL for damage to the forklift (your product).

Scenario two—Your work
You are an electrical contractor who has installed the wiring in a new building for a contract price of $50,000. The building suffers extensive damage as a result of your completed work. The CGL policy should pay for all the damage to the building. What won’t be covered is the wiring or the work that it will take to reinstall the wiring (your work).

Scenario three—Your impaired property 
You are the manufacturer of a part used in X-ray machines at medical clinics. You install your part in two X-ray machines at two different clinics. After the parts are installed, one machine is damaged because of your product. The clinic then checks the other location and discovers the part you installed could very likely damage the other machine. The CGL policy would fully pay for any damage, including the loss of revenues for the damage to the first machine. However, the second machine is considered “impaired property,” because it has not been physically damaged. What won’t be covered is the clinic’s loss of revenues while the second machine is repaired (impaired property).

Scenario four—Your product recall
You manufacture a backhoe. A rental company derives significant revenues from the rental of your backhoe. You have to recall this product because of a dangerous condition. The rental company may have a legitimate suit against you for loss of revenues from the recall of the backhoe. This is not covered under the standard CGL (product recall).

Don’t be Fooled – Know your Policy’s Exclusions and Gaps:

So now you are concerned about your company’s liability exposures. You want to know what your insurance policy covers. So, you begin to read your entire commercial liability policy. If you get through the first few paragraphs you will be very pleased. The CGL states, “We will pay those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’ to which this insurance applies. We have the right and duty to defend the insured against any suit seeking those damages…” Wow, you think, I can just stop here, this covers pretty much everything.

That’s where you may run into problems. The CGL policy starts out giving broad coverage then it restricts coverage through exclusions, limitations, definitions, and conditions. Four of the exclusions covered above include: Damage to your product; damage to your work; property damage to impaired property; and recall of your products, your work, or impaired property. However, these are only four out of fifteen ordinary exclusions.

What can you do about potential losses that fall under these four or under any of the other ordinary liability exclusions? There are normally three ways to deal with excluded coverage:

1. Avoidance:
   This means ceasing the activities that give rise to the risk. This may only be practical on a limited basis.
2. Self-insure the risk or retention:
   This means you continue the activity but plan to pay the resulting loses out of your pocket. Some keys to properly self-insuring is to: Consider the odds of an occurrence; b) Don’t risk more than you can afford to lose and; c) Don’t risk a lot for a little.
3. Transfer the risk:
   This means you use insurance and various types of hold-harmless agreements. In the above examples, your insurance broker may help you find a company willing to write a separate policy for those specific risks or, help you request that your current carrier delete the exclusion from your policy.