General liability

What Is General liability?

General liability, often referred to as Commercial General Liability (CGL) in the United States, is a broad type of insurance policy that provides coverage for common business risks, encompassing bodily injury, property damage, and personal or advertising injury that a business might cause to a third party. This type of coverage falls under the broader category of commercial insurance and is considered a foundational element of a comprehensive risk management strategy for businesses. General liability insurance typically covers legal defense costs and any payouts for which the insured party is found legally liable.⁷

History and Origin

The origins of modern liability insurance can be traced to the late 19th century as industrialization brought new forms of risk for businesses and their employees. In the United States, the first liability insurer for personal injury accidents emerged in 1886. Early policies primarily covered business tort liability for employee accidents and injuries to non-employees caused by business operations.⁶ The growth of industries like railroads further spurred the development of liability insurance to address new challenges in transportation and commerce.⁵ This period also saw the earliest attempts at insurance regulation, with New Hampshire establishing the first formal agency in 1851.⁴ By the early 20th century, as businesses became more complex, the insurance industry evolved to offer more specialized products, including various forms of general liability coverage.

Key Takeaways

• General liability insurance protects businesses from claims of bodily injury, property damage, and personal or advertising injury to third parties.
• It covers both legal defense costs and compensatory damages up to the policy limits.
• This type of insurance is a core component of a business's risk management strategy.
• General liability policies typically include per-occurrence and aggregate limits, defining the maximum payout for a single incident and over the policy period.
• Certain risks, such as professional errors, employee injuries, or automobile accidents, are generally excluded from general liability coverage and require separate policies.

Formula and Calculation

General liability insurance does not typically involve a specific formula for calculating risk or coverage in the same way that actuarial science might calculate life expectancy. Instead, the premium for a general liability insurance policy is determined by various factors through a process known as underwriting. These factors include:

• Type of business: Different industries carry different levels of inherent risk.
• Business size and revenue: Larger businesses with higher revenue often face greater exposure to potential claims.
• Location: Geographic location can influence risk due to local laws, population density, or environmental factors.
• Claims history: A business with a history of frequent or costly claims may face higher premiums.
• Coverage limits and deductibles: Higher coverage limits increase the premium, while higher deductible amounts can lower it.

Insurance companies assess these variables to estimate the potential for claims and set a premium that adequately reflects the risk.

Interpreting the General liability

Interpreting general liability insurance involves understanding its scope and limitations. A general liability policy is designed to cover third-party risks associated with a business's general operations, premises, and products or services. For instance, if a customer slips and falls on a business's property, the general liability policy would typically cover their medical expenses and any resulting legal liability. It's crucial for businesses to review their policy carefully to understand what is covered and what is specifically excluded. The policy specifies "per-occurrence" limits, which is the maximum amount the insurer will pay for a single claim, and an "aggregate" limit, which is the total maximum the insurer will pay during the entire policy period. Understanding these limits is essential for ensuring adequate coverage and managing potential financial exposure.³

Hypothetical Example

Consider "Smooth Moves Moving Company," a small business specializing in residential and commercial relocations. One day, while moving furniture into a new office building, a Smooth Moves employee accidentally drops a large filing cabinet, causing significant damage to the building's lobby floor. The building management holds Smooth Moves responsible for the repairs.

In this scenario, Smooth Moves' general liability insurance policy would come into play. The property damage caused by their employee's actions would likely be covered. The insurer would investigate the claims, cover the cost of repairing the damaged floor, and handle any legal fees if the building management decided to sue. This protection prevents Smooth Moves from incurring substantial out-of-pocket expenses that could severely impact its financial stability.

Practical Applications

General liability insurance is indispensable for almost any business, regardless of size or industry, because it addresses fundamental risks inherent in daily operations.

• Premises Liability: It covers incidents occurring on the business premises, such as a customer sustaining a bodily injury due to a wet floor.
• Operations Liability: This applies to injuries or damages arising from the business's ongoing operations, like a construction company accidentally damaging underground utility lines while excavating.
• Product Liability: If a business manufactures, distributes, or sells a product that causes injury or damage, the general liability policy may offer product liability coverage for resulting claims.
• Advertising and Personal Injury: This includes claims related to libel, slander, copyright infringement in advertisements, or wrongful eviction.

Regulatory bodies, such as the NAIC (National Association of Insurance Commissioners), play a vital role in establishing standards and best practices for the insurance industry in the U.S., which indirectly influences the practical application and consumer protection aspects of general liability policies.² Additionally, federal regulations, like those overseen by the eCFR regarding consumer protection in the sale of insurance, ensure fairness and transparency in how these policies are offered and managed.¹

Limitations and Criticisms

While general liability insurance offers broad coverage, it has specific limitations and does not cover every type of business risk. Crucially, general liability policies typically exclude:

• Employee Injuries: Injuries sustained by employees on the job are generally covered by workers' compensation insurance, not general liability.
• Professional Mistakes: Errors or omissions in professional services (e.g., an architect's design flaw) are covered by professional liability insurance, also known as errors and omissions (E&O) insurance.
• Automobile Accidents: Damage or injuries involving business vehicles are covered by commercial auto insurance.
• Intentional Acts: General liability policies do not cover damages or injuries resulting from intentional acts or criminal behavior by the insured.
• Punitive Damages: While policies generally cover compensatory damages, punitive damages (designed to punish the wrongdoer) are often excluded or limited by state law.

A common criticism, particularly in the past, has been the complexity of insurance policy language, which can lead to disputes over coverage. The Insurance Information Institute provides insights into the evolution of insurance, highlighting how the industry continually adapts to new risks and regulatory environments. Despite efforts to standardize policies, the interpretation of certain clauses, such as those related to "faulty workmanship" in construction, can still be a point of contention between insurers and policyholders.

General liability vs. Professional Liability Insurance

General liability and professional liability insurance are both crucial forms of business insurance, but they cover distinct types of risks. The primary difference lies in what they protect against.

• General liability protects a business from third-party claims of bodily injury, property damage, and personal or advertising injury that arise from the business's general operations, premises, or products. For example, if a customer trips over a loose rug in a retail store and is injured, general liability would cover the claim.
• Professional liability insurance, also known as errors and omissions (E&O) insurance, protects businesses and individuals who provide professional services against claims of negligence, errors, or omissions in the professional services they render. For instance, if an IT consultant provides faulty advice that leads to a client's data breach, professional liability insurance would cover the resulting damages and legal defense costs.

While a business might combine general liability with commercial property insurance into a business owner's policy, professional liability is almost always a separate policy, as it addresses a different facet of a business's legal liability.

FAQs

What does "per-occurrence limit" mean in general liability?

The per-occurrence limit is the maximum amount your general liability insurance policy will pay for any single covered incident or claim. For example, if your limit is $1 million per occurrence, the insurer will pay no more than $1 million for all damages and legal costs related to one event, even if the total damages exceed that amount.

What is an "aggregate limit" in general liability?

The aggregate limit is the total maximum amount your insurer will pay for all covered claims within a specific policy period, typically one year. Once this limit is reached, the insurer will not pay for any further covered claims until the next policy period begins, regardless of the per-occurrence limit. Understanding both the per-occurrence and aggregate limits is key to effective risk management.

Does general liability cover employee injuries?

No, general liability insurance typically does not cover injuries sustained by your employees while on the job. These types of injuries are usually covered by a separate policy called workers' compensation insurance, which is often legally required for businesses with employees.

Is general liability the same as a business owner's policy (BOP)?

No, general liability insurance is a component of a business owner's policy (BOP), but they are not the same. A BOP is a package policy that combines general liability coverage with commercial property insurance and often other coverages. It's designed to provide comprehensive protection for small to medium-sized businesses.

Why do I need general liability if I have other types of insurance?

General liability covers a fundamental set of risks that other specialized policies do not. For instance, while you might have commercial auto insurance for vehicles or professional liability for errors, general liability covers the "slip and fall" type of incidents, property damage caused by your operations, or claims of slander that could occur in any business setting. It provides a foundational layer of protection against a broad range of common third-party claims.