“But I have insurance for that”

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Albert GarciaWEBHow many times has a professional or small business owner who has been served with a lawsuit uttered those words in a state of anxiety? If you paid thousands of dollars in insurance premiums over the years only to have your insurance company deny you protection once you are sued, anxiety will be the least of your worries.

Most professionals and business owners carry liability insurance to protect them in the inevitable event that someone commits a mistake in the operation of their business and they are sued for the damages caused by that mistake. When that happens, liability insurance is supposed to protect you in two basic ways—pay an attorney to defend you in the lawsuit and, if a judgment is rendered against you, to pay the judgment up to the amount of the insurance policy’s limits. Have you read your liability insurance policy to see what kinds of claims it covers and, most importantly, what claims are not covered?

The most common liability insurance policy that is sold to businesses is called a commercial general liability policy (“CGL Policy”, for short). The policy itself is dozens of pages long. A page or two consist of what is covered, i.e. the Coverage Forms. The rest of the policy consists of “exclusions” and “conditions” that allow the insurance company to deny you coverage no matter how much you have paid in premiums.

I looked at a typical CGL Policy for this article and counted thirty-two standard exclusions to the two forms of coverage provided by the policy. Depending on the insurance company and the amount of premiums you pay, the standard CGL Policy can be amended by an endorsement that adds even more exclusions. For example, I recently worked on a case where a security company that provided security services at several bars and taverns had an insurance policy that excluded coverage for any security services that are provided at a business at “which more than 50% of sales or revenues are derived from the sale, consumption, or dispensing of alcoholic beverages.” Providing security at bars was the core of their business and yet their expensive insurance policy provided no coverage for that! That is like a doctor buying a liability policy that does not cover lawsuits arising from his care of patients or an attorney having a policy that does not cover legal malpractice.

In addition to “exclusions”, a liability insurance policy will also have certain “conditions” that the insured party must comply with. The most common condition requires the insured party to give the insurance company prompt written notice when they are sued. This gives the insurance company the opportunity to review the allegations in the lawsuit and hire the attorney of their choosing to defend the insured party in the lawsuit. If you are sued and you do not give prompt, written notice of the lawsuit, the insurance company can refuse to provide you with insurance coverage. In one case I was involved in, a large business was sued and had $5,000,000 in liability insurance coverage. However, they did not send the insurance company a copy of the lawsuit with a short letter informing it that they had been sued. The insurance company therefore refused to hire a lawyer to defend them in the lawsuit. The company ended up losing the lawsuit and a multi-million judgment was entered against it. The insurance company also refused to pay that judgment—all because the company did not promptly notify the insurance company that they had been sued.

It is crucial for all professionals and small business owners to understand what their liability insurance policies cover and do not cover. It is a mistake to just leave it in the hands of their insurance agent and forget about it. One should sit with his or her insurance agent and have them explain what aspects of their business are and are not covered in the event they are sued.