10 Spooky Exclusions Lurking in Your Business Insurance Policies
The phone rings. It’s your Human Resources Director calling to inform you that 12 employees have filed a lawsuit against the company for “Wage and Hour” mishandling under the Fair Labor Standards Act. You immediately call your insurance agent and find out that your insurance policy doesn’t cover this claim. As a result, you spend $125,000 of your own money defending and settling the case. You could have purchased this additional coverage for $800 (annualized).
The above story, unfortunately, is a true one from a technology SAAS company several years ago who I insured. Every insurance policy contains exclusions, as well as coverage limitations found under the conditions, definitions and limits of liability. The most common types of insurance purchased by businesses are Commercial Property, General Liability, Business Owners Policies, Business Auto and Workers Compensation.
For the purpose of this article, I will focus on 13 important exclusions you should know about. Ignoring these exclusions could cost you thousands and thousands if it leads to an uninsured loss. In many cases, you can purchase coverage to fill the “gap” for nominal costs. Check out the Ultimate Guide to Shopping for Business Insurance to learn the steps for optimizing comprehensive business insurance.
When a building is damaged and reconstruction efforts begin, many local communities may impose updated building codes. In the event those updated codes are enforced, or, in some cases, requiring the demolition of undamaged portions, it may result in increased construction costs. Those increased costs are often not accounted for in Commercial Property policies. The common insurance term is called “Ordinance or Law coverage” and it can normally be purchased back onto the policy.
Within Commercial Property policies, there are restrictions and exclusions in coverage for loss of electronic data. In General Liability policies, there are similar exclusions. Commercial Property, General Liability and Business Owner policies are designed to cover damage to tangible property, not digital property.
Enter the advent of “Cyber Liability” insurance to protect your business against damage to your own electronic data (costs to restore, plus loss of income, plus notification costs) and your customers (e.g. lawsuits from those suffering property or financial damages as a result of the breach).
One of our best carrier partners, The Hartford, wrote a great article on Data Breach (or “Cyber”) insurance. Check it out.
Pollution coverage is very restricted (or sometimes entirely excluded) in most Commercial Property, General Liability, Business Owners and Business Auto policies. There are a few exceptions to the exclusions, but for the most part a loss arising from mold/bacteria is not an insurable event.
Owners of apartments, hotels, condo association and contractors, in particular, should consider purchasing a separate Environmental Insurance policy. The costs have come down dramatically in the last decade, as David Dybdahl of ARMR, points out in an informative article written for a major insurance publication.
Your business’s Commercial General Liability insurance excludes bodily injury claims from “employees” (which are clearly defined in the policy) or any type of statutory work comp claim. You will need to purchase Workers Compensation coverage for this exposure.
It’s commonly believed that you are not liable to work comp statutes until you have a certain number of employees. This is a myth. There are laws on minimum number of employees before being required to purchase work comp insurance, but this does not exonerate you from the statutory liability in the event your employee is injured.
One important coverage gap caused by the Employer Liability exclusion in General Liability policies relates to Leased Workers. Under the GL insurance policy, “leased workers” are defined as “employees”. What this means is that if they’re injured on the job for you and sue your company for damages, then your insurance policy will deny coverage. Your work comp policy likely will not respond either, since by statutory standards they are NOT an employee of your business. This create a very obvious gap in coverage. There are solutions to this problem, so be sure to discuss with your Agent.
Sometimes, particularly with Professional Liability or General Liability policies written by surplus lines carriers, there may be Punitive Damages exclusions. What this simply means is that any damages awarded to the plaintiff over and above the “General Damages”, would not be insurable.
Some states do not even allow punitive damages to be insured, but many do, so it’s important to maintain this coverage in our policies whenever possible. The cost to buy the coverage back onto your insurance policy, if available, is usually quite nominal.
Employee lawsuits related to discrimination, harassment or wrongful termination can be very common and quite costly to defend. Commercial General Liability and Business Owner Policies exclude this exposure. Purchasing Employment Practices Liability insurance is a great move for any business with employees.
If your business involves any type of professional exposure whereby liability claims may arise from errors or omissions as a result of your work or advice, then beware this is NOT covered under typical General Liability or Business Owners policies. Separate coverage may be purchased, but it varies tremendously, depending on your type of work. For example, there are specialized Professional Liability policies just for physicians, dentists, lawyers, accountants, engineers, etc.
There are essentially two types of liability policies: Claims Made and Occurrence. If you purchase a Claims-Made policy (most common with professional liability), then it’s ideal to buy “full prior acts”.
Claims-Made vs Occurrence:
- Occurrence policies – coverage is triggered by an “occurrence” of an event which leads to alleged damages
- Claims-Made policies – coverage is triggered by an “occurrence” followed by an actual claim, but the occurrence date must be on or after the Retro Date (established within the policy)
Under the Claims-Made insurance policy, the two triggers bring into play this potential coverage gap known as the Retro Date. If your insurance policy has a Retro Date, then any occurrences prior to that date are not insurable. If your policy does NOT have a Retro Date, then it’s referred to as “Full Prior Acts”, meaning all prior events are insurable if claims arise. This is best.
If your business ever has property of others in your “care, custody or control”, then your standard Commercial Property and General Liability or Business Owners policies may not insure the exposures if damage occurs to that property. For example, a dry cleaner holds customers’ clothing and a marina holds customers’ boats. In both cases, special coverage is needed to protect those customers’ goods from damage while in your possession.
If your business does NOT own any vehicles, it’s likely that you or your employees drive their own autos on company errands or between job sites. In these circumstances, you can purchase, at a nominal price, coverage for Hired & Non-Owned Auto Liability to protect your company in the event an employee hits a bus full of lawyers while on company business in their own auto (which is a business “non-owned” auto). It can be purchased as a separate policy or sometimes as an extension to your Business Owners or General Liability policy.