What is a Legal Liability Coverage Form?
A legal liability coverage form refers to a written agreement between an insurer and the insured which outlines an extension of coverage that extends to the actions of the insured in which the insured is held legally liable for losses or damages arising from covered risks. In insurance contracts, this typically applies to situations where the insured’s negligence causes harm through error or omission when conducting business, thus injuring a third party or causing damage to their property.
These forms are customarily used in commercial general liability (CGL) policies in addition to the further stipulations and definitions. The purpose of such an instrument, beyond extending coverage, is to stipulate limitations on the indemnity provided by the insurer in the case of a legal liability claim . The coverage form generally explains that the policy will pay only for an insured’s own gross negligence and will not, or policy limits will apply, in the case of joint negligence with the other party. In addition, the form will oftentimes stipulate requirements on how to report and submit claims to be eligible for coverage.
Legal liability coverage forms play an important role in keeping the insured and insurer in compliance with the terms of the policy agreement. In the event of a liability claim, it also helps substantiate proof that shouldn’t be confused with errors or omissions insurance; general liability coverage usually excludes errors and omissions coverage.
Legal Liability Coverage Types
This section explains the different types of business legal liability coverage forms, and what each of them covers or excludes. It also explains the difference between the general liability and professional liability forms.
General liability coverage forms cover liability arising from an insured’s alleged failure to render a professional service, or malpractice. Actions or omissions, however negligent, that result in property damage or bodily injury to others are also covered.
Professional liability coverage forms, on the other hand, do not provide any coverage whatsoever for claims arising out of your alleged acts, errors, or omissions in relation to your professional services. Claims arising out of your commercial activities, however, are covered, so long as you do not provide a professional service as defined by the coverage form.
When it comes to product liability insurance, an insured needs both the general liability and professional liability coverage forms. The general liability form provides coverage for bodily injury or property damage arising out of products that you manufacture or sell. The professional liability form provides coverage for claims arising out of inaccurate or negligent advice you provide to your clients or customers.
For example, assume that you manufacture and sell a certain type of scaffolding. As a result of the scaffolding’s design, your client falls and suffers a serious personal injury. Assuming the scaffolding does not collapse due to its manufacturing, you have no coverage for that claim under the general liability coverage form since that form requires "property damage" to have occurred. On the other hand, if the scaffolding collapses because you provided negligent advice at the design stage, you would have coverage under the professional liability form that requires negligent advice.
Liability Coverage Form Must-Haves
Addressing legal liability coverage forms requires a quick overview of the typical components of such coverage forms. The number of pages within the coverage form and the breadth and depth of the language contained in the contract can vary based on the writer and the type of liability being insured. However, there are certain sections of a coverage form that will be present in most policies or that are considered standard for that type of coverage form. The following is an overview of the most common components that are located within a legal liability coverage form:
Declarations
Declarations are found at the beginning of the policy and include such information as: the name of the insured, the address of the insured, the coverage period, the coverage limit, premium, type of policy, form number, forms that are part of the policy, the named insured, and a description of the property covered.
Definitions
Definitions of the key terms used within the coverage form are often included in this section and can help you understand the meaning of the terms used throughout the policy.
Insuring Agreements
The insuring agreement sets out what risks are insured. Insuring agreements can vary in breadth and depth depending on the type of coverage. The insuring agreement contains the promise of the insurance company to pay benefits in accordance with the coverage provided. Other relevant sections of the coverage form often reference the insuring agreement.
Conditions
The conditions section sets forth the duties of the insured. These conditions must be fulfilled by the insured in order for coverage to apply. A condition often provides a specific time period in which an action must be performed. There are three types of conditions that may be included in a policy: precedent to liability, subsequent to liability, and concurrent. When a condition is precedent to liability, the insured must meet the condition before coverage applies. If the insured does not meet the condition, then coverage does not apply. A condition that is subsequent to liability requires something to be done after liability, i.e., notice of the suit, to bar recovery under the policy. A condition concurrent to liability involves something that may be done in the course of the performance and during the period of liability.
Exclusions
Exclusions set forth items/areas of risk that are not covered by the policy. Exclusions can be broad in nature and exclude certain forms of liability altogether or can be narrow in nature and exclude coverage for certain forms of liability against named parties.
Endorsements
Endorsements provide revisions to the basic form of the coverage. They may be used to increase or decrease limits, change or remove exclusions, add supplementary coverages, or to amend the definitions contained within the coverage form. The language in the endorsement will control, and any conflicts between the endorsement and other parts of the coverage form are resolved by reference to the endorsement.
How to Select the Correct Coverage Form
When it comes to selecting the appropriate legal liability coverage form for your organization, an understanding of your specific requirements is vital. Here are some factors to consider in your decision-making process: The Nature of Your Business: The kind of law-related services your organization provides will have a direct impact on the level of risk it faces in the event of an alleged error. For instance, if your organization deals with clients’ money, you will be at higher risk for loss exposures such as forgery, embezzlement and misappropriation of funds. Business Size: Most organizations seek legal liability coverage because they recognize the importance of financial protection even though they may not understand the various risks they face. Your business size will determine the level of risk and the amount of financial protection you require. For example, small businesses may only need protection for errors-and-omissions cases. Larger businesses may need coverage for malpractice and bodily injury cases. Industry Standards: You have a legal responsibility to protect your clients and maintain their privacy. If you fail to comply with industry standards, you could face serious legal and financial repercussions. Make sure your coverage adheres to state and federal laws concerning regulatory compliance. For more information regarding coverage options, buyers should consult their legal and financial advisors, who can help you better understand your specific needs. Potential Risks: The industries that produce the greatest income and profits also pose the highest levels of risk. Understanding your risks can help you make better informed decisions about your coverage options.
Exclusions and Limitations Explained
One of the biggest things that can bite policy holders when it comes to a legal liability coverage form are limitations or exclusions. There is a general rule of thumb that when it comes to exclusions, they have to be clear and conspicuous. In other words, you should be able to read them and understand that they apply to you. If you cannot understand the language after reading it, or if the language is hidden among other language that is smaller or harder to read, you have a problem.
Another important issue is to realize whether or not something is truly excluded or simply subject to a sublimit. A sublimit means that the insurance carrier will otherwise pay what it owes you under the general clause of the policy now has a limit that is less than that amount . Take workers’ compensation and bodily injury on the job. As long as it’s within the course and scope of employment, a legal liability coverage form will pay you what it owes you. But what if an employee is killed on the job? There may be a sublimit that labels that underinsured workers’ compensation or another situation with workers’ compensation where the insurer caps out the amount of the money it owes. So instead of paying you the full part of the policy, it will pay you a percentage.
There are lots of exclusions, and what’s most important is for you to examine your legal liability coverage forms and make sure that you’re not unduly limited by something that applies to you.
Claim Filing Process for a Liability Coverage Form
If you have a claims made legal liability coverage form, you are under an obligation to report the claim in accordance with the specific provisions of your policy. As a general rule, most claims made policies ask for prompt notice of any claim or wrongful act. What this means is that you must submit a formal claim to the insurance company. Simply reporting the claim to your agent will not suffice. Many policies contain specific notice provisions. For example, some policies provide that you must provide notice of the claim to the insurance company, and not the agent.
If you delay, or worse, fail to file a claim in a timely manner, the insurer may be able to argue that you violated the terms of the policy. If it can point to such a violation, the insurance company may deny the claim.
Most policies require that a claim be submitted in a certain way. If a claim falls into the category of a claim "made against" you, you need to submit the claim on a form that the insurer typically provides. The form generally requires the claimant to be notified of the claim. The claim must be verified by the claimant. The claim must provide a description of the alleged wrongful acts. The reason for the formality of the claim form is to assist the insurance company in adjusting the claim. If you do not follow the guidelines as to how claims are to be submitted, you may be giving the insurance company a reason to turn down the claim.
A claim under a civil proceeding or arbitration generally requires that the complaint or petition be served on the insurance company. In many cases, the policy conditions will require that the lawsuit is filed with the carrier. In the case of an "order of deposition," some policies require that you follow the policy conditions which may be different than if a lawsuit was filed. At the very least, a careful reading of your coverage will help ensure that your claim is submitted in the proper manner.
If you suffer a judgment or settlement, check your policy to determine whether the judgment or settlement needs to be approved by the insurance company. Typically, the insurance company will have the right to advise you whether to appeal a judgment or settlement and who will handle the appeal. Again, failure to notify the insurer in a timely manner may result in a denial of the claim.
How Legal Liability Coverage Impacts Businesses
The impact of having legal liability coverage is significant. When well-designed, legal liability coverage forms can put a greater pool of resources at the disposal of the insured to manage risks. A common practice in the industry is for the carrier to notify insureds (often through their brokers) of the various resources available at no additional charge to assist insureds facing the financial burdens of lawsuits.
These resources can include assistance with budgeting, pre claim evaluation and guidance, case management, expert witness identification and background investigations and forensic accounting. Legal liability programs can also help insure that the appropriate litigation resources are available as early as possible in the process.
In addition, when correctly structured, they can offer resources to aid in crisis management and public relations. Expert legal counsel and damage experts can be retained to advise on these matters and to develop the type of response strategy that can enhance the carrier’s relationship with key constituencies.
To protect the company’s reputation in the community and among customers and suppliers, prompt crisis management is critical. This type of comprehensive and sophisticated approach is not available from every legal liability program. In some cases, it is offered directly by the carrier as an enhancement of the coverage. But there are other times when it is only available from an outside vendor. The fact that these services are sometimes offered by outside vendors hired by the insurance company does keep the process somewhat neutral.
Latest Trends in Legal Liability Insurance
Recent trends indicate an increased willingness by insurers to offer specialization in legal liability coverage forms. Recent loss control efforts have been implemented aimed at reducing the frequency of claims against certain high risk firm practices. Insurers are also becoming more open to creative application of coverage forms, including reinsurance products, to mitigate risks and enhance value for firms.
Additional coverage forms have emerged as insurers look to capitalize on their functional niche ability to tailor coverage to best avoid risk to the carrier while providing much client value. These new coverage forms are aimed at additional exposures faced by firms, given the current environment of tighter budgets, shrinking workforces and the cessation of certain work. While some coverages are standalone products, such as EPLI, third-party cyber, and fiduciary liability, others offer new or enhanced coverage at more competitive pricing as compared to more established products . For example, further acknowledgement of the risks inherent in e-discovery, which has become almost ubiquitous in large litigation matters, has resulted in the emergence of e-discovery insurance, a stand-alone coverage form designed to address risk of exposure to the e-discovery process.
There appears to be a softening in the market in 2014, as concerns over the Dodd-Frank Act and its impact on the law firm market have begun to settle and risks have been better assessed. Along with this softening in the market, there have been more aggressive tactics to win business through decreased premiums and overall increased coverage. This broker-driven tactic has also resulted in more flexibility related to coverage negotiations and creative payment plans. Comparison of policies and endorsements continues to be a challenge, as policy language may be customized to some extent or be incredibly similar across the market because most do not offer material changes to policy language. Confusion is further increased given the myriad of unique features that each policy offers, which will vary according to risk management goals and strategies.