By Gwenyth Luu, Director – Commercial Lines
Any organization that purchases Commercial General Liability (CGL) insurance should have a good understanding of how limits of liability apply to claim payments in the policy. That information not only helps organizations choose what the best limits are for their policy, but it also helps them understand the requirements for umbrella or excess liability policies.
People often speak about General Liability as if it is one coverage. General Liability is really a broad term that refers to a package of coverages and coverage limits. These coverages and how they work are often misunderstood. On the most basic level, the CGL policy covers against lawsuits alleging bodily injury, personal injury, and property damage due to negligence.
A CGL policy has six different limits shown on the declarations page. While those limits are individual, they are also interrelated. What does that mean? Simple: a reduction due to a payment on one limit will reduce other limits as well. There is one caveat: after issuance of a CGL policy, any attempts to extend the policy period through an endorsement for less than 12 months has an adverse effect on the aggregate limits. It is better to write a longer policy period into the CGL policy at inception than to extend it in most cases.
Two of the six limits are Aggregate Limits and are related. Aggregate Limit means that it is the most an insurer will pay during a policy period. Once the insurer has paid the full amount of the Aggregate Limit, the insurer has no further obligation to pay the insured for any claims or suits that fall within the exhausted aggregate limits. Hence, an umbrella or excess liability policy aims to drop down over an exhausted aggregate underlying limit.
As we go through the limits, it may get confusing. To help illustrate the concept, imagine two large water tanks at full capacity as Aggregate Limits (at the beginning of the policy period) and four smaller, unfilled water tanks for the other CGL limits. Each small water tank is connected respectively to its own large water tank. When claims are paid from the smaller tanks, it draws water from the larger Aggregate tanks, reducing the water from the Aggregate tanks until they are empty. Once the large water tanks are empty, it means the Aggregate Limits are exhausted.
The General Aggregate Limit
The General Aggregate Limit is the most the insurance company will pay in any one policy year for claims arising out of your organization’s operations: Bodily Injury and Property Damage (Coverage A), Personal and Advertising Injury (Coverage B), and Medical Payments (Coverage C).
Products-Completed Operations Aggregate Limit
This aggregate limit indicates how much an insurer will pay for damages because of bodily injury or property damage resulting from the Products-Completed operations hazard. The Products-Completed Operations Aggregate is separate from the General Aggregate Limit. Payments for damages out of the Products-Completed Operations Limit does not affect the General Aggregate limit and vice versa. Under the CGL policy, the total liability exposure for the insurer is the sum of the two aggregate limits.
To be a bit more specific, the Products-Completed Operations Limit only applies to the following cases of property damage or bodily injury:
- Incident occurred away from the premises of the named insured, and
- Arose due to products of the named insured that are no longer in the possession of the named insured, or
- Arose due to work that was completed by the named insured.
- Personal and Advertising Injury Limit
Personal Injury refers to slander, libel, invasion of privacy, and defamation of character. Advertising Injury refers to false advertising practices. This coverage provides protection from suits related to any of these offenses. The most the insurer is required to pay is established in this Personal and Advertising Injury Limit. There are a couple of things to know about this limit:
It is independent of the Each Occurrence Limit in Coverage A (Bodily Injury and Property Damage); however, an insurer may be required to pay both the Personal and Advertising Injury Limit and Each Occurrence Limit.
It is applied not to each offense but to each person or organization. Regardless of the number of persons or organizations claiming damages, the most the insurer is required to pay is the Personal and Advertising Injury Limit.
Each Occurrence Limit
This is the maximum that the insurer is obligated to pay for any damages within Coverage A and expenses within Coverage C. Despite a separate General Aggregate Limit for Products-Completed Operations, all damages paid under Coverage A and all expenses paid under Coverage C are subject to the Each Occurrence Limit. For the purpose of this article, an “occurrence” by policy definition is defined as an accident, including continuous or repeated exposure to substantially the same general harmful conditions.
An example of this would be a cheese processor preparing a shipment improperly, resulting in the sale of contaminated or otherwise compromised cheese. As a result, multiple people become ill. Each one of those individuals then sues the company. Does this count as multiple occurrences or does it count as one? There are two views. The first looks at the cause of the liability, which would consider them all to be the same occurrence. The second looks at the effect, which would find each individual injury to be a separate occurrence.
Damage-to-Premises-Rented-to-You Limit
This separate limit applies to fire damage to premises rented from a landlord by the insured and to damage—regardless of cause—to premises or their contents occupied for seven days or less by the insured. This limit applies to any premises and is a sublimit of the Each Occurrence limit. Payments under this coverage reduce the Each Occurrence and General Aggregate limits.
Medical Expense Limit
Medical Expenses are Coverage C, and they are meant to pay for reasonable medical treatments resulting from accidents or injuries, regardless of who is at fault. Like the Damage-to-Premises-Rented-to-You Limit, payments under this coverage reduces the Each Occurrence and General Aggregate limits.
Understanding not only your CGL policy but also how limits can come into play if a claim is made are essential to successfully protecting your organization from risk. After all, having coverage is good, but having the wrong understanding isn’t going to help anyone. It should be more than apparent that the way limits work and connect to each other are complicated, and having a professional there to help is essential.
