Liability insurance policies include provisions, known as “exclusions,” that limit or eliminate coverage. Insurance companies put exclusions in policies for various reasons: Because another type of policy covers that kind of loss, to limit the cost of the insurance, and because some types of losses are so severe that they are uninsurable (for example, losses resulting from a war). Many exclusions eliminate coverage for some incidents or things but give it back for others. The Commercial General Liability policy (CGL) does not cover losses for which the insured assumed liability under a contract, but it gives back coverage for liability assumed under “insured contracts,” as the policy defines that term. However, there are some exclusions, called “absolute exclusions,” that eliminate coverage entirely with no give-back. Left unaddressed, these exclusions can leave a business exposed to large uninsured losses.
Insurance companies did not create these exclusions to cheat their customers. Rather, over the years they found that courts were interpreting policies in ways that the companies had not intended. In the 1970s and early 1980s, companies used wording such as, “Coverage does not apply to,” or “to any claim based upon.” They thought this language clearly stated that they did not intend to cover certain losses. Some courts disagreed, found the wording to be ambiguous, and ordered the companies to pay the claims anyway. Because the companies had not expected to pay these claims, they had not charged premiums to cover them. Given the choice between increasing their premiums to cover the losses and tightening up the exclusions’ language to make them more effective, the companies changed the wording.
For example, during the 1970s, courts ruled that liability policies covered pollution incidents, much to the dismay of the insurance companies that issued them. Consequently, the standard CGL policy now states that it does not apply to injury or damage arising out of the “actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape” of pollutants at or from a premises, site or location that any entity insured under the policy ever owned, occupied, rented or borrowed. Further, it eliminates coverage for pollutants the insured transported, sites where it stored them, or brought to a job site by the insured or its contractor. The companies have attempted to make this exclusion as precise and unambiguous as possible so that they will not receive future surprises in court.
Other types of Liability insurance, such as Employment Practices Liability and Errors & Omissions policies, now have exclusions that are similarly broad in scope. They may include wording that excludes coverage for losses “directly or indirectly “based on, attributable to, arising out of, resulting from, or in any manner relating” to a particular act or hazard. Again, the purpose of this language is to eliminate any possibility of unintended coverage.
These exclusions potentially can leave an organization with no coverage at all for what might be a catastrophic event. If an Employment Practices Liability policy excludes coverage for anything that the insurance company might construe as a bodily injury, then the organization will have no protection against a claim for emotional distress, which can be the most expensive part of an employment practices loss. The absolute pollution exclusion can eliminate coverage for incidents that occurred many years ago at a property the insured owned but never occupied.
To reduce the chances of uninsured losses, work closely with our insurance agents to identify potential coverage gaps and possible solutions, such as a separate Pollution Liability policy. The additional cost of these policies is small compared to the financial damage an uninsured loss could inflict. With appropriate insurance in place to fill the gaps, an organization can survive a serious incident.