The Fundamentals of Commercial Insurance
Go to: Fundamentals and Definitions | The Attorney’s Role | Obtaining Insurance | Understanding
Common Kinds of Commercial Insurance | The Insurance Plan | Related Information
You will get a general overview of typical types of company insurance in this practice note. It will also be beneficial to you.
the terminology, the procedure by which, and the theoretical foundations of insurance in general, for you to have a deeper understanding of it.
how it is acquired, and how, as the insured’s counsel, you can provide the best advice to a client on commercial business insurance.
problems.
See Business Insurance Policies Review and Business for additional details about business insurance.
The Meaning of Insurance Contracts.
Definitions and Basics
In its most basic form, insurance is a contractual agreement under which the insurer agrees to take on the risk.
of a financial loss experienced by another, often referred to as the insured. In this context, “risk” is best described as the
The possibility that an event may or may not cause financial loss. The notion or transfer of the risk of
The consideration paid is referred to as a premium, and in exchange for the payment of that consideration, there is a loss.
When there is a transfer of risk between an insurer and policyholders with similar risk profiles, or when the risk is assumed, this happens.
“exposures”). Only if that commonality of risk characteristics exists can an insurer accurately predict the probability of
financial risk and sets a premium. The statistical idea of “the law of large numbers” comes into play.
the readiness of an insurance company to take on risk, as well as the premium rate. The law of large numbers is a statistical
a notion that includes an insurer’s evaluation of the frequency and magnitude of losses sustained by a large population over time.
Such data aids in forecasting the frequency and extent of potential future losses.
The Attorney’s Function
A commercial organization may choose to insure against risk unless the law requires it.
The risks to which it could be subjected. If it chooses not to, it is said to “self-insure.” On the potential risks, clients may seek your opinion.
It’s crucial to recognize that the choice is not entirely a legal one, but rather includes a number of financial considerations.
It has ramifications that might necessitate a team approach that includes the client’s financial advisor, internal risk management, and the client’s financial counselor.
and maybe other related experts.
Depending on the risk or combination of risks for which the client chooses to get insurance, they may or may not ask for your help.
purchasing insurance. Small companies frequently don’t employ their lawyers to accomplish this. However, you might do it in conjunction with your lawyer.
A valuable function in making sure the client comprehends the boundaries may be played by an insurance expert.
and coverage triggers. There are cases where insurers deal directly with policyholders, without the use of an agent in between (they are).
direct-writers). In this case, the customer may not have an advocate in the same way that an agent may be.
assisting in risk assessment and providing advice on the kind, price, and other considerations pertaining to the insurance agreement. If that’s the case,
However, in that instance, you may need to take a more proactive role as the company’s attorney. But once more, you might need to take a more active role unless you have certain
client needs are better met by a team of experts you may have in risk management or insurance.
put together and perhaps even guide
Getting Insurance
The Fundamentals of Commercial Insurance
The connection between the insurer and the insured starts with an insurance application. The application is created by the insurer to
collect data upon which the insurer bases its decision—sometimes in conjunction with other data—as to whether to accept the
The process of evaluating that information is known as “underwriting,” and all insurers have criteria against considering an applicant a risk.
which are used to assess the risk posed by the candidate and the acceptability of an application.
“underwriting guidelines.”
The insured and insurer first establish their respective expectations throughout the application procedure. For the insured,
This is accomplished by outlining the physical components of the company operation and, of course, addressing potential risks.
The insurance is established by either refusing the application or giving a policy at a specified premium.
The traditional offer-and-acceptance model of the common law is often followed by regulations. In the majority of cases, when an
The relationship is insured under a somewhat uniform policy that covers the same risk or hazards.
insured on roughly the same terms, regardless of the insurer. When, though, the risks are bigger or more complicated,
The policy may be specifically customized for the insured if they are engaged. In such case, the agreement is often referred to as
includes a “manuscript policy” and clauses that the parties have agreed upon.
See Insurance Applications Process for additional details on the application procedure.
Knowing the Insurance Policy
The terms of a policy can be complicated when it is offered or submitted for review.
as well as the underlying issues. You might be hired to analyze a potential insurance policy and offer your opinion.
analysis of coverage and recommendations. Among the typical queries are the following:
Does the policy cover business property damage?
Does it address the potential liabilities that might apply to a company like mine?
Will the insurance cover any damages sustained by a client as a result of the company’s operations or on its premises?
Which damages are the responsibility of the client-business?
Does the client have to pay the claimant first, even if the nature of the liability and damages are covered?
repayment from the insurer?
Is there cybersecurity coverage or any comparable coverage for computer errors or hacking that results in harm?
to the client, third parties, or both?
Are the policy limits determined by the occurrence or by the individual (there is a difference!), and what are they?
If a loss occurs, what are the responsibilities of your client? Is there a deadline for adherence?
Typical Business Insurance
Commercial General Liability Coverage
The coverage provided by is among the most crucial aspects of a company organization’s insurance plan.
commercial general liability (CGL) plans. These historically broad policies protect against the risk that the insured may
This sort of insurance policy, which protects the policyholder from claims, may injure third parties.
commonly referred to as offering “third-party coverage” – in contrast to claims made by third parties or organizations.
“First-party coverage” policies that cover damage to the insured’s own property are included in this category. See Commercial
Insurance for real estate.
The two primary forms of coverage provided by CGL policies are, as with other insurance policies, indemnity.
(liability) protection and defense coverage
Indemnity or liability coverage pays a third party for injury or damage for which the insured is legally liable. Payment
can be by way of settlement or after a finding of liability at trial. Keep in mind, however, that except in extraordinary
circumstances, the insurer’s obligation to pay is limited to the policy limits purchased.
Most all liability policies, including the CGL, furnish a defense for the insured. That means that the insurer appoints
and pays an attorney (and court costs) to defend the insured in a lawsuit stemming from a covered occurrence.
Prior to a suit being filed, the insurer will investigate the claim and may make a pre-suit offer to resolve it.
Importantly, the insured is obliged to fully cooperate in the investigation and, if suit is filed, in the defense. In most
situations, the insurer has the right to “control the defense” in the sense of deciding whether or not to settle the
claim or go to trial, but the interest of the insured have to be paramount.
When suit is filed and defense counsel assigned, a “tripartite” relationship is created: the insured, the attorney
defending the insured who is paid by the insurer, and the insurer itself. Ethical dilemmas can sometimes develop or
it can be perceived that defense counsel is doing the bidding of the insurer. If that is your perception or that of your
client, you can and should monitor the litigation. While the insurer does have the right to the direct the defense,
there may be remedies available if a poor result for the insured can be traced to the insurer and/or defense counsel.
History and Development of the CGL
The Insurance Services Office (ISO) standard CGL form provides coverage for two categories of occurrences: (1)
bodily injury and property damage and (2) personal and advertising injury. These coverages are discussed in
further detail below.
The earliest standard CGL policy form, which was titled the Comprehensive General Liability Policy, was developed
in 1940 by insurance industry organizations. The industry developed a standard form so that coverage terms and
prices could be easily compared, to allow industry-wide loss statistics to be collected, and to enhance the
consistency of judicial interpretation of policies. Since 1940 the standard form has undergone a number of
significant revisions.
Before 1966, CGL policies generally covered injury or damage “caused by accident.” In 1966, the policy form was
broadened to cover “occurrences,” which was defined as “an accident, including injurious exposure to conditions,
which results, during the policy period, in bodily injury or property damage neither expected nor intended from the
standpoint of the insured.” In 1973, the CGL form was revised to exclude coverage for pollution, unless such
pollution was “sudden and accidental.”
The year 1986 saw several major revisions to the CGL form. First, the pollution exclusion was revised to eliminate
the “sudden and accidental” exception and the policy added exclusions for asbestos and other types of toxic tort
liability. The 1986 revision also offered two different coverage triggers: occurrence and “claims made,” though the
latter proved unpopular with policyholders and has not been widely adopted. See Occurrence or Claims-Made
Policies. Finally, the form was renamed the Commercial General Liability Policy. The CGL form has been revised
numerous times since 1986, most recently in April of 2013, but the core coverage provided has remained the same.
The current standard CGL form is drafted by the ISO.
Because most CGL policies provide coverage on a “per occurrence” basis (i.e., they are triggered by the date of the
claimant’s injury rather than the date of the claim), older CGL policies may provide coverage for claims filed many
years after the claimant’s injury began. Accordingly, it is important to retain all CGL policies.
For more information, see Commercial General Liability (CGL) Insurance and 3 New Appleman on Insurance Law
Library Edition § 16.01 (2018)
Commercial Property Insurance
For many commercial policyholders, their property – physical, tangible, and other, in whatever form the interest – is
a valuable asset. Most large businesses typically purchase first-party property insurance policies, one of the oldest
forms of commercially available insurance coverage They do so specifically to protect their property against fire,