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AOF Insurance

Lesson 10Commercial Liability Insurance

Student Resources

Resource Description

Student Resource 10.1 Scenarios: Commercial Liability Cases

Student Resource 10.2 Anticipation Guide: Commercial Liability Insurance

Student Resource 10.3 Reading: Commercial Liability Insurance

Student Resource 10.4 Project Chart: Liability Risks

Student Resource 10.5 Reading: Types of Commercial Liability Coverage

Student Resource 10.6 Project Activity: Types of Commercial Liability Coverage

Student Resource 10.7 Instructions: Liability Risks Poster

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AOF InsuranceLesson 10 Commercial Liability Insurance

Student Resource 10.1

Scenarios: Commercial Liability Cases

Stella Liebeck vs. McDonald’s RestaurantsStella Liebeck, a 79-year-old woman from Albuquerque, New Mexico, sued McDonald’s for more than $2 million dollars after she received third-degree burns when a cup of coffee she ordered from the drive-through window of a McDonald’s restaurant spilled on her lap while she was trying to add cream and sugar. Liebeck was wearing cotton sweatpants; they absorbed the coffee and held it against her skin as she sat in the puddle of hot liquid for more than 90 seconds, scalding her thighs, buttocks, and groin.

Austin Aitken vs. NBCIn a lawsuit against NBC, Austin Aitken claimed that he experienced great suffering, injury, and pain when he watched an episode of the NBC show Fear Factor where contestants were eating rats. Aitken claims that watching the disgusting sight made him vomit and caused severe dizziness, which in turn caused him to run into a doorway. Aitken asked for a reward of $2.5 million.

Roy Pearson vs. ChungRoy Pearson, a Washington, DC, judge, sued a dry cleaning business for $67 million. According to Mr. Pearson, the dry cleaners lost his pants and refused his demands for a large refund. Pearson believed that a “Satisfaction Guaranteed” sign in the window of the shop legally entitled him to a refund for the cost of the pants, estimated at $1,000. Pearson reduced his demands from $67 million to $54 million. The $54 million total included $2 million in “mental distress” and $15,000, which he estimated to be the cost of renting a car every weekend to go to another dry cleaner.

Richard Grimshaw vs. Ford Motor CompanyThirteen-year-old Richard Grimshaw sued Ford Motor Company after he was left badly burned when the Ford Pinto he was in caught fire after being rear-ended. Killed in the crash was the car’s driver, Lily Gray, Richard’s neighbor. Grimshaw’s lawyers argued that Ford executives had made a decision not to install needed safety features because their cost would have been greater than simply paying for damages from lawsuits resulting from injuries and deaths due to the lack of safety features.




Anticipation Guide: Commercial Liability InsuranceStudent Name:_______________________________________________________ Date:___________

Directions: For each of the statements below, circle whether you agree or disagree and write one reason to explain your guess. Then take notes on what you learn about this topic in the assigned reading or presentation.

Unethical companies get sued the most.

My guess: I agree I disagree

My reason:

I learned:

Most commercial liability insurance policies cover all forms of liability risk and pay for whatever the cost of liability damages might be.


My reason:

I learned:

Commercial liability rates are set according to how much the company is willing to pay, through an auction in competition with other companies.


My reason:

I learned:




Reading: Commercial Liability Insurance

This presentation provides an overview of commercial liability insurance, one of the most important types of insurance an organization can purchase. It answers some of the following questions:

• What is commercial liability insurance? How is it the same as and different from personal liability insurance?

• What sorts of things does commercial liability insurance cover? What does the insurance company do?

• What are the most common commercial liability products?

• What are the key parts of a commercial liability policy?

• How do insurers set rates for commercial liability coverage?

• How can companies keep their insurance premiums low? What happens if a company is underinsured?



Commercial liability insurance is one of the most important components of a comprehensive risk management plan. It provides protection against lawsuits from third parties and claims for damage due to negligence by the insured. It is important for businesses both large and small, nonprofit organizations, and even government agencies.



Both commercial liability insurance and personal liability insurance have the same basic purpose and work in similar ways. Both protect the policyholder from third-party lawsuits due to losses or damages.

If a covered peril occurs, the insurance company will pay claims up to the covered limit, minus any deductible. It will also provide legal representation to the insured.

One important difference between personal and commercial insurance is in the variety of liability insurance products for businesses. Because there are so many different types of businesses, and such a wide variety of perils that may occur, insurance companies have developed specialized liability policies to cover them.



Because many companies come into contact with thousands (if not millions) of people each month, including customers, suppliers, and distributors, the risk of lawsuits is great for many companies, often exceeding the risk of loss due to damages to their own property.

The main purpose of all liability policies is to protect the policyholder from legal fees and awards resulting from lawsuits by third parties, up to the limit of the coverage. In most cases the insurance company will represent the policyholder in court and will often try to settle out of court for an amount that is under the limit of coverage.

A third party can be any person or organization, including customers, shareholders in the company, suppliers, government agencies, members of the general public, and even employees within the company.



Because there are so many types of businesses, and so many liability perils that companies face, insurance companies have created policies, coverages, and endorsements to cover many of them.

Despite the word “general” in the term general liability coverage, this type of coverage does not cover all perils. It usually excludes damages caused by pollution or by vehicles, and it excludes lawsuits related to financial losses to the company or to others due to negligence on the part of the company’s employees, directors, or officers.

To fill in some of these gaps, insurers have created the following liability coverages:

• Pollution (lawsuits related to accidental releases of pollutants)

• Errors and omissions (lawsuits related to financial loss caused by mistakes made by the insured)

• Vehicle (lawsuits related to loss and damage caused by a company vehicle)

• Umbrella (supplements coverage if limits are exceeded on other policies, or covering other perils)

• Directors and officers (lawsuits related to poor management of company resulting in financial loss to shareholders)



All liability insurance policies have limits on the amount of damage they cover, and many also have deductibles as well as perils that are excluded. An umbrella policy will usually provide coverage for the same perils as the policyholder’s primary policy.

An umbrella policy can provide added protection because it is designed to provide liability coverage for a wide range of third-party perils and can pay for damages above the limits of the underlying policy.

An umbrella policy will not be triggered by a covered peril until the limits of an underlying policy have been reached, or if the covered peril is not covered by any underlying policies.



The typical commercial liability policy has many components in common with a personal liability policy:

• Insuring agreement: The clause that outlines the situations the insurance company will respond to

• Exclusions: Perils that are not covered by the policy

• Endorsements: Special additions to the basic policy, often covered perils

• Coverage limits: The maximum amount that the insurance company will pay, either in a year or per claim

• Deductibles: An amount that the policyholder will pay before the insurance company begins coverage

• Premiums: The amount that the policyholder pays regularly for the coverage



The premiums for liability insurance policies are set by underwriters using the data provided by actuaries and risk-specific information provided by the prospective insured.

The key job of an underwriter is to select risks and set the premiums for any type of coverage at a level high enough to bring the insurance company a profit in the long run. While an insurance company may lose money in any given year, over the course of several years they should show a profit.

In general, the premiums for most liability insurance policies are set using the following information:

• History of losses for that particular type of coverage in a specific industry

• Size of the policyholder’s payroll, sales, or number of employees

• Policyholder’s claims history (the number and size of claims filed against the company in a given time period)

• Type of coverage, including coverage limits, deductibles, and perils covered

While the policyholder has little control over some factors, good management and effective safety procedures can have a positive effect on claims filed.



While companies don’t want to overpay for liability insurance, they also don’t want to be underinsured.

Generally, less expensive policies have lower coverage limits, have more exclusions, and/or cover a more limited time frame.

Sometimes companies that believe they’re protected realize too late—after an expensive lawsuit has been filed—that the specific peril resulting in the lawsuit is not covered.

Other companies sometimes discover too late that their policies don’t cover the total amount of very large losses.

Insurance companies can employ deductibles and self-insurance as ways to balance the cost and benefits to both firms and insurance companies.



While a company certainly has to worry about losses and damage to its own buildings, machinery, vehicles, and employees, it cannot ignore the very real risk of financial losses due to claims for damages or lawsuits caused by damages and loss to third parties.

Insurance enables a business to continue operations, without closing, while it defends against real or fraudulent claims of certain types of negligence or wrongdoing.

The savvy risk manager looks at all of the activities undertaken by the company and tries to anticipate the risks of each activity. Purchasing liability insurance to cover these risks is a critical part of protecting the company.




Project Chart: Liability RisksStudent Names:_______________________________________________________ Date:___________

Directions: Fill out the information about your company below. Then, fill out the liability risk chart about your company. In the left column, write each type of activity your company engages in. For each activity, list possible liability risks, your estimate of how likely it is to occur, and ways to manage the risk. In the final row, determine the possible liability risks for one other feature of the company, such as its size or primary customers.

Company Name:________________________________

Business Activities:

Size of the Company:

Nature of the Business:

Primary Customers/Clients:

Example: Fast-Food Restaurant

Activity Possible Liability Risks Chance of Occurrence

Ways to Manage Risk

Serving food Food poisoning

Customer burned by hot coffee

Rodent or bug in the food causing emotional damage

Medium

Medium

Low

Practice safe food storage and handling

Staff training, customer warnings

Proper storage of food and regular inspections



Activity Possible Liability Risks Chance of Occurrence

Ways to Manage Risk

Other (size, clients, etc.)




Reading: Types of Commercial Liability Coverage There are many different kinds of insurance products that offer liability protection to businesses and other organizations. The following are some of the most common ones.

Comprehensive General LiabilityThis type of liability insurance provides protection against lawsuits brought on by bodily injury or property damage to third parties. The insurance company will defend the policyholder and pay for an agreed-upon amount of the damages for covered types of liability. Of course, policies do not cover damages caused intentionally. General liability policies do not cover damages caused by vehicles or pollution, and they don’t cover professional services such as architectural, engineering, financial, and legal services.

Excess or Umbrella CoverageThis type of liability insurance provides supplemental coverage after limits have been reached on primary policies (such as comprehensive general liability, vehicle liability, or employer liability). Umbrella policies may also cover hazards not covered in other policies held by the policyholder.

Pollution InsuranceThis type of liability insurance provides liability coverage for losses and damage caused by accidental polluting incidents caused by the covered company. Most general liability policies exclude pollution-related risks.

Employers Liability InsuranceThis type of liability insurance provides additional protection against claims made by employees injured on the job, as well as discrimination and sexual harassment suits among others. While workers compensation insurance protects covered companies against most injury claims, many companies still are at risk for liability in this area.

Directors and Officers Liability InsuranceThis type of liability insurance provides protection for the directors and officers of a company or not-for-profit organization from claims of financial losses to the company caused by poor management decisions.

Errors and Omissions Liability InsuranceThis type of liability insurance provides protection from third-party claims of financial loss caused by a mistake by the company, its employees, and sometimes agents.



Product Liability InsuranceThis type of liability insurance provides protection against claims for damages and loss caused by a defect or malfunction of a company’s product or by incorrect labeling, warnings, or instructions. It is important to note that not only the manufacturers of a product are liable. Often a retailer or reseller of a product is also held liable.




Project Activity: Types of Commercial Liability Coverage

Student Names:_______________________________________________________ Date:___________

Directions: For each of the following types of commercial liability insurance below, give a specific example of how it could be used in your company. Note whether you think this insurance should be a low, medium, or high priority for your company, and explain why. If it is a low priority, would you recommend self-insurance?

Use this example as a guide:

Excess or Umbrella Coverage: This type of insurance could be used if McGrady’s Restaurant loses a lawsuit for mass food poisoning and the commercial general liability coverage does not cover all of the damages. This is a high priority, because McGrady’s is a large restaurant chain whose food sources are distributed throughout the country, and the risk of expensive lawsuits for food poisoning or other causes is high.

Use a separate sheet of paper if you need more room.

Comprehensive General Liability:

Directors and Officers Liability Insurance:

Employers Liability Insurance:

Errors and Omissions Liability Insurance:

Excess or Umbrella Coverage:

Pollution Insurance:

Product Liability Insurance:




Instructions: Liability Risks PosterStudent Names:_______________________________________________________ Date:___________

Directions: Work with your team to create a poster illustrating the most likely liability risks faced by your company, along with strategies for managing each of the risks. Follow these steps to complete the first draft of your poster:

1. Complete Student Resource 10.4, Project Chart: Liability Risks.

2. Review the rubric for the assignment, Teacher Resource 10.4, Rubric: Liability Risks Poster.

3. Design a layout and organization for your poster that will best communicate the information. For example:

o Using pencil on a large sheet of poster paper, draw a circle about one foot in diameter (see example below).

o Inside of this circle, write your company’s name and a picture or logo representing the company.

o Underneath this circle, write your company’s primary products or services.

o Decide how many liability risks you want to include in your poster (at least three), and draw a circle for each one, arranged around the center circle.

o In each of these circles write a short description of the liability risk and sketch a drawing or add a picture illustrating the risk.

o Below each circle, write one or more strategies to manage the risk.

4. Review your poster using the rubric as a guide, and take notes on how to improve it for the second draft.



Example of Poster Layout:


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