Myth #1: Your Business Is “Fully Covered”

Last week I provided a list of my top 10 commercial insurance myths and misconceptions.  Today I want to start with the first misconception on the list: Your Business Is “Fully Covered”.

I hear this a lot from clients.  From a liability standpoint, it usually means their company has a comprehensive general liability (CGL) policy with at least $1 million in per occurrence limits.  It usually also means they have excess coverage.  Many moons ago, CGL policies were comprehensive, and covered just about every “accidental” liability a company could face.  In today’s market, CGL policies are so full of gaps that they barely cover the basic liabilities that arise when a company is alleged to have caused bodily injury or property damage.  Further, the standard Coverage B, the personal injury and advertising injury liability coverage part, once covered most types of unfair competition, antitrust, and intellectual property claims.  Current forms provide hardly any coverage for these claims.

The huge gaps found in modern CGL policies often do not become apparent to businesses until they are embroiled in coverage litigation.  A few years back, I was meeting with the general counsel of a large, publicly traded company.  We were in the middle of a highly contentious coverage litigation involving several disputed CGL issues with tens of millions of dollars at stake.  We had just gone over the main coverage issues in preparation for trial and he turned to me and said, “You know, I have come to the conclusion that the only thing we are buying when we purchase liability insurance is the right to sue our insurance company.”

That comment stuck with me.  It reflects the frustrations of many in-house counsel and company executives who cannot understand why their company has spent so much money on insurance premiums over the years yet when they make a claim their insurer responds with citations to a dozen policy exclusions that apply.  It is as if their own carrier is holding up their worthless insurance policy and it suddenly looks like Swiss cheese.

Of course, once a claim comes in it is too late to do anything about coverage gaps.  The time to recognize these issues is at underwriting.  Risk managers and in-house lawyers must recognize up front that CGL policies in today’s market at best represent a foundation on which to build a liability insurance program.  The important part of the underwriting process is filling as many of the CGL gaps as possible with specialized insurance: directors & officers, errors & omissions, employment practices, intellectual property, pollution liability, and data breach & privacy coverage, to name a few.  It is important when buying these specialized coverages to read the endorsements carefully and to negotiate policy terms to ensure that the extra insurance your company buys does not itself have huge coverage gaps.  (Which reminds me of the insurer who used to sell a liability policy called ‘The Defender’ which contained no defense obligation, but that is a story for another day.)

In the end, there is no such thing as being “fully covered”.  And perhaps, even with the best of insurance programs, the only thing companies are buying is the right to sue their insurer.  But by plugging as many gaps as possible during the underwriting process, and understanding how different types of specialized insurance can protect against the unique liabilities faced by each organization, companies can at least give their coverage counsel a fighting chance.