A General Counsel's Guide To Business Liability Insurance

Business Liability insurance which is also called as third-party insurance, is a part of the general insurance system of risk financing or risk mitigation to protect the purchaser (the "insured") from the risks of liabilities imposed by lawsuits and similar claims and protects the insured if the purchaser is sued for claims that come within the coverage of the insurance policy. Liability insurance is typically designed to offer specific protection against third-party insurance claims, which means that payment is not typically made to the insured, but rather to someone suffering loss who is not a party to the insurance contract. But in some instances, the insured also makes the payment first and then tries to take reimbursement from the Insurance company through this liability insurance. However, it should be kept in mind that in general, damage caused intentionally as well as contractual liability are not covered under liability insurance policies. When a claim is made, the insurance company has the duty (and right) to defend the insured.

A Business Liability insurance covers the insured against the damage of compensation claims due to malpractice, injury or negligence. Some of the major liability insurance in the market are Commercial General Liability Policy, Excess General Liability, Fidelity Insurance, Errors and Omissions, Directors and Officers Liability Insurance Policy.

Commercial General Liability: This insurance - Commercial General Liability Insurance, is a policy that provides protection against claims of bodily injury or property damages/destruction for which your business may be liable. This policy covers a range of liability loss exposures faced by most organizations. Apart from bodily injury or property damages, it also covers advertising injury and personal injury to a third party for which a company is found to be legally liable. This policy may also provide a separate advertising or personal injury aggregate limit that is not subject to a general aggregate limit. Companies which are sued in Intellectual Property Disputes typically take coverage under Commercial General Liability Insurance. 

Bodily Injury and Property Damage Liability: This cover typically protects the insured against any bodily injury or any claim against property damage. The insured may get this claim either from third party or their own employees. The Insurers have the right and duty to defend the insured against any suit seeking these damages.

Fidelity Guard Policy: This policy is generally taken by the insured to cover employee dishonesty, loss of money, securities or other property resulting directly from one or more fraudulent dishonest acts. This also covers losses due to third party fund transfer fraud, theft of money, securities or other property by computer fraud. 

Excess Umbrella Policy: This policy is usually taken by the insured over and above the Commercial General Liability Policy. The legal terms and conditions of both the policies will be same. But the insured can only exercise this policy after exhausting the Commercial General Liability Policy. 

Directors and Officers Liability Insurance Policy (D&O Policy): This policy covers the insured in two portions. On the First part, it protects the insured for a wrongful act in the insured’s capacity as a director, officer or employee of the company. On the second part, it covers the loss of the Company for a wrongful act in the Insured capacity as a director. This policy usually covers the current, the past and the future members of the Board of Directors. The in-house counsels while negotiating for buying the policy should ensure that the Policy should cover the parent company and also all the subsidiaries. 

Errors and Omissions Policy (E&O): Contractual indemnification claims may arise as a result of breach of the obligations under the Agreement. The breach may include defects, non-performance, loss of data, failure of delivery, pay roll failures etc. E&O Policy comes in handy if the customers or clients of the company sue the insured for any breach of the terms of the Agreement. This policy also covers the risks associated with the failure of the insured products to perform its functions and/or insured failure to perform services within the terms of the Agreement. 

Many a times the in-house counsels are required to take critical decisions. The critical decision range across scenarios where the client asks additional insured endorsement certificate, or sometimes the client asks for a fixed cover over and above the contract value, or the client asks Insurance from a company with a rating of A, or the clients ask that the insurance cover should preferably be from a local insurance company. Here are a few broad guidelines to address and negotiate such scenarios.

Additional Insured Endorsement Certificate: Many a times the in-house Counsels come across a scenario where the client asks that the clients name should be added as additional insured with a separate endorsement. Now why do the clients want these type of Additional Insured Endorsement Certificate ? This way, the client will also be covered as insured in addition the Vendor being covered as the insured in the original policy. However, the client will not incur any additional cost to be the Additional insured. Once, a claim arises, the client, as Additional insured, can directly proceed against the insurance company and stake its claim. The client need not come to the Vendor to get the claim processed. However, the Insurance Company will take its own process to complete the due diligence before honoring the claim. The Insurance Company will come to the Insured (The Vendor) to get the details during the due diligence process. 

Now the most important question - Is it Ok to give the Additional Insured Certificate if you are the in- house Counsel from the insured company. The answer is simple - No it is not Ok to give the Additional Insured certificate from the insured view point. But if it is a deal breaker It is advisable that we go ahead and issue the Additional Insured Certificate as it is not going to adversely impact the insured position. The claim will still be known to the insured (Vendor) and the normal due diligence will still be followed by the Insurance Company before honoring the claim from the client. Hence In-house Counsels to not hesitate to give the additional insured endorsement certificate if this is the last piece of hindrance in the deal closure. 

Fixed E&O cover: Sometimes the clients may ask for an E&O cover which is much over the contract value. This client requirement may be that this value be incorporated within the agreement that is going to be signed. To make it simpler, let me give you an example. The agreement value may be say USD 1 Million. The client insists that the insured take a policy cover of say USD 2 Million and mention that in the Agreement. So, the Agreement now contains a statement that Vendor maintains an E&O policy of USD 2 Million in the Agreement but the Agreement is worth only USD 1 Million. But the query everyone asks me is - “can we give an E&O cover of more than the business value in the contract and will it increase your business liability?” The answer is very simple. The in-house Counsels should note that under no circumstances the liability of the insured or the Vendor will be over the Limitation of liability already agreed in the Agreement, except in certain specific cases or as decided by the Court. The insurance cover is just a hedging mechanism to cover your risk in the event of trigger of the incident. This does not mean that your liability is to the extent of the insurance that you have in your contract. Hence, it is perfectly fine to mention and have an additional insurance cover well over the contract value or the limitation of liability in the contract. 

Insurance cover from A rated companies: The clients sometimes insist that insurance should be taken from A rated companies. Though taking business insurance cover from insurance companies lesser than A rated companies will be cheaper but it is always recommended to go with A rated companies. This is a win-win situation for both the client and the insured. The insurance claim settlement ratio will be better in A rated company and hence, it is always a win-win situation.

Insurance cover from local companies: Clients may also insist that insurance covers should always be from a local company. Suppose your Singapore subsidiary is entering into an agreement with the client then the client insist that the insurance cover should preferably be Singapore based from a Singapore Insurance Company. But sometimes the Singapore based policy may not be sufficient. In that case the insured should always insist that any short fall in the insurance cover should be covered through the Global policy held by the insured from other Geography. To make it simpler with an example, say for instance the E&O policy in Singapore is for USD 1 Million. Apart from this policy in Singapore the insured is holding a Global Policy of USD 10 Million from say India. If the Client in Singapore insist that the insured requires a policy of say USD 4 Million from a Singapore based Insurance Company, then the shortfall of USD 3 Million in Singapore will be covered through the Global Policy held by the insured. 

These are some of the negotiation strategies for the in-house Counsels when they sit across the table with the client to discuss the insurance clause in the Agreement.