If your business is sued for a cause covered by your insurance, the insurance company will pay for your legal defense and also cover any settlements or judgments against your company, up to the policy limit.
To help you understand the impact of commercial general liability insurance, let’s walk through a hypothetical example:
You own a plumbing business, and one of your employees is out making repairs at a client’s home. After finishing the job, your employee accidentally leaves behind a piece of piping on the floor. The homeowner doesn’t see the pipe and trips on it, hitting his head. The injury results in large medical bills for the homeowner, who also suffers a loss of income from being unable to go to work. The homeowner sues your business for causing this injury.
In this nightmare scenario, your business is at risk of financial ruin. Because of the lawsuit, you may face expensive legal bills, and if your business is found to be at fault, you may be responsible for paying the customer’s medical bills and lost income. With a commercial general liability policy, however, the financial burden of this incident can be averted.
What does commercial general liability insurance cover?
The three most important coverages under commercial general liability insurance for contractors are:
Other relevant coverage under commercial general liability includes:
Bodily injury coverage protects your company if it causes physical injury to another person. This includes incidents like the forgotten piping example mentioned earlier.
An important exclusion to bodily injury coverage is any injury to your company’s own employees. If an employee is injured while on the job, commercial general liability insurance provides no coverage for his or her injury. To properly cover your employees, you’ll need workers’ compensation insurance.
Property damage insurance covers you for damage to others’ property caused by your business.
Consider this example: a client hires you to repair the ceiling in their house. While repairing the ceiling, one of your workers drops a hammer from ceiling height, shattering an expensive custom wall mirror. The client sues your company for the cost to replace the mirror and repair the wall. Property damage insurance would protect your business from financial loss in this scenario.
An important exclusion to property damage coverage is property belonging to others that is under your care, custody, or control. This exclusion can be a bit confusing, so let’s walk through an example:
You are hired to remodel a client’s kitchen. As your employees are carrying a heavy sink into the kitchen, they accidentally drop the sink, severely damaging the floor. In this scenario, the damage to the floor would not be covered by property damage insurance because the kitchen would be considered to be in your care, custody, or control.
To protect against such incidences, you’ll need an additional endorsement to your property damage insurance, often known as voluntary property damage. Voluntary property damage provides coverage for unintentional damage to others’ property while that property is under your care, custody, or control.
Products and completed operations
Even after you’ve finished a project and left the job site, if any of the work your company has completed ends up causing bodily injury or property damage, your company may still be liable. With products and completed operations coverage, however, your business is protected even after you’ve completed the job.
Even after you’ve finished a project and left the job site, if any of the work your company has completed ends up causing bodily injury or property damage, your company may still be liable.
Consider this example: a client hires you to install custom cabinets in their office. Although you had no knowledge of it, at the time of installation, your employee failed to properly secure one of the cabinet attachments to the wall. The cabinet works fine for a while, but two months after installation, the cabinet falls off the wall, injuring a secretary and damaging the wall. The secretary sues your business for bodily injury liability, and the client also sues your business. Products and completed operations insurance would protect your business in this example.
An important limitation of products and completed operations insurance is that you will only receive coverage if your policy is active when the bodily injury or property damage occurs. For example, if you installed cabinets in March, and you cancel your coverage in April, if someone is injured by your cabinets in May, you won’t be covered. In order to ensure your business is fully covered by products and completed operations insurance, you must keep your policy continually active, even after work has been completed.
Personal and advertising injury
Personal and advertising injury liability coverage provides for specific types of non-physical injuries that your business might cause to another person or business. Contracting businesses may see this most commonly in cases of slander, libel, copyright infringement in advertising, or publications that violate privacy.
A slander or libel claim may arise if your business makes untrue comments about a another business or a client in an advertisement or on social media. Copyright infringement claims may occur if your business uses or copies another company’s copyrighted material, logo, or slogan in your advertising. Claims made for publications that violate privacy could include use of a person’s name or likeness without permission or advertisements that show others in a false light.
Medical payments to others
Medical payments to others is a type of coverage that provides for medical payments in instances where someone is injured on your business premises or as a result of your business activities. Unlike bodily injury coverage, which only pays if your business is found to be at fault, medical payments to others pays for accidents whether or not your business is to blame. Keep in mind that, like bodily injury coverage, medical payments to others does not extend to your own employees, who should be covered under workers’ compensation insurance.
Medical payments to others coverage is meant to reduce the chances of a lawsuit, with the hope that if an injured party has their medical bills covered, they are less likely to sue for damages.
Medical payments to others coverage is meant to reduce the chances of a lawsuit, with the hope that if an injured party has their medical bills covered, they are less likely to sue for damages. Usually, this type of coverage has a low limit, so it’s meant to cover injuries that aren’t too serious.
Consider this example: you are renovating a client’s office. You’ve let the client know that while the job is still in progress, it is unsafe to enter the worksite. The client ignores you, however, and goes to the office to see how the work is coming along. While inside the worksite, the client trips and injures himself, requiring a trip to the emergency room where they put stitches in his arm. The medical payments to others coverage would pay for the client’s injury, without needing to determine whether your business was at fault or not.
What doesn’t commercial general liability insurance cover?
An important exclusion from commercial general liability insurance is auto liability. Since vehicle crashes are a common cause of liability claims, they are not covered by commercial general liability insurance. To properly cover your liability for vehicles used for work purposes, you’ll need commercial auto insurance.
As a contractor, you may own or operate mobile equipment, like a backhoe or forklift, that could possibly be used on public roads. An important question is whether or not that equipment is considered an auto, and whether or not that equipment would be covered under a commercial general liability policy.
The answer depends on whether or not your state requires auto liability insurance for the mobile equipment. If your state does not require auto liability, then the equipment is considered mobile equipment and will be covered by the commercial general liability policy. If your state does require auto liability, then the equipment will need to be covered under commercial auto insurance. When the vehicle is on public roads, it will be covered by commercial auto insurance. When the vehicle is not on the road, it will be covered by your commercial general liability insurance.
Consider this example: your business owns a backhoe, and your state requires auto liability insurance for the backhoe. You cover the backhoe under your commercial auto policy. If the backhoe causes a crash while it is being driven on the highway, it would be covered under commercial auto insurance. On the other hand, if the backhoe injures a bystander while it is being used to dig, it would be covered under your commercial general liability policy.
If you are hiring subcontractors, keep in mind that many insurance policies exclude subcontractors from your liability coverage. To be fully covered, you’ll want to make sure that all subcontractors you hire have liability insurance with the same limits of liability that you have.
Consider this example: you are hired to remodel a client’s office. You hire a subcontractor to complete the plumbing work since your company does not have plumbing expertise. The plumbing subcontractor installs a pipe incorrectly, leading to a burst pipe that causes water damage to the client’s office. The client sues your company for damages. Your business would be responsible for the damage, and your insurance company may not cover the damages since the work was performed by a subcontractor.
When hiring subcontractors, it’s important to require them to have insurance.
When hiring subcontractors, it’s important to require them to have insurance. Ask to see a subcontractor’s Certificate of Insurance, which proves that they have insurance coverage, and make sure the subcontractor adds you as “Additional Insured” on their insurance policy, which obligates the subcontractor’s insurance company to cover you if you are sued for work performed by the subcontractor.
If the subcontractor you hire is unable to obtain liability insurance, you can add them as “Additional Insured” under your commercial general liability policy, which may require an additional premium. Doing so will cover the subcontractor for work that they perform for your company, but not for work they perform for other clients.
There are several other common exclusions to commercial general liability insurance you should know about:
- Your business property. Liability insurance only covers damage to the property of others. For coverage of your own property, you need Property Insurance for Contractors.
- Damage caused intentionally.
- Liability resulting from crimes or fraud.
- Professional errors. To cover this, you need Professional Liability Insurance.
- Employee injuries. For employee injuries, you need Workers’ Compensation Insurance for Contractors.
- Employee discrimination lawsuits. Employment Practices Liability Insurance covers employment-related issues such as discrimination, harassment, and wrongful termination.
Is commercial general liability insurance required?
Commercial general liability insurance is not legally required in most cases. In some states, liability insurance is required as a condition of getting a license for some contracting professions such as plumbers and electricians. Alternatively, some states may require surety bonds in order to obtain a license.
It is common for clients to require liability insurance before they will do business with a contractor.
It is common for clients to require liability insurance before they will do business with a contractor. If a client hires a contractor and an accident occurs, the client may be on the hook to pay for the damages if the contractor does not have insurance. Therefore, many clients will want to see proof of insurance before hiring your company.
Additionally, if your business serves as a subcontractor to a general contractor, you may also be required to have insurance by the general contractor. This is because the general contractor will be liable for any damages caused by their subcontractors, and if the subcontractor is uninsured, the general contractor will have to pay for any damages or injuries caused.
Does commercial general liability insurance have a deductible?
No, commercial general liability Insurance usually does not have a deductible.
What is the commercial general liability insurance limit?
The limit of insurance is the maximum that the insurance company will pay in a covered loss. You can usually negotiate the limit of insurance with your insurance company. A higher limit of insurance usually increases the premium you pay.
It is common in general liability policies for there to be separate limits “per occurrence” and “per year”. The “per occurrence” limit is the maximum that the insurer will pay for a single loss, while the “per year” limit is the maximum they will pay for the policy year.
Consider this example:
Your business has limits of $2 million “per occurrence” and $4 million “per year”. During a particularly unlucky policy year, your business experiences the following losses:
- $2.5 million
- $1 million
- $1.5 million
The insurance company would pay the following amounts on your claims:
- $2 million, because the “per occurrence” limit is $2 million
- $1 million
- $1 million, because the “per year” limit is $4 million and $3 million has already been paid in (1) and (2)
Are legal defense costs covered by commercial general liability insurance?
If your company is sued for a cause covered by the insurance policy, commercial general liability insurance will cover the costs of your legal defense, including attorney’s fees, expert witness fees, and court costs. These fees will be covered whether or not your company is found at fault.
These legal fees don’t count against your limits of coverage for most general liability policies. For example, if your policy has a limit of $1 million, and you are liable for a judgment of $1 million plus $250,000 in legal fees, the insurance company would pay for all $1.25 million in costs.
» Up next: Learn about workers’ compensation insurance for contractors.