General liability insurance explained: a beginner's guide

General liability is the policy a business buys because it exists in the world. A customer trips on a display, a ladder goes through a client's window, a product you sold starts a fire, a competitor claims your advertisement defamed them. The policy pays what you legally owe for the injury or damage and, separately and often more importantly, pays the cost of defending the claim whether or not it has merit.

It is usually the first commercial policy a new business is asked to show, because landlords, general contractors, event venues and licensing boards all want proof that if something goes wrong on their premises or their project, there is a carrier behind the small business rather than a lawsuit against a sole proprietor's house. This guide explains what the policy covers, how the limits are structured, what it leaves out, and what a certificate of insurance is really asking for.

What the policy pays for

A standard commercial general liability form has three coverage parts, and each responds to a different kind of loss.

• Coverage A, bodily injury and property damage: injury to a person who is not your employee, or damage to property you do not own, caused by an occurrence arising from your premises, your operations, your products or your completed work. This is where nearly all claims land.
• Coverage B, personal and advertising injury: libel, slander, invasion of privacy, wrongful eviction, misuse of another's advertising idea and similar offences. It is the part that responds when a review response or a marketing campaign draws a lawsuit.
• Coverage C, medical payments: small medical bills for a member of the public injured on your premises, paid without arguing about fault. It exists so that a customer's sprained wrist gets an urgent-care visit rather than a lawyer.

Products and completed operations: coverage after you leave

The part of Coverage A that confuses new owners is products-completed operations. Premises and operations coverage responds while you are on site or the customer is in your shop. Products-completed operations responds after: the deck you built collapses a year later, the food you served causes an illness, the appliance you installed leaks and ruins a floor. For a contractor, a manufacturer or a restaurant this is the larger exposure, and it has its own aggregate limit on the declarations page.

One distinction follows from it. The policy pays for damage your work causes to other things; it does not pay to redo the work itself. If a plumber's bad joint floods a kitchen, the ruined cabinets are covered and the joint is not. That is the your-work exclusion, and it is the reason a contractor's warranty and a contractor's insurance are different obligations.

How the limits work: per occurrence and aggregate

A general liability policy carries several limits at once. The per-occurrence limit is the most it pays for any one accident or event. The general aggregate is the most it pays in total during the policy year for everything except products-completed operations claims, which have their own products-completed operations aggregate. There are also sublimits for personal and advertising injury, for damage to rented premises and for medical payments. When any aggregate is exhausted, the policy stops paying for that kind of claim until it renews, even though the per-occurrence limit is untouched.

Suppose the policy carries a $1,000,000 per-occurrence limit and a $2,000,000 general aggregate. In March a customer's fall settles for $300,000; in July a water leak into the neighbouring tenant's space costs $800,000. Both are within the per-occurrence limit and together they use $1,100,000 of the aggregate, leaving $900,000 for the rest of the year. A third claim in November for $1,000,000 would be paid only up to the remaining $900,000. Those figures are invented, but the mechanism is why a business with several claims in a year can find itself uninsured for the last one, and why a commercial umbrella sits above the aggregate as well as above the per-occurrence limit.

Defence costs are usually paid outside the limits on a standard form, meaning the lawyer's bills do not reduce the money available for the judgement. Some forms, and many surplus-lines forms, put defence inside the limits; that is a materially worse policy at the same price, and it is worth reading for.

Occurrence versus claims-made

Most general liability policies are written on an occurrence basis: the policy in force when the injury or damage happened responds, no matter when the claim is made. A deck that fails three years after the policy expired is still a claim against that expired policy. Some carriers, particularly for higher-hazard classes, write general liability on a claims-made form instead, which responds only if the claim is made while the policy is in force and the event happened after a retroactive date. Claims-made coverage is cheaper at first and needs tail coverage when it ends. Know which form you are buying; the declarations page says.

What it does not cover

The exclusions are where a small business finds the other policies it needs.

• Injuries to your own employees. That is workers' compensation and employer's liability.
• Vehicles. An accident in a company truck, or in an employee's car on company business, is a commercial auto question, including hired and non-owned coverage.
• Professional advice and services. A design error, a bad recommendation or a missed deadline is a professional liability claim, not a general liability one, and many general liability forms exclude it outright for professional classes.
• Your own property and your own work. Damage to the building you rent is limited to a small damage-to-rented-premises sublimit; damage to your tools, stock and equipment needs a property policy.
• Pollution, except for a narrow set of circumstances, and in some cases silica, asbestos and lead for construction classes.
• Data breaches and cyber events, which most current forms exclude explicitly.
• Liability assumed under a contract, except for the kinds of contract the form defines as insured contracts, which is why the indemnity clause in a lease or subcontract should be read against the policy.
• Liquor liability for a business that sells or serves alcohol, which needs its own coverage or endorsement.

Certificates, additional insureds and the contract you signed

A certificate of insurance is a one-page summary the carrier or agent issues showing the policy, the limits and the dates. It is proof, not coverage; it does not change the policy. What changes the policy is an additional insured endorsement, which extends your coverage to the landlord or general contractor for claims arising out of your work for them, and a waiver of subrogation, which stops your carrier from recovering a paid loss from them. Leases and subcontracts commonly require both, plus wording that your policy is primary and non-contributory to theirs.

Read the insurance clause of any contract before signing, and send it to us. The usual problems are a required limit higher than the policy carries, a requirement for completed-operations additional insured status that the basic endorsement does not provide, and a demand for a waiver that the carrier will not give on that class. Each is fixable before the job starts and expensive after a claim.

What decides the premium

The carrier rates the policy on a classification code that describes what the business does, an exposure base for that class, usually gross sales, payroll, square footage or units, and the limits chosen. The premium at inception is an estimate; most policies are auditable, and at year end the carrier compares actual sales or payroll to the estimate and bills or refunds the difference. Understating payroll to lower the deposit only defers the bill. Claims history, years in business, and whether the operation is roofing in Phoenix or bookkeeping in Boise all move the rate, and carrier appetite by class varies widely.

In Arizona and Nevada, contractor licensing boards require certain financial proof to hold a licence, and general contractors and public owners in all four states routinely set minimum general liability limits in their contracts. Those requirements are contractual and administrative rather than statutory in most cases, but the effect is the same: the limits a small contractor carries are set by the work it wants to bid.

How to use this

Find the declarations page and note four things: the per-occurrence and aggregate limits, whether the form is occurrence or claims-made, whether defence is inside or outside the limits, and which endorsements are attached. Then gather the insurance clauses from your lease and your two or three biggest contracts. Comparing the first list against the second is the whole analysis for most small businesses. We do it against the carriers we represent in Arizona, Nevada, Utah and Idaho, and when the policy already matches the contracts, the recommendation is to keep it.