Most businesses carry commercial general liability (“CGL”) insurance intended to cover such things as a customer’s getting injured falling down on the premises. However, insurers do not cover so-called “business risks” under a CGL policy. The most common business risk is a risk that the business does not do its job competently and must repair or replace its faulty work. The essence of the difference is the distinction between claims that you did not do a good job with your product or service versus claims that you did something that caused harm. Determining the line between business risk and a covered risk can be tricky.
A good example of this is the 1983 case of Honeycomb Systems v. Admiral Ins. Co. that was heard in Federal District Court in Maine. Honeycomb manufactured a large dryer drum that went into a paper machine. After the purchaser operated the machine for awhile, the drum developed a crack. It had to be removed and replaced, causing the paper machine to shut down for two months. The economic damages from the shut down paper machine were substantial. In drawing the line between the “business risk” and the covered risk, the court found the cost of replacing the drum to be an uncovered business risk. However, the damage claim by the paper company for being shut down for two months was a covered claim.
Insurance policies change and consequently, the scope of the business risk exclusions vary from policy to policy and over time. You need to check your policy carefully and check it every time it is renewed. However, some of the more common business risk exclusions include:
- Property damage to your own product;
- Property damage in your care, custody or control;
- Property damage to property you own, rent or occupy;
- Damages incurred by the loss of use, withdrawal or recall of your product.
CGL insurance coverage is not intended to cover business risks. Understanding this can be very helpful in having realistic expectations as to what your liability insurance will cover and in considering your overall risk management plan. Understanding how CGL coverage fits into this is an important part of putting together an appropriate plan. We would be pleased to advise you on these matters or to answer any specific coverage questions.
Authored by Stephen B. Wade, Esq.