AAIS COMMERCIAL LIABILITY UNDERWRITING CONSIDERATIONS (Excerpt)

Underwriting the commercial liability exposures of a business requires a properly completed application and a thorough understanding of the coverages provided.

NAMED INSURED

The most important aspect of underwriting general liability coverage is the insured, as they are protected by the coverage provided. For this reason, the first named insured is the primary covered party. However, everyone listed on the declarations is a named insured. Each is treated as if a separate coverage form has been issued to each insured. Documents essential for establishing a business's identity and operations include its annual financial report, profit and loss statements, balance sheets, and other financial records. Monitoring the company's finances is a key strategy for managing risks and protecting assets.

COVERAGE L–BODILY INJURY LIABILITY - PROPERTY DAMAGE LIABILITY INSURING AGREEMENT

This is the first of the five insuring agreements, offering coverage for risks related to premises and operations not included under Coverage N – Product/Completed Operations. The coverage applies to bodily injury and property damage occurring during the policy period. Additionally, the incident must take place within the defined coverage territory.

After identifying the nature and scope of all business activities and operations, the next step is to ask how. How can injuries or damage happen, and how can they be prevented? This requires an understanding of operations, information about products and services offered, and experience with similar types of operations. Loss control or loss prevention departments can offer valuable insights to support this evaluation.

COVERAGE M–MEDICAL PAYMENTS

This insurance agreement covers medical expenses for bodily injuries arising from an accident occurring on property owned or rented by the insured, on adjacent roads, or due to the insured's operations and activities. The accident must occur during the policy period to qualify for coverage. Underwriting this coverage is very similar to underwriting Bodily Injury and Property Damage coverage, as the risks involved are essentially the same. The key difference is that Bodily Injury and Property Damage require proof of the insured's negligence, whereas Medical Payments can be claimed regardless of fault. Remember, offering this coverage can help prevent lawsuits by ensuring the injured party receives prompt care and medical expenses are paid.

CONTRACTUAL EXPOSURES

The coverage forms protect against liability based on specific written contracts or agreements that are listed. Any other agreements are not covered. It’s important to understand all your contractual obligations and determine if they are covered by insurance. Written contracts often transfer responsibilities from one party to another, so it’s crucial to know what duties you are accepting and what has been transferred or avoided in the contract.

EVALUATING LOSS HISTORY

This requires adequate information on previous losses. The loss history should have a reasonably recent valuation date and include at least five full years of experience in addition to the current year. Ten or more years of loss experience may be required on larger risks or those engaged in high-risk operations.

Frequency

Frequent small losses might not lead to an unacceptable overall loss ratio, yet they can indicate underlying issues. Incidents such as slips and falls may signal housekeeping problems or structural concerns, which could lead to more significant losses. Minor property damage claims could reveal quality concerns or morale hazards. The crucial step in assessing a pattern of small losses involves identifying if a clear, measurable trend exists, which can be analyzed and addressed. Claims-handling costs for both the insurance company and agency on small, frequent losses should be considered alongside the payout amounts. Liability deductibles can address certain issues but may conceal more serious problems. They should be implemented carefully and sparingly, only after a thorough understanding and assessment of the cause of their frequency.

Severity

Ignoring a single large or severe loss as a fluke is a mistake. In fact, multiple significant losses can occur unless preventive measures are in place. The specifics of the loss and the insured's subsequent actions to mitigate future risks are crucial and can significantly impact the acceptability of the risk. It is essential for both the insured and the insurance company to conduct comprehensive post-loss reviews to thoroughly examine, assess, and understand all aspects of the event, ensuring any unresolved issues are properly addressed.