AAIS COMMERCIAL LIABILITY COVERAGE FORMS UNDERWRITING CONSIDERATIONS

(September 2025)

INTRODUCTION

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. While the first named insured has special responsibilities and privileges regarding premiums and cancellations, these differences do not impact the coverage provided.

After reviewing all listed named insureds, it is important to identify how each one relates to the others. If a person or entity does not have a relationship with or cannot be legally combined with the others on the list, it should be removed and insured under a separate coverage form.

Each named insured is considered a separate entity, and this distinction drives the definition of "insured." Since each entity is treated individually, there is a specific section in the insured definition for each one. If one entity is an individual, only the pertinent portion of the definition applies to the individual. Conversely, if another entity is a partnership, only the section related to partnerships applies.

When an individual is included on a policy featuring a corporation, the coverage extends to the corporation's business, any operations exclusively owned by the individual, and the individual’s other business activities.

Example: A commercial general liability coverage application has been submitted for First In Line Corporation and Pamela Oblong. The initial step in underwriting is to review the definitions of insured and understand how each type applies to the individuals and entities listed on the application.

First In Line Corporation – Entity is a Corporation
Executive officers and directors, but only to the extent of their duties as such
Stockholders, but only such liability imposed on stockholders
Employees, but only within the scope of their employment
Pamela Oblong, individually - applies to Pamela and/or her spouse, as well as covering any other business operations she owns individually
Pamela Oblong's employees, but only in the scope of employment for Pamela

There is no requirement for Pamela Oblong’s activities to be related to First In Line Corporation.

Once it is determined who is insured, the next step is to establish what must be assessed. It is essential to determine the specific actions or offenses each insured has committed, which may lead to an occurrence. The insuring agreements do not specify whether occurrences or offenses must be linked to any business operations; they simply state the insured must be legally obligated to pay. Therefore, it is essential to uncover all activities conducted by the insured. Once these activities are identified, the associated risks must be evaluated to determine their acceptability.

A risk survey tailored to a specific business or operation can be beneficial. Relying on a standard application or general questions may not provide enough detailed information. The insured might overlook certain aspects of their operations, and a targeted survey can help remind them.

NOTE: The Rough Notes Company, Inc. Producer’s Commercial Lines Risk Evaluation System is an excellent resource for identifying operations.

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.

Example: Continuing the example above, First In Line Corporation’s operations include inspecting and evaluating other corporations, making recommendations on how they can become more effective and efficient. Pamela Oblong not only participates in these recommendations but she also writes books on consulting theory, hosts a popular website, and breeds, trains, and sells Shih Tzus.

Those activities involving Pamela’s efficiency review and recommendations appear to be consistent with the primary operations of the business. However, the additional operations will require further investigation and evaluation. In this case, simply adding Pamela Oblong individually without asking any further questions could lead to missing some significant exposures.

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.

The question of where is an essential question because the insuring agreement is extremely broad. Coverage applies anywhere, subject to only the coverage form's definition of coverage territory. As a result, coverage is not limited to only named or listed locations or operations. New locations or operations are covered without requiring an addition to the coverage form. A question may arise concerning a location existing at the time of the policy application but was not included on the application—will it be covered? If an insured intentionally provides false information, coverage does not apply. However, if the location was left out by mistake or oversight, it may still be covered.

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.

A good way to begin underwriting this coverage is by excluding it for businesses and operations frequently causing such injuries. Examples include athletic participation activities, daycare centers, and schools, where medical payments coverage is often excluded.

This coverage form's exclusion applies effectively to clearly identifiable classifications. However, other operations may present similar, less obvious risks, in which underwriting needs to be evaluated to determine coverage.

Remember, offering this coverage can help prevent lawsuits by ensuring the injured party receives prompt care and medical expenses are paid. However, problems can occur if this coverage is misused as a replacement for health insurance or accidental injury coverage.

COVERAGE N–PRODUCTS/COMPLETED WORK

Injury or damage caused by products is covered only when the injury or damage occurs after the product has left the premises and transferred to another party. Following best practices, including multiple quality assurance inspections, is crucial. Providing proper instructions and warnings is particularly important, especially age-appropriate information.

Retailers and wholesalers can often refer many claims back to the manufacturer, unless they modify the products after receipt or directly import them. In those cases, retailers and wholesalers must be considered as manufacturers.

Underwriting completed operations is similar to products because the loss or damage typically occurs after the named insured has finished the project. The most important factor is experience. How long has the named insured been doing this type of work? One can expect the types of projects managed in the past to be like those managed in the future. If the named insured begins exploring new areas, more investigation is required.

COVERAGE O–FIRE LEGAL LIABILITY

This coverage applies to a building or portions of a building, including permanently attached fixtures, which is loaned, rented, or leased to the insured. If property damage occurs due to fire and the insured is held legally responsible, the coverage will apply.

This coverage is often overlooked and sometimes considered unimportant; however, it is just as crucial as any other risk your insured may encounter. Fire Legal Liability exposures should be assessed for every insured. It is essential to evaluate the current exposures the insured may face, as well as any potential future risks they may encounter throughout the policy year.

It would be beneficial to initiate a conversation with the insured regarding any rented or loaned buildings located outside of their primary business location. This discussion can help determine the need for higher coverage limits, or in some cases, a separate policy might be more appropriate. When such situations arise, a more in-depth analysis should be conducted.

Related Article: CP 00 40-Legal Liability Coverage Form Overview

COVERAGE P–PERSONAL INJURY LIABILITY - ADVERTISING INJURY LIABILITY

Coverage applies to personal injury and advertising injury caused by an offense arising out of the named insured's business. The offense must be committed in the coverage territory and during the policy period.

It's important to understand how the insured's actions can lead to personal injury or advertising injury losses. Some businesses are more likely to face these types of losses than others. Professions that usually need this type of coverage include lawyers, advertising agencies, radio and television broadcasters, publishers, and security firms. If any of these professions are being considered, this coverage should be excluded and instead included in a specialty or professional liability policy.

It is always important to evaluate each business in relation to this coverage. However, such exposures are not necessarily limited to high-profile occupations, such as those listed above. For example, retail businesses with paid security staff may have significant exposure to charges of invasion of privacy and false imprisonment. Any company publishing newsletters faces potential exposure to libel or plagiarism claims. A company evaluating products may become a target for defamation lawsuits. Religious organizations can be sued if they release information considered to be defamatory. The important point is to first determine how an offense can occur and then identify the steps to take or measures and procedures to implement in order to prevent the offense from happening.

Defense costs are another area to consider. Personal and advertising injury cases often lead to lawsuits, which can be very contentious. Insurance companies cover all the costs to defend these cases, and they can become quite expensive.

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.

ADDITIONAL INSURED ENDORSEMENTS

Several additional insured endorsements are available to address specific requirements imposed by additional interests. Additional interests are typically included due to contractual requirements. The named insured makes its limits available to the additional insured for claims related to loss which may be brought against the additional insured due to its relationship with the named insured.

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. It should include, at a minimum, loss dates and descriptions of whether the losses are open or closed, as well as the amount paid or the current reserve amount. Reserve information is often not provided because it offers an estimate, which may or may not be accurate.

Example: Pamela was not paying attention when she suddenly looked up and accidentally collided with Marsha. She was at fault. Pamela asked if Marsha was injured and offered to call an ambulance, but Marsha declined and continued on her way. Pamela then informed her insurance company about the incident and did not think about it further.

About 18 months later, a claims adjuster and an attorney reached out to Pamela, informing her Marsha was suing her for $1,000,000 due to a serious back injury resulting from their collision. The insurance company had been negotiating but failed, so the case was going to trial, and Pamela would need to testify. Should this case be reserved at $1,000,000, given the claim amount, or at $25,000 based on the insurance company's estimate of the actual liability?

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. Although the overall loss ratio may appear acceptable, it can become significantly worse once claims handling costs are considered.

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.

PRICING

Underwriters need to review manual premium calculations to ensure accuracy and completeness. They then apply additional judgment to adjust pricing with credits or debits based on the risk's specific characteristics, in accordance with the carrier's schedule rating plans. This judgment relies on identifiable and assessable factors.

ENDORSEMENTS

Underwriters need to review endorsement requests carefully. A straightforward name change might indicate a shift in ownership, potentially impacting operations. An address change should prompt questions about new locations and activities. Unusual language in insurance certificates should be scrutinized for operational changes. Many change requests contain clues suggesting possible operational modifications or emerging risks, which should be assessed.