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Three More Things You Didn’t Know About Liability Insurance

Three More Things You Didn’t Know About Liability Insurance

There is a large insurance company with some quirky commercials that likes to use the phrase “When it comes to insurance, what you don’t know CAN hurt you.”  They aren’t wrong.  Insurance policies can sometimes include clauses or conditions that can limit your insurance coverage.

At Hayes Brokers, we’re here to help by bringing some of these limitations to light.  As part of our ongoing series, here are three more things you didn’t know about General Liability Insurance.


Where Are Your Defense Costs?

When it comes to claims, you will most often here about the big check paid to a plaintiff.  That is often not the only check written on a claim.  An even bigger payout can come in the form of attorney and trial fees, otherwise known as defense costs.

Defense costs can be applied to your policy in one of two ways:

  1. Inside the limits.  This means that the defense costs come out of the policy limit.  If your per occurrence limit is $1,000,000 and your insurance company spends $400,000 in defense costs and pays out $800,000 to the plaintiff, the total claim amount would be $1,200,000.  Your per occurrence limit would be exhausted and the additional $200,000 would come out of your own pocket.
  2. Outside the limits.  This means that defense costs are picked up by the insurance company and do not erode your policy limit.  Any settlement to a plaintiff or claimant still lowers your policy limit.


Most insurance companies prefer policies with costs inside the limit, but some do offer the costs outside endorsement.   Be aware that defense costs outside the limit may also be limited to a certain amount and anything beyond that amount becomes the responsibility of the insured.


What Is The Difference Between Claims Made and Full Occurrence?

There are two types of General Liability insurance, and each has benefits and drawbacks. The cost effectiveness of one sometimes outweighs the ease of the other.

Claims Made insurance policies require that any claim made on the policy must be presented to the insurance carrier either during the policy period or within a certain amount of time after the policy expires (usually 60 days).  These policies are usually a little less expensive than a Full Occurrence policy, but the drawback is that once the claims reporting period is over, coverage ceases under the policy. This can become a problem if a claimant decides to wait until the statute of limitations is about to expire to file a claim or lawsuit.  The claims reporting period can be extended by renewing coverage with full prior acts with the same carrier, but if you change insurance carriers you must make sure you have prior acts coverage with the correct retroactive date. Contact your broker for more information.

Full Occurrence policies do not usually have a time limit on when a claim can be made on the policy.  However, payment of claims is subject to several factors including the statute of limitations, whether or not the insurance company is still in business and whether or not there is sufficient policy limit left available to pay the claim.  This can also be limited by the next point, a Sunset Clause.


What’s a Sunset Clause?

A Sunset Clause is a handy (for them) little endorsement that some insurance carriers use to limit coverage on a General Liability insurance policy to a certain predetermined period of time, usually 3-5 years.  The endorsement looks something like this.

For example, a policy runs from 06/01/2014-06/01/2015 and has a 3 year sunset clause.  The cause of any claims for this policy must (1) have occurred during the original policy period and (2) be filed before 06/01/2018.  In the case of a contractor, the work must have been done during the policy period and the claim must be filed prior to 06/01/2018.

Sunset clauses are dangerous to contractors because in the state of California (and many other states) construction defects must be warranted for 10 years.  A 3 year sunset clause means the contractor is left holding the bag for the final 7 years before the state requirement is met.  Always check your quotes and policies to be sure that a sunset clause does not find its way onto your policy.

A contractor recently contacted Hayes Brokers because a policy they had purchased from another broker included a sunset clause.  They were looking to find a General Liability policy that included full prior acts to cover any possible claims for work done during the policy period where the sunset clause was in effect.  While full prior acts coverage is available for purchase in some cases, if there is a known claim on a prior policy, an insurance carrier will not offer full prior acts coverage. This contractor had a claim that occurred on the policy with the sunset clause that wasn’t filed until beyond the scope of the sunset period, so they had to pay the claim out of pocket.


The word of the day is: Review!  Review your quote with your insurance broker to make sure you know what you are purchasing.  Keep your quote handy and review it against your policy when you receive it to make sure there are no surprises.  When in doubt, call your broker and ask, or call Hayes Brokers and we will review your policy with you.  We’re here to help.




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