Commercial general liability insurance pays for legal damages an organization would otherwise have to pay for injuries or damage to others. These include bodily injuries, property damage, advertising injuries, and personal injuries such as violations of privacy. Another benefit of this insurance, however, can be just as valuable or even more so: Coverage for the cost of legal defense.
The standard CGL insurance policy gives the insurance company “the right and duty to defend the insured” against any suit seeking damages. Conversely, the company has no duty to defend against a suit seeking damages for an incident the policy does not cover. Most policies provide coverage for defense costs in addition to the amounts available for payment of damages.
Because the company does not have to defend a claim it believes is not covered, the policyholder and the company may disagree about whether a duty exists. Courts tend to interpret the duty to defend in ways that are most favorable to policyholders. In a 2013 decision, a federal court said, “unless there exists an unequivocal demonstration that the claim against the insured does not fall within the policy coverage, the insurer has a duty to defend.”
However, the duty is not absolute. If the plaintiff’s allegations are not potentially covered by the policy, the company is not obligated to provide a defense. The California Supreme Court upheld this principle in a 2014 decision involving one company’s alleged disparagement of another company’s product: “Here, because the facts and pleadings were not sufficient to support a possible claim of disparagement, there was no duty to defend under the … policy.”
Suppose the insured is a construction firm. An employee tosses a tool, striking and injuring another contractor’s employee on the job site. The injured employee sues the contractor and the worker. The CGL policy does not cover injuries the insured person expected or intended. However, it is possible that the employee did not expect or intend to hurt someone. That means the loss may be covered. The insurance company will have to defend both the firm and the employee against the lawsuit.
Now assume the policyholder is a restaurant. One patron arrives already intoxicated, has drinks with dinner and leaves the restaurant in worse shape. He suffers serious injuries when a car strikes him, and he sues the restaurant for his injuries. The CGL policy does not cover injuries that result from the insured organization contributing to a person’s intoxication, if selling alcoholic beverages is part of the organization’s business (the restaurant would need to have Liquor Liability coverage which is not part of the CGL policy and has to be added). Because there is no possibility that the restaurant’s policy will cover this claim, the insurance company has no duty to provide defense.
The cost of defending a lawsuit can often exceed the cost of the settlement. All businesses should discuss their liability coverage with their insurance agents to ensure that they have the protection they need if they get sued. The agent can identify coverage gaps and recommend solutions. They may involve additional premiums, but the extra protection is with the cost.