COMMERCIAL INSURANCE COVERAGE GAPS (COMMON, COSTLY & DANGEROUS)
Commercial Insurance Coverage Gaps
Gaps in business insurance are both real and very common. They exist in many commercial insurance policies, and often, businesses are not even aware they exist.
We have tried to identify some of the most common commercial insurance coverage gaps (this is not an exhaustive list) to help businesses both identify and close these dangerous and potentially very costly coverage gaps.
Coverage Gaps That Can Occur On Most Types Of Business Insurance Policies
- Incomplete or Inaccurate List of Insureds – Including an incomplete or inaccurate list of insureds on the declarations page. The improper listing of insureds in the policy declarations is a common cause of coverage gaps.
- Improper “First Named Insured” – Specifying an improper “first named insured” on a policy. Many insurance policies assign special rights and duties to the first named insured including notifying the insurer of an occurrence, loss, or claim and paying premiums.
Commercial Insurance Coverage Gaps In General Liability Policies
- Improperly Relying On Fire Legal Liability Coverage – Reliance on commercial general liability fire legal liability coverage to insure leased premises when commercial property insurance is needed to satisfy the obligations of a lease.
- Not Providing Additional Insured Status – Failure to provide additional insured status as required by contract.
- No Coverage For Joint Ventures And Newly Acquired Companies – Lack of coverage, or inadequate coverage, for joint ventures and newly acquired companies.
- Relying On General Liability Policy For Professional Liability Risks – Relying on the general liability or umbrella policy to cover professional liability (errors & omissions) exposures.
- No Coverage for Leased Workers – Failure to arrange coverage for leased workers in states that do not bring leased workers within the workers compensation system.
- No “Loss of Electronic Data” Coverage – Failure to arrange “loss of electronic data” coverage resulting from physical injury to tangible property.
- Contractual Assumptions For Incidental Security Services – Failure to add coverage for contractual assumptions of personal injury liability claims stemming from false arrest, detention, or imprisonment by indemnitors that provide incidental security services.
- No Coverage Relating To Herbicides & Pesticides – Failure to endorse coverage in connection with herbicides and pesticides, as required by manual rules, for insureds engaged in lawn care, fumigation, pest control, and crop spraying services.
Commercial Insurance Coverage Gaps In Professional Liability (E&O) Policies
- Inadequate Limits When Defense within Limit – Inadequate limit due to inclusion of defense coverage within the limit.
- Incorrect Description Of Professional Services – An erroneous description of professional services contained in the application for coverage, which may negate the insurance.
- Gaps and/or Overlaps Between Professional & General Liability Policies – Gaps and overlaps between the professional liability policy and the CGL policy due to lack of or faulty coordination of insuring agreements, exclusions, and definitions of the two policies.
- No Coverage For Predecessor Firm Exposures – Failing to obtain coverage for predecessor firm exposures.
- Restrictive Wording of “Absolute” Exclusions – Coverage denials caused by “absolute” exclusions that use “arising out of, involving, or in any way related to” wording, rather than “for” language
- No Coverage Of Punitive Damages – No coverage of punitive damages because of either an exclusion or absence of a “most favorable jurisdiction” provision.
- No Tail Coverage For Retired Professionals – Not providing tail coverage for claims made against professionals following retirement.
Commercial Insurance Coverage Gaps In Workers Compensation Policies
- No Other States Coverage For Incidental Exposures – Failure to provide other states insurance under the workers compensation and employers liability insurance policy for incidental exposures in other states.
- Not Listing States Of New Permanent Operations – Not ensuring that the states of an employer’s new permanent operations are listed for coverage in the workers comp policy.
- No Voluntary Workers Compensation Endorsement – Not including the voluntary workers compensation endorsement to address claims brought by workers like volunteers.
- No Foreign Voluntary Workers Compensation – Failure to procure a foreign voluntary workers compensation endorsement to provide coverage for endemic disease and repatriation costs of employees working abroad.
- No Longshore and Harbor Workers Compensation Act Coverage Endorsement – Not including the Longshore and Harbor Workers Compensation Act coverage endorsement from employer that have a potential exposure under the Act.
Commercial Insurance Coverage Gaps In Umbrella Or Excess Liability Policies
- Improperly Scheduling Underlying Policies – Failure to completely and accurately schedule the underlying policies in the umbrella policy.
- Purchasing Lower Than Required Primary/Underlying Limits – Purchasing lower primary or underlying limits than the umbrella requires.
- Not Insuring All Parties – Failure to ensure that all parties insured by the primary policy are also insured by the umbrella policy.
- Improper “Follow Form” Provisions – Improper “follow form” provisions that turn an umbrella policy into a standalone excess policy.
- Overlooking Additional Or Broader Exclusions – Failure to discover additional or broader exclusions in the umbrella than in the primary cgl policy.
- Using Narrower Definitions – Use of narrower definitions in the umbrella than are included in the primary policies.
- Accepting Strict Exhaustion Language – Strict exhaustion language in the umbrella policy that requires the actual payment of the entire underlying limit before the excess coverage applies.
- Non-concurrency Between The Umbrella & Underlying Policies – Potentially violating the umbrella policy’s aggregate limit prerequisite via an underlying policy term that is different or non-concurrent with the umbrella policy term.
- No Coverage for Punitive Damages – No coverage for punitive damages where permitted by law,
- Using Occurrence Form Over A Claims-Made Underlying Policy – Use of an occurrence form umbrella over one or more claims-made underlying coverages or policies with no attempt to coordinate the coverage trigger provisions.
- No Coverage For Insured VS Insured Claims – Failure to ensure coverage for insured versus insured claims.
Commercial Insurance Coverage Gaps In Business Auto Policies
Commercial auto policies protect businesses from claims from the use of vehicles. This includes lawsuits seeking damages for bodily injury or property damage by third parties in auto accidents and the company is found liable.
- Improperly Insuring Private Passenger Autos On A Business Auto Policy – Improperly insuring private passenger autos that should be insured by a personal auto policy on a commercial auto policy or the reverse.
- No Drive Other Car Coverage – Not covering executives or others who are provided with company vehicles with drive other car coverage, when they have no personal auto policy (including no-fault coverage).
- No Hired and Non-owned Auto Liability Coverage – Failure to procure hired and non-owned auto liability coverage for insureds that do not have any owned vehicles themselves.
- Improperly Insuring Mobile Equipment – Failure to identify mobile equipment subject to motor vehicle laws and cover it under commercial auto.
- No Hired Auto Physical Damage Coverage – Failure to provide hired auto physical damage coverage.
- No Coverage For Autos Hired by Employees – Failure to provide liability and physical damage coverage to employees who hire autos in their own names for business use.
Commercial Insurance Coverage Gaps In Property Policies
- Inadequate Limits Due To Incorrect Valuation Basis – Failure to purchase adequate limits of insurance from using accounting book value as the insurable value of covered property, overreliance on property value estimates from software programs using minimal information about the property, or other causes.
- Less Than Optimal Valuation Provisions – Use of less than optimal valuation provisions like Actual Cash Value instead of Replacement Cost.
- Use Of Specific Rather Than Blanket Limits – Use of specific rather than blanket limits of insurance, especially when an insured has multiple locations.
- Use Of A Per Occurrence Limitation Or Margin Clause – Use of a per occurrence limitation of liability or margin clause that essentially converts blanket limits into specific limits.
- No Agreed Value Clause – Not using an agreed value clause or failing to renew it annually on a multiyear policy.
- Failure To Include All Locations – Failure to include all locations for which coverage is needed.
- Inadequate Sub limits For Unnamed Locations – Use of inadequate sub limits for unnamed locations.
- Not Considering Cost Of Debris Removal – Failing to consider the cost of debris removal when determining the appropriate debris removal sublimit or the overall insurance limit.
- No Ordinance Or Law Coverage – Failing to purchase ordinance or law coverage, including loss to the undamaged portion of the building, the cost of demolishing the undamaged portion of the building, and the increased cost of reconstruction or repairs to comply with ordinances.
- No Time Element Ordinance Or Law Coverage – Failing to purchase time element ordinance or law coverage to increase the period of restoration to include the additional time needed to comply with ordinances and failing to consider this additional period of restoration when selecting time element coverage limits.
- No Flood And Earthquake Coverage – Not purchasing coverage for loss from flood and earthquake.
- No Equipment Breakdown Coverage – Failure to arrange equipment breakdown coverage for direct damage to equipment, consequential spoilage, and resulting loss of income.
- Inadequately Insuring Vacant Property – Not adequately insuring vacant property due to vacant property limitations in the commercial property policy.
- Inadequately Insuring Property Under Construction – Inadequately insuring property under construction, renovation, or expansion by relying on the commercial property insurance form instead of a builders risk form.
Commercial Insurance Coverage Gaps In Equipment Breakdown
- Not Insuring Business Interruption Exposures – Failing to insure business interruption, rental value, extra expense, and leasehold interest exposures.
- No Business Interruption Coverage For Utility Interruption – Failure to cover business interruption arising from utility interruption that originates away from the insured’s premises, including overhead transmission lines.
- No Coverage For Contingent Business Interruption Exposures – Not arranging coverage for contingent business interruption exposures arising from damage to property of the insured’s key suppliers or customers or businesses that attract the insured’s customers.
- Inadequate Business Income Coverage Limits – Purchasing inadequate business income coverage limits as a result of failing to consider the possibility that it could take more than one year to replace damaged property and resume operations.
- Not Understanding Reporting Form Coverage – For reporting form coverage, failure to understand the penalties for not submitting reports on time and failure to arrange for increased limits of insurance when needed.
- Not Insuring Finished Stock On Selling Price Basis – Not insuring finished stock on a selling price basis.
- No Extended Period of Indemnity Coverage – Failing to procure extended period of indemnity coverage when arranging business interruption coverage for an organization that will experience a slow resumption of sales following a shutdown.
Commercial Insurance Coverage Gaps In Directors & Officers Liability Policies
- Privately Held Companies Not Buying Insurance – Failure of privately held companies to buy D&O liability insurance without adequately evaluating the exposure to loss.
- No Coverage For Executives Serving On Outside Boards – Not adding coverage for executives serving on outside charity or association boards to the D&O policy.
- Not Naming High-Level Non-officers As Insureds – Failing to name high-level non-officers as insureds in the D&O policy.
- Not Obtaining Prior Acts Coverage – Failing to obtain D&O coverage for a newly acquired subsidiary’s prior acts.
- Buying “Limited” Severability Provision – Buying a D&O policy with a “limited” rather than a “broad” severability provision.
- Excess Coverage Only After Exhaustion By Insurer Payment – Buying an excess D&O policy that provides coverage only when the underlying layer(s) is exhausted by insurer payment (rather than one that includes coverage when payment is made by an insured).
- Not Amending the “Damages” Definition – Not amending the “damages” definition in the D&O policy to include coverage for criminal investigation costs.
- Failure To Maintain Insurance Exclusion – Failing to remove or amend the failure to maintain insurance exclusion from the D&O policy.
- Not Selecting “Final Adjudication” Language – Selecting a D&O policy with “in fact” rather than “final adjudication” language within the intentional/criminal acts exclusion.
- No Coverage For Directors & Officers Of Foreign Subsidiaries – Not providing D&O coverage for directors and officers of foreign subsidiaries either because they are not covered under the corporate policy or because a local policy is required to provide coverage.
Commercial Insurance Coverage Gaps In Management Liability Policies
- No Third-Party Liability Coverage In Employment Practices Liability – Not adding third-party liability coverage to EPLI policies.
- No Defense Coverage For Wage and Hour Claims – Not adding defense coverage for wage and hour claims to EPLI policies.
- No Employment Practices Liability Coverage for Leased Employees Or Independent Contractors – Failing to add coverage for leased employees or for independent contractors to EPLI policies.
- Not Naming Employee Benefit Programs As Insureds – Failure to name the insured’s employee benefit programs as insureds under the crime policy and, if necessary, add ERISA compliance language to comply with ERISA bonding requirements.
Commercial Insurance Coverage Gaps In Inland Marine Policies
- Not Insuring Property Shipped By Common Carrier – Not insuring property shipped by common carrier, on the assumption that the carrier will cover all losses.
- No Warehouse Coverage For Property In Transit – Overlooking the responsibility for property during inland and ocean transit and while stored at warehouses, resulting in inadvertent self-insurance.
- No Coverage For Rented/Borrowed Equipment – Failure to arrange coverage for rented or borrowed equipment.
Commercial Insurance Coverage Gaps In Crime Policies
- No Coverage For Employees’ Theft of Customers’ Property – Failure to add coverage for theft of customers’ property by the insured’s employees to the crime coverage.
- No Coverage For Independent Contractors or Volunteers Or As “Employees” – Failure to cover volunteers or independent contractors as “employees” under crime insurance.
- No Funds Transfer Or Computer Fraud Coverage – Not adding funds transfer or computer fraud coverage to the commercial crime policy.
- Inadequate Limit of Crime Coverage – Not purchasing an adequate limit of insurance for crime coverage, especially employee theft coverage.
Miscellaneous Commercial Insurance Coverage Gaps
- No Coverage For Environmental Liability Exposures – Failure to cover environmental liability exposures arising from owned property or construction operations.
- No Coverage For Pollution From Transportation Exposures – Failure to cover pollution liability arising from transportation of pollutants.
- No Coverage For Copyright/Trademark Infringement Or Data Breach – Failure by companies that market or conduct business over the Internet to purchase liability coverage for copyright and trademark infringement or data breach.
- No Coverage For Data Breaches Of Personally Identifiable Information or Health Data – Failure by companies in possession of “personally identifiable information” or health data to buy coverage for the costs to mitigate data breaches.
Commercial Insurance Coverage Gaps - The Bottom Line
We hope this article on commercial insurance coverage gaps was informative. It is important for business owners to understand what risks their business actually faces, and then buy adequate insurance to cover their exposures. Most businesses are not aware of the exisitng gaps in their insurance program that can put their entire operation at risk.
Find a professional commercial insurance broker who can help you recognize the issues that lead to coverage gaps, identify dangerous coverage gaps in your insurance polices and find appropriate alternatives to close the gaps.