Understanding Who Is Insured On Your Commercial Policy

“There is only one constant in life…Change!” I’m sure you’ve heard that statement before as it’s a variant of an ancient Greek philosopher. This is even more prevalent in the business world as owners add partners, change their business type, morph into a different entity, are bought and sold, etc. As businesses go through changes, you may soon find yourself with a business policy that fails to cover work that you did under the previous entity. This could be a catastrophic mistake.

Here are a few examples taken from an IA&B article by Jerry Milton:

Example 1

Melvin operated his business for 10 years as a sole proprietor under the trade name, Mel’s Heating and Cooling. He incorporated the business two years ago as Melvin’s Mechanical Contractors, Inc. Mel is the CEO of the corporation. For 10 years Mel had a CGL (Commercial General Liability policy) with “Melvin DBA Mel’s Heating and Cooling” as the named insured. For the past two years, the named insured on the CGL has been “Melvin’s Mechanical Contractors, Inc.”

A furnace installed by Mel five years ago exploded last month. A claim for the injuries and damages that resulted from this explosion has been filed against Mel. Is Mel an insured for this loss? No! Mel is being sued for injuries and damages arising out of work he did as an individual. The CGL in effect at the time of the loss insures Mel but only for his duties as CEO of the named corporation.

How do we solve this problem? We include “Melvin DBA Mel’s Heating and Cooling” as an insured under the current CGL policy issued to the corporation. Mel needs completed-operations coverage for work he did as a sole proprietor for a minimum of 12 years in Pennsylvania, 10 years in Maryland and six years in Delaware.

Example 2

Carl was a self-employed contractor specializing in home improvements for 35 years. He decided to retire last year and called his agent and canceled his CGL policy.

Carl has received a complaint alleging that several people were injured when a deck he built three years ago collapsed and that the collapse was a result of his faulty work. The collapse occurred six months after Carl retired. Is Carl covered for this loss? Again, no!

What is the solution for this scenario? Carl should have purchased discontinued-operations coverage, which is a CGL providing completed-operations coverage after the business has been closed or sold.

Example 3

Ellen founded Electronics, Inc. in 1970. Last year she retired and moved to her condominium on the beach. Her son and daughter continued to operate the business.

Ellen has just been notified that a machine manufactured by Electronics a few years ago malfunctioned. A fire resulted and caused extensive damage to the customer’s building.

A claim has been filed against Electronics, Inc. and Ellen personally for these damages. Does she have coverage? Once again, no! Ellen was an insured under a CGL when the machine was manufactured and sold, but when the loss occurred, she no longer qualified as an insured since she was no longer an executive officer or employee of the named insured.

Many claims-made liability policies (D&O, Employment Practices, Professional, etc.) cover past, current and future officers and employees. But, the CGL only covers current officers and employees. If coverage needs to be continued for officers when they retire, then they must be added as insureds.Many claims-made liability policies (D&O, Employment Practices, Professional, etc.) cover past, current and future officers and employees. But, the CGL only covers current officers and employees. If coverage needs to be continued for officers when they retire, then they must be added as insureds.

The CGL covers bodily injury and property damage that occurs during the policy period. As these examples illustrate, you can be an insured when the work was done but not an insured when the loss occurs.

These issues affect contractors, manufacturers, processors, etc. Be sure to talk to your insurance agent about any change in business name, entity change or change in ownership.