What it means
The cover answers a specific question: if the business's activities hurt someone outside the business or damage something it does not own, who pays. A visitor slipping in a showroom, a contractor cracking a client's flooring, or a product causing injury after sale all fall inside the typical policy.
Legal defence costs are usually covered in addition to the limits, which matters because defending a groundless claim still costs real money. Just as important is what the policy excludes.
Professional advice errors need separate cover, injuries to the company's own employees fall under workers compensation, vehicle accidents belong to commercial auto, damage to the business's own property belongs on a property policy, and the cost of recalling a defective product is normally excluded. Buying general liability and assuming everything is covered is the single most common misunderstanding.
Limits are quoted as a pair. A per-occurrence limit caps what the insurer pays for any one incident, while an aggregate limit caps total payments across the policy year, so several moderate claims can exhaust the aggregate even if none came close to the occurrence limit.
Businesses that need higher protection usually add an umbrella policy that sits above the general liability limits rather than raising the underlying policy. Timing matters too.
An occurrence policy responds to injury or damage that happened during the policy period, whatever the date the claim is made, while a claims-made policy responds only to claims reported during the period. Most general liability cover in the market is written on an occurrence basis, which is more forgiving when harm surfaces years after the work was done.
Pricing works off an exposure base, most often annual revenue or payroll, multiplied by a rate that reflects the industry classification and the claims history. Contractors and hospitality businesses pay far more per dollar of revenue than office-based firms, and a poor loss record raises the rate through an experience modifier.
Customers and landlords typically verify the cover through a certificate of insurance and often ask to be named as an additional insured.
In practice
Real-world examples.
Example
A customer trips over a trailing cable in a cafe and fractures a wrist. The cafe's general liability insurer appoints a solicitor, negotiates a $48,000 settlement covering medical costs and lost earnings, and pays the defence costs on top of the settlement.
Example
A flooring contractor's equipment leaks hydraulic fluid across a client's newly finished timber floor. The client claims $22,000 to replace the affected area, and the contractor's policy responds because the damage is to property the contractor does not own.
Example
A marketing agency runs a campaign using a slogan a competitor claims to have used first. The advertising injury section of the agency's general liability policy funds the defence and a modest settlement, an exposure the agency had not realised the policy covered.
Formula
Calculation
Base premium = (Exposure base / 1,000) x Rate per $1,000 of exposure
A landscaping contractor has annual revenue of $4,000,000 and its classification carries a rate of $3.50 per $1,000 of revenue.
Exposure units = $4,000,000 / 1,000 = 4,000
Base premium = 4,000 x $3.50 = $14,000 a year
Now suppose a retaining wall it built collapses and injures a passer-by, and the matter settles for $1,300,000. With a $1,000,000 per-occurrence limit and a $2,000,000 aggregate, the general liability policy pays $1,000,000 and an umbrella policy covers the remaining $300,000. The general liability aggregate now has $2,000,000 - $1,000,000 = $1,000,000 left for any further claims in the same policy year.Case study
Seen in the real world.
Thornbury Event Staffing is an invented business used purely as an illustrative example. It supplied crews for outdoor festivals and carried a general liability policy with a $1,000,000 occurrence limit and $2,000,000 aggregate, which it renewed each year without reviewing.
During one summer it faced four separate claims from different events, settling at $420,000, $380,000, $610,000 and $290,000 for a total of $1,700,000. No single claim came near the occurrence limit, but the aggregate left only $300,000 of cover for the remaining four months of the policy year. A fifth claim in September had to be part-funded from the company's own reserves.
In this fictional outcome Thornbury restructured at renewal, raising the aggregate to $4,000,000 and adding an umbrella layer above it. The illustrative lesson is that businesses with high claim frequency need to watch the aggregate limit at least as carefully as the headline occurrence figure.
Watch out
Common mistakes.
- Assuming general liability covers mistakes in professional advice. Errors in design, advice or specification need professional indemnity cover, and general liability policies exclude them explicitly.
- Confusing the per-occurrence limit with the total cover available. The annual aggregate caps everything paid in the policy year, and several mid-sized claims can exhaust it well before any single claim reaches the occurrence limit.
- Accepting a customer's contract wording without checking the policy supports it. Contracts often require specific limits, additional insured status and waivers of subrogation, and promising cover the policy does not provide leaves the business personally exposed.
Questions
People also ask.
Does the policy cover injuries to my own employees?
No, employee injuries fall under workers compensation or employers liability cover, which is a separate and usually compulsory policy.
What is the difference between occurrence and claims-made cover?
Occurrence cover responds to harm that happened during the policy period no matter when the claim arrives, while claims-made cover responds only to claims reported while the policy is live, which means gaps appear if cover lapses.
Why do customers ask to be named as an additional insured?
It extends the business's policy to protect the customer against claims arising from that business's work, so the customer is not left relying on a supplier's willingness to pay.
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