What it means
A commercial general liability policy protects a business against claims that it caused injury or damage to others. Sometimes a single policy names several related companies as insureds, such as a parent company and its subsidiaries.
If one of those companies were to sue another over a defective product, the insurer would effectively be paying one of its own policyholders for a claim against another. The exclusion deals with that situation.
It states that the insurer will not pay for injury or damage arising from products made, sold or handled by one named insured when the claim is brought by another named insured. It applies only between the insureds named on the policy, and claims from outsiders are not affected.
Insurers include the exclusion for several reasons. The main one is to avoid covering what is really an internal dispute within a group, where the companies can often settle matters among themselves.
Another is to prevent the policy from being used to move losses from one group member to another. Companies with many subsidiaries should read their policies for this wording.
Where group companies trade with each other, for example when one subsidiary makes components and another assembles them, the exclusion may leave real exposures uncovered. A broker can often arrange separate policies for subsidiaries, or negotiate the clause away.
It is helpful to see the exclusion alongside the separation of insureds provision, which treats each insured as if it had its own policy. The two work together, and the exact outcome depends on the wording of the policy, the jurisdiction and the facts of the claim.
The clause is a technical point, yet it can decide whether a claim is paid. Anyone responsible for insurance should ask the broker to explain every exclusion that affects related companies.
In practice
Real-world examples.
Example
A parent company and its subsidiary are both named on one liability policy. The subsidiary buys faulty components from a sister company and tries to claim for the resulting damage, and the insurer declines under the exclusion. The group has since started to record which entities trade products with each other and to share that list with its broker every year.
Example
A group manufactures furniture in one entity and sells it in another. The sales entity faces a claim from a customer, which is covered, but a claim by the sales entity against the manufacturing entity is excluded.
Example
A risk manager reviews a new policy and finds the exclusion listed in the endorsements. She asks the broker to confirm whether any group companies trade products with one another and whether a separate policy is needed.
Case study
Seen in the real world.
Ashgrove Holdings is an illustrative, fictional group of three companies: a parts maker, an assembler and a distributor. All three were named on one liability policy arranged by the group's risk manager.
A batch of faulty parts caused $400,000 of damage to the assembler's equipment. The assembler made a claim, but the insurer pointed to the intercompany products suits exclusion and declined, because the parts maker was another named insured under the same policy.
The group had to absorb the loss. In this illustrative story, the risk manager then arranged separate policies for each company and asked the broker to review every clause that affected claims between related companies. She also briefed the finance director on why the original policy had looked adequate on paper, so that future insurance purchases would be questioned more closely before renewal. The broker explained that insurers often include the clause as a standard endorsement, so the surprise was common among groups that had bought a single policy for convenience. The risk manager added the exclusion to the group's insurance checklist and reviewed every renewal against it from then on. The broker added that the cost of separate policies was modest compared with the loss, and that the premium difference could often be offset by agreeing a higher deductible.
Watch out
Common mistakes.
- Assuming that naming every group company on one policy gives complete cover, when claims between them may be excluded.
- Reading only the main policy form and missing the endorsements, where exclusions of this kind are often added.
- Believing the exclusion blocks claims from outside customers, when it applies only to claims between named insureds.
Questions
People also ask.
What does the exclusion do in simple terms?
It removes insurance cover when one company named on the policy makes a products-related claim against another company named on the same policy.
Which businesses should pay attention to it?
Groups with several related companies that make, buy or sell products from each other and share one liability policy.
Can the exclusion be removed?
Sometimes, since it is an endorsement that can be negotiated or avoided by buying separate policies, but this depends on the insurer.
From the founder's library
Take it further with the book.
Build your financial confidence beyond this definition. Shihan's full-length guide, Accounting Fundamentals, takes the same plain-English approach and turns it into a complete, practical playbook for non-finance managers, business owners and students - with chapter-end quiz answers and presentation slides included.
25% off with code MMHQ25, applied at checkout. Priced in USD - checkout may show the equivalent in your local currency.
View the book and save 25%Related