Businessowners Policy: Section II Liability
A businessowners policy (BOP) is often described as the commercial equivalent of a homeowners policy. It combines property and liability protection for small and medium-sized businesses in a simplified package. Its standard form is the Businessowners Coverage Form.
Characteristics and purpose
A BOP is designed for many small and medium-sized operations, such as offices, apartments, and certain manufacturing, service, and processing businesses. It includes its own Declarations and common conditions, similar to those found in a commercial package policy (CPP) used for larger businesses.
The purpose of the BOP is to give a small or medium-sized business the property and liability coverages it needs in a single form. Its main characteristics are:
- One form in three sections. Section I is Property, Section II is Liability, and Section III holds the common policy conditions that apply to both.
- Open-peril property coverage. Section I covers direct physical loss unless the loss is excluded or limited.
- Replacement cost valuation. Covered property is generally valued at replacement cost, without deduction for depreciation.
- Business income and extra expense included. They are additional coverages, paid outside the Section I limits of insurance.
- Limits that adjust automatically. The building limit rises through the policy year, and the business personal property limit rises for seasonal peaks.
Eligibility
Whether a business is eligible for a BOP depends largely on the size and type of the operation. Eligibility rules are not part of the policy form. They are underwriting rules, and they vary by insurer.
Insurers commonly write BOPs for risks such as:
- Small repair shops
- Drugstores
- Bake shops
- Beauty salons
- Small convenience stores
- Pizza shops
Classes of risks that insurers commonly treat as not eligible for BOP coverage include, but are not limited to:
- Any large manufacturer of products
- Hospitals
- Auto dealerships
- Financial institutions (banks and credit unions)
Businessowners section II — liability
Section II of the businessowners policy (BOP) is the liability half of the form. Coverage is provided for the legal liability of the insured arising out of the ownership of the business premises and the business activities. Section III then sets out the common policy conditions, which apply to both the property section and the liability section.
Liability insurance pays other people. When the insured is legally responsible for someone else’s injury or damaged property, Section II pays the damages and defends the insured.
Coverages
Section II has two coverages: business liability and medical expenses.
Business liability. The insurer pays those sums that the insured becomes legally obligated to pay as damages because of bodily injury, property damage, or personal and advertising injury to which the insurance applies.
- Bodily injury and property damage are covered only if they are caused by an occurrence that takes place in the coverage territory, and only if the injury or damage occurs during the policy period.
- Personal and advertising injury is covered only if it is caused by an offense arising out of the insured’s business, committed in the coverage territory during the policy period.
Business liability also reaches injury or damage that occurs away from the insured’s premises and arises out of its products or its completed work. The form calls this the products-completed operations hazard.
Defense. The insurer has the right and duty to defend the insured against any suit seeking covered damages. The duty to defend ends when the applicable limit of insurance has been used up in paying judgments, settlements or medical expenses. The insurer also makes supplementary payments, such as the expenses it incurs, court costs taxed against the insured, and interest on a judgment. These payments do not reduce the limits of insurance.
Damage to premises rented to you. A business is generally not covered for damage to property it rents or occupies. Section II makes two exceptions: damage by fire to premises rented to the insured or temporarily occupied by the insured with the owner’s permission, and damage other than by fire to premises rented to the insured for seven or fewer consecutive days. Both are subject to the separate damage to premises rented to you limit. The fire coverage is often still called fire legal liability.
Medical expenses. The insurer pays medical expenses for bodily injury caused by an accident on premises the insured owns or rents, on ways next to those premises, or because of the insured’s operations. These payments are made regardless of fault. The expenses must be incurred and reported to the insurer within one year of the date of the accident.
Exclusions
Business liability does not apply to, among others:
| Exclusion | What is not covered | Main exceptions |
|---|---|---|
| Expected or intended injury | Bodily injury or property damage expected or intended from the standpoint of the insured | Bodily injury from the use of reasonable force to protect persons or property |
| Contractual liability | Liability the insured assumed in a contract or agreement | Liability the insured would have without the contract, and liability assumed in an insured contract |
| Liquor liability | Liability for causing or contributing to a person’s intoxication, or furnishing alcohol to a person under the legal drinking age or under the influence | Applies only if the insured is in the business of manufacturing, distributing, selling, serving or furnishing alcoholic beverages |
| Workers’ compensation and similar laws, and employer’s liability | Any obligation under a workers’ compensation law, and bodily injury to an employee arising out of and in the course of employment | |
| Pollution | Injury or damage from the release of pollutants at or from the insured’s premises or a waste site, and clean-up costs | |
| Aircraft, auto or watercraft | Any aircraft, auto or watercraft owned or operated by, or rented or loaned to, any insured | Parking a non-owned auto on or next to the premises |
| Professional services | Rendering or failing to render a professional service, including legal, accounting, medical, engineering, cosmetic and pharmacy services | |
| Damage to property | Damage to property the insured owns, rents or occupies, property loaned to it, and personal property in its care, custody or control | The two exceptions for premises rented to the insured, described under Coverages |
| Damage to your product | Damage to the insured’s own product arising out of it or any part of it | |
| Damage to your work | Damage to the insured’s completed work arising out of it or any part of it | The damaged work, or the work the damage arises out of, was performed on the insured’s behalf by a subcontractor |
Medical expenses are not paid for bodily injury to an insured (other than a volunteer worker), to a person hired to do work for an insured or for a tenant of an insured, to a person injured on the part of the premises that the person normally occupies, to a person entitled to benefits under a workers’ compensation law, to a person injured while taking part in sports or athletic contests, or for injury included within the products-completed operations hazard. Anything excluded under business liability is excluded for medical expenses too.
Who is an insured
Who is insured depends on how the named insured is designated in the Declarations.
| Named insured | Insureds |
|---|---|
| An individual | The named insured and spouse, but only for the conduct of a business of which the named insured is the sole owner |
| A partnership or joint venture | The partnership or joint venture, and its members, partners and their spouses, but only for the conduct of the business |
| A limited liability company | The company, its members for the conduct of the business, and its managers for their duties as managers |
| Any other organization, such as a corporation | The organization, its executive officers and directors for their duties as officers or directors, and its stockholders for their liability as stockholders |
| A trust | The trust, and its trustees for their duties as trustees |
Employees are also insureds, for acts within the scope of their employment or while performing duties related to the business, and volunteer workers are insureds only while performing duties related to the business. They are not insureds for injury to the named insured, or to a co-employee injured in the course of employment or while performing duties related to the business. A person or organization acting as the named insured’s real estate manager is an insured as well.
Limits of insurance
The Section II limits shown in the Declarations are the most the insurer pays, regardless of the number of insureds, claims made, suits brought, or persons making claims.
| Limit | The most the insurer pays for |
|---|---|
| Liability and medical expenses limit | All bodily injury, property damage and medical expenses arising out of any one occurrence, and all personal and advertising injury sustained by any one person or organization |
| Medical expenses limit | All medical expenses because of bodily injury sustained by any one person |
| Damage to premises rented to you limit | Property damage to any one premises while rented to the insured, or fire damage while it is rented to or temporarily occupied by the insured with the owner’s permission |
| Aggregate limit, products-completed operations | All injury and damage included in the products-completed operations hazard: twice the liability and medical expenses limit |
| Aggregate limit, all other | All other bodily injury and property damage, plus medical expenses, plus personal and advertising injury: twice the liability and medical expenses limit |
The limits apply separately to each consecutive annual period.
Suppose the Declarations show a liability and medical expenses limit of $1,000,000 and a medical expenses limit of $5,000. If two customers are hurt in one accident, the most the insurer pays for that occurrence is $1,000,000, and no more than $5,000 of it is medical expenses for either customer. Across the year, the most it pays is $2,000,000 for products-completed operations claims and $2,000,000 for all other claims together.
General conditions
Four general conditions apply to liability and medical expenses.
- Bankruptcy. Bankruptcy or insolvency of the insured does not relieve the insurer of its obligations.
- Duties in the event of occurrence, offense, claim or suit. The insured must notify the insurer as soon as practicable of an occurrence or offense that may result in a claim. If a claim is made or a suit is brought, the insured must see that the insurer receives written notice as soon as practicable, immediately send copies of any demands or legal papers, and cooperate. No insured may voluntarily make a payment, assume an obligation or incur an expense without the insurer’s consent, except at its own cost. First aid is the exception.
- Legal action against us. No one may join the insurer in a suit against an insured, or sue the insurer unless all the policy terms have been complied with. A claimant may sue the insurer to recover on an agreed settlement or a final judgment against an insured, up to the limit of insurance.
- Separation of insureds. The insurance applies as if each named insured were the only named insured, and separately to each insured against whom a claim is made. This does not increase the limits of insurance.
Definitions
Section II gives special meaning to certain terms, among them:
Section III — Common policy conditions
Section III applies to both Section I and Section II. Its conditions include:
- Cancellation. The first named insured may cancel by giving the insurer advance written notice. The insurer may cancel by giving the first named insured written notice at least 10 days ahead for nonpayment of premium, or 30 days ahead for any other reason. Only five days’ notice is required when certain conditions exist at a covered building, such as a building vacant or unoccupied for 60 or more consecutive days. If the insurer cancels, the premium refund is pro rata. If the first named insured cancels, it may be less than pro rata.
- Changes. The policy can be amended or waived only by an endorsement issued by the insurer.
- Concealment, misrepresentation or fraud. The policy is void in any case of fraud by the named insured, or if the named insured or any other insured intentionally conceals or misrepresents a material fact concerning the policy, the covered property or a claim.
- Liberalization. If the insurer adopts a revision that broadens coverage without additional premium within 45 days before the policy period or during it, the broader coverage applies immediately.
- Transfer of rights of recovery against others to us. After the insurer pays, the insured’s rights to recover from another party pass to the insurer to the extent of the payment. Under the property coverage, the insured may waive those rights in writing before a loss. After a loss it may waive them, also in writing, only against a party that at the time of the loss was another insured under the policy, a business firm it owns or controls or that owns or controls it, or its tenant.
Endorsements are available to change a BOP, for example spoilage, hired and non-owned auto liability, and liquor liability endorsements.
Lesson summary
- A BOP gives a small or medium-sized business property and liability coverage in one form with three sections. Eligibility is an underwriting rule that varies by insurer.
- Section II has two coverages. Business liability pays damages the insured is legally obligated to pay for bodily injury, property damage, and personal and advertising injury. Medical expenses pays regardless of fault, for expenses incurred and reported within one year of the accident.
- Bodily injury and property damage must be caused by an occurrence in the coverage territory and must occur during the policy period.
- Business liability excludes, among others, expected or intended injury, pollution, autos, professional services, and damage to property the insured owns, rents or occupies.
- Who is an insured depends on how the named insured is designated in the Declarations. Employees are insureds for acts within the scope of their employment or while performing duties related to the business; volunteer workers only while performing duties related to the business.
- The liability and medical expenses limit applies to each occurrence. The two aggregate limits are each twice that limit, and the limits apply separately to each annual period.
- Under Section III, the insurer cancels on 10 days’ notice for nonpayment of premium and 30 days’ notice for any other reason, or five days’ notice when certain building conditions exist.