Topic:
INSURANCE (GENERAL); LIABILITY INSURANCE; CORPORATIONS;
Location:
CORPORATIONS; INSURANCE;

OLR Research Report


March 3, 2008

 

2008-R-0183

CORPORATE LIABILITY INSURANCE

By: Janet L. Kaminski Leduc, Associate Legislative Attorney

You asked for a description of corporate liability insurance products and state insurance laws regarding them.

SUMMARY

One way for a business to limit corporate liability is purchasing insurance that meets the business' needs based on its potential risks. Some common business insurance products available include general liability, directors and officers, employment practices, and errors and omissions. These are described below.

There also are numerous other insurance products available to a corporate employer, who may wish to periodically consult with its insurance agent to review needs and adjust coverage appropriately in light of business changes during the year or anticipated in the future. Other products include fiduciary liability, environmental, intellectual property, employee benefit liability, commercial motor vehicle and property, and workers' compensation.

State insurance laws applicable to liability policies are contained in chapters 700 and 701 of the Connecticut General Statutes. The laws speak to insurers' policy forms, rating practices, and nonrenewal and cancellation requirements. Except for workers' compensation and motor vehicle insurance, there is no statutory requirement to purchase or maintain corporate liability insurance.

GENERAL LIABILITY

A commercial general liability (CGL) policy is the most basic type of liability insurance. It protects against (1) accidents and injuries that occur on a company's or customer's property and (2) product liabilities. The policy makes payments to injured persons (e.g., to cover medical expenses) and owners of damaged property. It also covers libel, slander, copyright infringement, and other personal and advertising injuries.

A CGL policy typically excludes losses that can be covered under other insurance liability policies, such as those that cover directors and officers, employment practices, errors and omissions, automobiles, and workers compensation. A CGL policy does not cover damage to the insured company's property; it is limited to covering legal liability.

DIRECTORS AND OFFICERS

Directors and officers (D&O) insurance protects against claims employees, stockholders, and clients make against the company that also target directors and officers individually. Claims may arise from breach of duty and wrongful acts in connection with the company. For example, directors and officers may be liable for misappropriating corporate assets, commingling business and corporate assets, or not disclosing conflicts of interest.

A company purchases D&O insurance on behalf of its directors and officers to indemnify them against claims. Without such coverage, the director's and officer's personal assets could be at risk.

EMPLOYMENT PRACTICES

Employment practices insurance covers the costs of defending lawsuits brought by current, former, and potential employees. The lawsuits include those alleging discrimination, wrongful termination, sexual harassment, and breach of employment contract. It also can cover negligent evaluation, failure to hire or promote, mismanagement of employee benefit plans, wrongful discipline, wrongful infliction of emotional distress, and deprivation of career opportunity.

The policy usually covers the company and its directors and officers.

ERRORS AND OMISSIONS

Errors and omissions coverage protects against claims by customers that a company made mistakes or failed to perform contractual work. It insures errors by a company's owners, employees, and contractors and includes coverage for legal defense costs. It is also referred to as professional liability insurance.

APPLICABLE STATE LAWS

Other than workers' compensation and motor vehicle insurance, Connecticut law does not require companies to maintain liability insurance.

State insurance laws applicable to property and casualty insurance generally apply to the liability policies described above and are contained in chapters 700 and 701 of the Connecticut General Statutes. The laws speak to insurers' policy forms, rating practices, and cancellation requirements.

Policy Forms

Insurers must file commercial insurance policy forms with the commissioner before issuing them. If at any time the commissioner finds that any policy form is not in accordance with law, he must issue an order disapproving the form's issuance and provide the reasons for disapproval (CGS 38a-676(c)).

Rating Practices

Informational Filing: Commercial Insurance. With the exception of workers' compensation, employers' liability, and certain medical malpractice insurance, insurers must submit a rate filing (rates and rating methodologies) for commercial insurance policies to the insurance commissioner on or before its effective date for informational purposes only (CGS 38a-676(a)).

File and Use: Workers' Compensation and Employer Liability. An insurer must submit rate filings for workers' compensation and employers' liability insurance policies to the commissioner at least 30 days before their proposed effective dates. The commissioner may request an additional 30 days if necessary to review the filings. Rates are deemed approved unless the commissioner disapproves them in writing within the waiting period or extension (CGS 38a-676(b)(1)).

Prior Approval: Medical Malpractice. An insurer must submit rate filings for professional liability insurance for physicians and surgeons, hospitals, advanced practice registered nurses, or physician assistants to the commissioner and receive his approval before using them if the insurer seeks to increase rates over the rates in the insurer's previous filings by 7% or more. The insurer must notify insured professionals who would be affected by the increase and the department must hold a public hearing if any insured requests one. The commissioner must approve, deny, or modify the filing within 45 days from receipt (CGS 38a-676(b)(2)).

Premium Billing

An insurer must mail or deliver a premium billing notice to the insured at least 30 days before the policy renewal. But it does not have to send a bill for (1) a commercial risk policy if the rate for the next policy year increases by less than 10% or (2) any policy that had an annual premium of less than $50,000 for the prior policy period (CGS 38a-323(b)).

The advance billing notice period is at least 60 days for any liability policy where a municipality is the named insured (CGS 38a-323(d)).

Notice of Nonrenewal or Policy Transfer

The law prohibits an insurer from refusing to renew a policy that is subject to the property/casualty rating practice requirements unless the insurer notifies the policyholder at least 60 days in advance of such action (90 days for any professional liability policy). The notice must specify the reason for the nonrenewal.

The requirement does not apply in the case of nonpayment of premium. Also, an insurer that transfers a policy to an affiliate insurer because of a merger or acquisition does not have to send a cancellation notice if (1) there is no interruption of coverage and (2) the affiliate's policy contains the same terms, conditions, and provisions, including policy limits, as the transferred policy. But the insurer must notify a policyholder of the impending policy transfer at least 60 days before the transfer effective date (CGS 38a-323(a) and (e)).

Cancellation Requirements

By law, once a policy has been in effect for 60 days or renewed, an insurer may not cancel the policy unless any of the following occurs after the policy or renewal effective date:

1. nonpayment of premium,

2. conviction of a crime arising out of acts increasing the hazard insured against,

3. discovery of the insured's fraud or material misrepresentation in obtaining the policy or in perfecting any claim under it,

4. discovery of the insured's willful or reckless act or omission increasing the hazard insured against,

5. physical changes in the property increasing the hazard insured against,

6. the commissioner's determination that policy continuation would violate or place the insurer in violation of the law,

7. a material increase in the hazard insured against, or

8. a substantial loss of reinsurance by the insurer affecting the particular line of insurance.

If cancellation is due to nonpayment of premium, the insurer must give the insured at least 10 days' advance notice. The insured may continue the coverage and avoid cancellation by paying in full at any time before the cancellation date.

At least 10 days advance notice of cancellation must be given if cancellation is due to (1) conviction of a crime arising out of acts increasing the hazard insured against, (2) discovery of the insured's fraud or material misrepresentation in obtaining the policy or in perfecting a claim under it, (3) discovery of the insured's willful or reckless act or omission increasing the hazard insured against, or (4) the commissioner's determination that policy continuation would violate or place the insurer in violation of the law.

In all other cases, the insurer must give at least 60 days' advance notice (90 for a professional liability insurance policy).

A cancellation notice is not effective unless the insurer (1) sends it by registered or certified mail or by mail evidenced by a U.S. Post Office certificate of mailing or (2) delivers it to the named insured by the required advance notice date (CGS 38a-324).

Insurance Loss Information

Whenever the insurer or insured nonrenews or cancels a commercial motor vehicle insurance or general liability insurance policy, the insurer must give the insured written reports for the insured portion of the period beginning four years before the nonrenewal or cancellation date and ending six months before that date (CGS 38a-326). The reports must include:

1. each policy number,

2. each period of coverage provided,

3. evidence that the reports are furnished by the insurer,

4. written premiums,

5. pricing information specified by regulations and modifications used if the insured requests it, and

6. a detailed listing of incurred losses.

If the insurer does not renew or cancels the policy for reasons other than those permitting cancellation upon 10 days' notice under CGS 38a-324, the insurer must give the reports to the insured first named in the policy or the insured's authorized producer no later than the nonrenewal or cancellation notice date.

If the insured does not renew or cancels the policy or the insurer cancels it for any reason for which the 10 days' notice of cancellation is required under CGS 38a-324, the insurer must provide the reports within 60 days of receipt of a written request from the insured first named in the policy or the insured's authorized producer.

If subsequent reports updating the required information are needed to properly rate or to obtain insurance coverage with a different insurer, the prior insurer must provide the reports within 60 days of receipt of a written request from the insured first named in the policy or the insured's authorized producer.

    

  An insurer must provide, upon request by the principal named insured, a summary of policy claim information on commercial insurance policy for a period beginning not more than four years before the date of the request. The information must include:

1. each policy number,

2. each period of coverage,

3. the number of claims,

4. the paid losses of all loss information, and

5. the date of each loss.

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