Liability Policies Aren’t That General

Picture this:

* You own a service business treating and disposing of hazardous wastes generated by manufacturers in a number of industries throughout the Los Angeles area.

* Following long-established procedures, your crews park your trucks--scrubbed clean of all waste materials--each night in lots strategically located to make the trucks available in the event of an emergency anywhere in the region.

* One of those lots lies within eyeshot of several houses in an upscale neighborhood. The owners complain about your trucks, but you hold a long-term lease on the lot and you refuse to find a new site.

* The owners sue, alleging that your trucks have caused the value of their houses to drop.

Your first reaction is to scoff. Your second reaction is to call your insurance broker. You carry general liability insurance coverage, and you figure it will cover you.

Simple, right?

Wrong. General liability insurance isn’t blanket coverage, and it doesn’t protect you against all eventualities. Most particularly it doesn’t automatically protect you against frivolous lawsuits.

You can, of course, argue any claim with your carrier. But if you lose, you will face the claim entirely on your own.

If this takes you by surprise, you aren’t alone. Most business owners don’t understand what their liability insurance actually covers, and when they find themselves fighting over a claim, they get angry. What, after all, is general liability insurance for?

The answer lies in the language found in most general liability policies, and a quick look shows two reasons the coverage does not always apply:

* For starters, something must actually happen to trigger your insurance coverage--namely, what insurers call an “occurrence,” by which they mean a sudden or accidental event such as your equipment damaging a building owned by one of your customers.

* In addition, the event must cause damage to property or injury to people.

In plain English, this means that unless a mishap causes property damage or personal injury, you have no protection. Instead, you must hire a lawyer at your own expense and, worse, pay any damages should the suit actually go to trial and you lose.

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And don’t think you can persuade your insurer to cover you if indeed the property owners convince a jury that your trucks actually did cause the drop in the value of their houses. Property damage does not mean diminution of value per se. It means physical damage, and the financial loss to the property owner must come about as a result of that damage.

“Diminution of value is a gray area, and very hard to prove, so it’s hard to support a claim for it under general liability insurance coverage,” says Kevin Shane, a vice president of the big insurance brokerage J&H; Marsh & McLennan, who specializes in professional liability and errors and omissions insurance

“Property damage is covered when property has been physically damaged or when there is a loss of use of property.”

Similar arguments limit your coverage against claims of personal injury to third parties, Shane says.

You still face big odds if you argue that your policy’s “loss of use” provisions trigger coverage. In essence, these provisions commit the insurer to pay for losses not directly caused by property damage or personal injury resulting from some kind of mishap.

These provisions might protect you if, for example, a restaurant owner showed that vapors from your paint factory drove customers away--the theory being that your fumes deprived the restaurant owner of the use of his or her property. But they would probably not protect you under circumstances like those outlined above because the property owners suffered no loss of use per se.

The long and the short of it is that general liability policies don’t protect you against claims not arising out of actual damage to property or injury to people. They cover you only when some mishap causes property damage or personal injury, or when something you do causes another to lose the use of property.

Nuisance suits, in other words, don’t qualify.

To be sure, nuisance suits rarely go to trial, but whether they do or don’t, you still foot the bill for your lawyer’s time plus the costs of any settlement. Put together, these can easily reach into the tens of thousands of dollars, doing serious damage to your bottom line.

All is not gloom and doom, however, according to Shane. You can’t get insurance against the costs of nuisance suits, but insurers sense a demand for such protection and may devise some way to sell it, he says.

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It is already possible, he notes, to tweak some liability policies--notably those covering intellectual property and pollution liability--to trigger coverage for legal costs in the absence of any damage to property or injury to people.

Put another way, insurers already understand that, when it comes to liability insurance, not all risks arise from property damage, personal injury or the loss of use of property. Some risks have nothing to do with such events, and business owners want protection against them, too.

“The insurance market is very soft,” Shane says. “Things are being done today that weren’t being done a year ago. And if you could take the concern business owners have for issues like this and draw a box around it for underwriters, it might be doable.”

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How to get financing will be a topic of The Times’ Small Business Strategies Conference Oct. 17-18 at the Los Angeles Convention Center. Columnist Juan Hovey will be featured. He can be reached at (805) 492-7909 or via e-mail at jhovey@gte.net.