Million-Dollar Risks: Learn About Commercial Liability Gaps
Most business owners believe their commercial general liability policy offers complete protection. Reality tells a different story. Hub International’s North American Outlook Report 2025 reveals that 73% of companies operate while underinsured.
Businesses and their insurance brokers are noticing a trend: they need higher coverage limits beyond their standard commercial general liability (CGL) insurance.
Businesses That Should Consider Coverage Beyond a Standard CGL Policy
The demand for higher liability coverage is clearly growing. Eric Scott, Vice President of Property and Casualty Solutions at Trisura, explains that what was adequate years ago just doesn’t cut it now.
“…back in the day, $2 million CGL [may have been adequate],” says Scott. “But now it’s typically a larger CGL limit. And more frequently, there’s specific mention of umbrella liability needing to be purchased in order to fulfill the insurance requirements within that contract.”
This increasing need highlights the value of a liability tower. A liability tower is essentially a layered approach that combines your primary Commercial General Liability (CGL) policy with additional umbrella and excess liability policies. This method achieves two key things:
- Increases Coverage: It dramatically raises the total protection amount.
- Closes Gaps: It helps ensure there are no unintended holes in your coverage.
The result is a stronger defence for businesses against large liability claims.
According to Hub International’s North American Outlook Report 2025
81%
Of companies say economic challenges and inflation have made it difficult to get sufficient coverage
73%
Of these businesses report they are underinsured against risks that could impact their bottom line
Who Needs Extra Coverage?
It’s no surprise that high-risk industries, like those dealing with hazardous materials, that face frequent lawsuits or are prone to catastrophic damage, need to explore higher limits through excess or umbrella insurance.
However, umbrella coverage is becoming a requirement for almost everyone. Even low-risk businesses are often required by their clients and vendors to carry umbrella coverage as a condition of their contracts. As Scott mentions, “Often, one insurer is not willing to put up large [primary] limits on a very small business,” which makes purchasing an umbrella policy a practical, sometimes essential, way for small and medium-sized organizations to meet these contractual obligations.
Industries Most Likely to Need Enhanced Commercial Liability Coverage:
- Construction and contracting
- Manufacturing
- Transportation and logistics
- Hospitality and food service
- Healthcare and medical facilities
- Environmental services
- Professional services (accountants, consultants, etc.)
Skyrocketing court awards, particularly in the U.S., make this additional protection absolutely necessary. When a business faces a massive claim, having enough insurance can be the difference between survival and bankruptcy.
It’s helpful to understand the basic difference between the two main types of supplemental coverage:
- Excess Coverage: This extends the limits of your existing Commercial General Liability (CGL) policy. Think of it as piling more money on top of the coverage you already have.
- Umbrella Coverage: This provides broader protection. It not only adds higher limits but can also fill certain gaps in coverage once your underlying CGL policy is exhausted.
What You Need to Watch Out For
Understanding exactly what your umbrella policy covers and, even more importantly, what it doesn’t cover, is crucial.
In the case of truly massive losses, like a major accident involving multiple severe injuries or fatalities, you need to pay attention to the umbrella policy’s attachment point. This point is the dollar amount where the umbrella coverage actually kicks in. If the attachment point is very high, the umbrella policy may only start paying out after several of your other underlying policies have been completely exhausted.
Beyond Limits: Understanding the Nuances of Coverage
While understanding the need for higher limits through excess or umbrella insurance is crucial for businesses in high-risk industries, it is also increasingly important for low-risk businesses to meet contractual obligations. It’s equally vital to understand what those basic CGL policies actually cover.
Alarming Claim Denial Statistics:
The fact that insurance companies denied over 20.4% of liability claims in 2020 underscores this point. Analyzing denial reasons reveals a troubling trend: denials due to lack of coverage surged from 50.3% in 2020 to a staggering 64.8% in 2021.
This highlights the critical need for clearer communication about policy coverage before purchase. Being unaware of common CGL exclusions and the availability of other crucial product lines like pollution liability, errors & omissions (E&O), and directors & officers (D&O) insurance remains the top reason for claim denials in the property and casualty sector.
As the following case demonstrates, even seemingly comprehensive coverage can have significant gaps, particularly when it comes to specialized risks.
Case Overview: West Van Lions Gate Cleaners Ltd.
This case involves a coverage dispute between West Van Lions Gate Cleaners Ltd. and its insurers, Intact and Economical, regarding a lawsuit alleging environmental contamination. A neighbouring business sued West Van, claiming that dry-cleaning chemicals and petroleum products from the dry cleaner’s site contaminated their property’s groundwater and soil.
West Van sought coverage from its insurers, who denied the claim based on pollution exclusions in their Commercial General Liability (CGL) policies. The case has made its way through the British Columbia court system, and West Van has applied for leave to appeal to the Supreme Court of Canada.
Basis for Denial of Coverage and Court Ruling
Both Intact and Economical denied coverage based on pollution exclusions present in their respective CGL policies. These exclusions varied slightly in wording but generally aimed to exclude coverage for damages “arising out of” the release or escape of pollutants at or from premises owned or occupied by the insured. The key issue was whether the alleged contamination fell within these exclusions.
Initially, the British Columbia Supreme Court ruled in favour of West Van, finding ambiguity in the exclusion wording, particularly concerning contamination originating from prior owners or operators of the site.
However, the British Columbia Court of Appeal overturned this decision. The judge emphasized that the policies were “occurrence-based” and not intended to cover events predating the policy’s effective dates. The appeal court concluded that the pollution exclusions clearly applied, and the insurers had no duty to defend West Van.
Would “more coverage” have helped West Van Lions Gate Cleaners?
There is a possibility that having a separate environmental impairment liability (EIL) policy, sometimes also called pollution liability insurance, could have helped, in theory. A standard CGL policy, even with higher limits, typically excludes pollution-related claims, as was the case here.
That’s why the pollution exclusions in the CGL policies were so decisive in the court’s rulings. EIL insurance is specifically designed to cover environmental contamination. It can respond to claims like the one against West Van, addressing cleanup costs, legal defence, and third-party liability related to pollution. If West Van had carried an EIL policy in addition to their CGL policies, it’s possible the EIL policy would have responded to the lawsuit, even though the CGL policies didn’t.
Unfortunately, the exact coverage amount that West Van Lions Gate Cleaners Ltd. was seeking from Intact and Economical is not publicly available in the case details. It’s tough to give a precise number without more information, but we can make an educated guess based on similar cases and the context of this one.
The potential cost of this claim could have ranged from several hundred thousand to a few million dollars.
Common Misconceptions About Commercial Liability
Many business owners operate under misconceptions about commercial liability coverage that can leave them vulnerable to significant financial losses. Understanding these common myths is crucial for proper risk management.
Top Misconceptions About Commercial Liability Insurance:
- Misconception #1: “My CGL policy covers all business-related liability.”
Reality: Standard CGL policies typically exclude numerous exposures, including professional errors, cyber incidents, pollution, and employment practices.
- Misconception #2: “Higher limits are all I need for complete protection.”
Reality: While higher limits help with covered claims, they don’t extend coverage to excluded risks. The West Van case demonstrates that even with higher limits, pollution claims would still be excluded.
- Misconception #3: “All commercial liability policies are essentially the same.”
Reality: Significant variations exist between insurers in terms of coverage terms, exclusions, and conditions. Policy wording matters tremendously when claims arise.
- Misconception #4: “Small businesses don’t need to worry about liability towers.”
Reality: As an increasing number of contracts require higher limits, even small businesses need to consider liability towers to meet client requirements and protect against catastrophic claims.
Recent Trends in Commercial Liability Insurance in Canada
The commercial liability insurance landscape in Canada continues to evolve in response to emerging risks, legal developments, and market conditions. Understanding these trends is essential for businesses seeking to optimize their coverage strategies.
Key Commercial Liability Insurance Trends in Canada (2025):
- Market Stabilization After Hard Market Cycle
After several years of hardening markets, marked by significant premium increases and capacity restrictions, the commercial market is showing signs of stabilization. Increased competition among insurers is helping to moderate premium increases and expand the availability of coverage options.
- Rising Contractual Requirements
Businesses are increasingly facing higher liability limit requirements in contracts. What was once a standard $2 million CGL requirement has commonly increased to $5 million or more, driving demand for excess and umbrella coverage.
- Expansion of Environmental Liability Concerns
With increasing focus on environmental protection and stricter regulations, more businesses are recognizing the need for specialized environmental liability coverage beyond their standard CGL policies.
- Social Inflation Impact on Claims Severity
Social inflation, the tendency for insurance claims to rise in cost above general economic inflation, continues to drive higher settlement amounts and judgments, particularly in bodily injury cases.
- Growing Emphasis on Risk Management Services
Insurers are increasingly offering value-added risk management services to help businesses mitigate liability exposures, potentially qualifying them for more favourable coverage terms and pricing.
The Bottom Line: Protecting Your Business
The risks businesses face today are constantly changing, and standard commercial liability policies often have dangerous gaps. An unexpected exclusion in your policy can quickly lead to a devastating financial loss.
A Good Time to Review Your Policy
The good news is that we are currently seeing some favourable trends in the commercial insurance market. Reports from Swiss Re Institute, Applied Systems, and Aon Canada indicate that commercial insurance rate increases are slowing down.
As Kera McDonald, chief underwriting officer at Swiss Re Corporate Solutions, observes, “On the casualty side, we observe a trend of general market softening across most long-tail lines.”
Take Action Now
A regular policy review is critical for finding potential gaps before they turn into costly surprises.
It is essential to remember that your basic liability policy may not cover everything you think it does. The best defence is being proactive: investing time now to review your coverage is a smart business decision.
FAQs
What are some common exclusions in commercial general liability policies?
Commercial general liability policies typically exclude coverage for intentional harm, contractual liability from assumed obligations, and damage to property under the insured’s care or control. They also often exclude employee injuries, which usually fall under workers’ compensation insurance.
What is the difference between excess liability and umbrella liability coverage?
Excess liability coverage extends the limits of your existing commercial general liability policy under the same terms and conditions. Umbrella liability coverage, on the other hand, provides broader protection after the underlying coverage is exhausted.
How can businesses enhance their liability coverage?
Businesses can enhance their liability coverage through additional insurance options like umbrella policies, strategic policy endorsements for specific risks, and risk transfer techniques such as contractual agreements. Regular policy reviews and working with insurance professionals who understand industry-specific challenges are also crucial.
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Posted in Business on February 12, 2025 by Hope Prost
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