Businesses Face Million-Dollar Risks: 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. Eric Scott, Vice President of Property and Casualty Solutions at Trisura, points out this increasing demand. This situation highlights the value of a “liability tower.”

A liability tower combines a primary CGL policy with additional umbrella and excess liability policies. This layered approach increases the overall coverage amount and helps close any gaps in protection. The result is stronger protection for businesses against large liability claims.

…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.

Businesses That Should Consider Coverage Beyond a Standard CGL Policy

Businesses in high-risk industries—those handling hazardous materials, facing frequent lawsuits (including class actions), or prone to severe injuries or significant property damage—often need more than a standard Commercial General Liability (CGL) policy. These businesses should explore higher liability limits via excess or umbrella insurance.

Increasingly, even low-risk businesses are required by vendors and clients to carry umbrella coverage as a condition of contracts. As Eric Scott notes, “Often, one insurer is not willing to put up large [primary] limits on a very small business,” making umbrella policies a practical solution for small and medium-sized organizations to meet these contractual obligations.

Rising court awards, especially in the U.S., further underscore the need for this added protection. It’s vital to understand the difference between excess and umbrella coverage: excess extends existing CGL limits, while umbrella offers broader coverage, filling gaps once the underlying policy is exhausted.

A clear understanding of what’s covered and, crucially, what’s not at the umbrella level is essential. For example, in catastrophic losses involving multiple severe injuries or deaths, umbrella policies with high attachment points may only be triggered after multiple underlying policies are exhausted.

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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 and increasingly important even for low-risk businesses to meet contractual obligations, it’s equally vital to understand what those basic CGL policies actually cover.

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.

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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. 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 for the cost of this claim could have ranged from several hundred thousand to a few million dollars.

The Bottom Line: Protecting Your Business

Today’s business landscape presents evolving risks that often leave standard commercial liability policies with dangerous gaps. Unexpected policy exclusions can lead to devastating financial losses. Fortunately, commercial insurance rate increases are currently trending downward, as reported by Swiss Re Institute, Applied Systems, and Aon Canada. “On the casualty side, we observe a trend of general market softening across most long-tail lines,” notes Kera McDonald, chief underwriting officer at Swiss Re Corporate Solutions.

However, even with favourable market conditions, your business protection strategy must adapt to these changing risks. Regular policy reviews are crucial to identify potential gaps before they result in costly surprises. Partnering with a qualified insurance professional who understands your industry’s specific challenges is invaluable in building a robust coverage plan.

It’s essential to remember that your basic liability policy may not cover everything you assume it does. Investing time now to review your coverage is a wise decision. Discovering gaps during a claim is far more expensive than addressing them proactively.

FAQs

Q1. 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.

Q2. 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.

Q3. 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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