Cross-Liability Coverage
Understanding Cross-Liability Coverage in Commercial Insurance
Liability insurance policies often include more than one person or entity, and this can include named insureds, automatically defined insureds, and additional insured. But what happens to the coverage if one insured sues another insured under the same policy? While this may seem unusual, it often happens, and is addressed by specific policy provisions.
Cross-liability coverage is significant in family-owned businesses or among related companies. For example, if one family member is successful in obtaining a judgment against another, the benefit could inadvertently apply to both parties at the insurer’s expense. For this reason, most personal-lines policies exclude coverage for cross-liability suits among family members, with some exceptions, such as New York’s supplemental spousal liability insurance.
Intercompany Suits
Such situations can be termed to be “incestuous” and can occur when two related companies are insured under the same policy. However, standard Commercial General Liability (CGL) policies typically cover intercompany suits, such as product liability claims between related businesses.
If a business prefers to exclude these risks, an Intercompany Products Suits endorsement can be added. Excluding coverage may reduce premiums by removing intercompany receipts from the rating basis.
These exclusions are further expanded by ISO with optional endorsements that allow insurers to specifically exclude claims brought by one named insured against another in multiple liability coverage parts.
Separation of Insureds
One of the most crucial provisions affecting cross-liability coverage is the Separation of Insureds condition in CGL policies. This provision treats each insured as if a separate policy were issued to each, ensuring that coverage is available to one insured even if another insured is involved in a claim.
But this protection has limits. Some members, if sued by other employees or the named insured, may not be covered, such as employees, officers, or principals. There are exceptions for executive officers of managers of limited liability companies, who enjoy broader protection in certain types of bodily injury or personal injury suits.
Other insureds, such as real estate managers, legal representatives of deceased insureds, and newly acquired organizations, may also qualify without cross-liability restrictions. Volunteer workers are covered only for acts within the scope of the organization, and cross-liability exclusions apply if a volunteer injures another volunteer.
Additional Insureds
The additional insured endorsement extends coverage to third parties. This may include club members or business partners. If there are no restrictive terms in the endorsement, the Separation of Insureds provision automatically allows cross-liability coverage for these additional insureds.
In some cases, endorsements may include restrictive language that limits cross-liability protection. These restrictions can sometimes be modified through a manuscript or independently filed endorsement, allowing broader coverage while adjusting premiums accordingly.
Cross-Liability vs Insured vs Insured Exclusions
On the contrary, an insured versus insured clause is an exclusion that bars coverage for lawsuits between parties named on the same policy. This prevents collusive or internal claims.
Cross Liability coverage treats each insured individually. If one insured accidentally injures or damages property belonging to another insured on the same policy, the insurer covers the claim. This is typically included in Commercial General Liability policies via the Separation of Insureds clause. The limitation is that while it does allow inter-party lawsuits, it does not increase the overall party limits; this means that the total payout by the insurer remains capped.
The Insured vs. Insured clause explicitly denies coverage for claims brought by one insured against another insured on the same policy. The main purpose of this clause is to prevent fraudulent or collusive lawsuits, such as business partners manufacturing internal disputes to access insurance funds. These exclusions are commonly found in Directors and Officers (D&O) liability, management liability, and certain professional liabilities.
Practical Considerations
It is crucial for any organization to be aware of the rules behind cross-liability coverage, especially for the sake of risk management. Policyholders should be informed about potential gaps before a loss occurs, particularly in family businesses, volunteer organizations, or groups of related companies. Proper documentation and review of endorsements can help avoid surprises and ensure that coverage aligns with real-world operations.
For more queries, contact an expert at Professional Liability Insurance Group today.
