Like many small businesses, your company is probably insured under a business (general) liability policy. Your policy covers damages you are legally obligated to pay because of bodily injury or property damage that results from an occurrence (accident). It also covers damages you are legally obligated to pay because of personal and advertising injury caused by a covered offense.
General liability policies cover damages that result from a claim or suit.
While most policies define the term suit, they are silent on the meaning of claim. What is a claim and how does it differ from a suit? This article will answer that question.
Meaning of Suit
Under most general liability policies the term suit means a civil proceeding alleging damages because of bodily injury, property damage or personal and advertising injury that is covered by the policy. Note that a suit is a civil action, not a criminal action.
Beside lawsuits, the definition of suit includes an arbitration proceeding or other form of alternate dispute resolution (ADR) proceeding in which damages are claimed against you. ADR proceedings are covered if you submit to them voluntarily with the insurer's consent. For instance, you and a plaintiff agree to resolve a lawsuit via mediation. As long as your insurer consents to the mediation, it qualifies as a suit.
Also considered a suit is an arbitration proceeding you engage in because you are obligated to do so. The terms of a contract you signed may require you to resolve all disputes with another party via arbitration rather than lawsuits.
What is a Claim?
While most general liability policies don't define the word claim, this term generally refers to a demand for damages. A lawsuit that demands damages qualifies as a claim. However, many liability claims aren't lawsuits but simply requests for damages. These requests are usually initiated by a demand letter from the plaintiff or his or her attorney. The demand letter may be sent to you (the defendant) or to your liability insurer.
A demand letter summarizes the plaintiff's complaint against you. It describes the nature of the plaintiff's injury, the accident that caused it, and the reasons why the plaintiff is holding you responsible. The letter usually specifies a sum of money the plaintiff is seeking. It also includes documentation (such as a list of expenses) that explains how the sum was calculated.
A demand letter normally specifies a date by which the plaintiff expects you to respond. If you fail to reply by that date the plaintiff may file a lawsuit.
Here is an example of a typical claim filed against a liability policyholder.
Paul is the president of Prestige Properties, a residential property owner. Prestige owns a small apartment complex called Apex Apartments. The firm is insured for liability under a standard general liability policy.
One weekday morning Paul is in his office perusing the day's mail. He is shocked to find a demand letter from a local attorney. The letter describes injuries allegedly sustained two months ago by Susan Smith, a tenant of Apex Apartments. The letter states that on the date of the accident Susan was walking down a staircase from her apartment building to the parking lot. She was holding onto a handrail when the rail suddenly gave way. When the handrail broke, Susan tumbled down the staircase and fractured her shoulder.
The shoulder injury prevented Susan from performing her job as restaurant cook for three weeks. She is seeking $3000 in lost income. She is also demanding reimbursement for the $10,000 she has spent (and an additional $1000 she expects to spend) for medical treatment. Susan contends that Prestige Properties is liable for her injury because the accident that caused her injury resulted from Prestige's negligence. The handrail had been loose for several months before her accident. The problem had been reported to the apartment manager, a Prestige employee, on two separate occasions. However, the manager had failed to fix it.
Paul forwards the demand letter to his liability insurer. The insurer assigns the case to an adjuster, who reviews the letter and accompanying documents. After investigating the incident, the adjuster decides that the amount Susan is seeking in compensatory damages is reasonable. Prestige Properties' liability insurer sends Susan a check for $14,000.
As in the scenario described above, most claims against policyholders do not involve lawsuits. Instead, the plaintiff sends a letter demanding compensation for an alleged injury. Most of these demands are resolved out of court. The plaintiff or his or her attorney negotiates with the policyholder's insurer to reach a settlement.
Of course, some third parties do file lawsuits against policyholders. Yet, most suits never go to trial. Instead, the plaintiff and the policyholder's insurer settle the case out of court.