When discussing general liability insurance, clients sometimes ask, "Now, will this policy cover me for ten years into the future because my buddy tells me I need to make sure I get a policy that covers my work for ten years?" There are many even in the insurance industry who do not understand this concept, so I wanted to provide you with some quick background information.
General Liability policies generally do not say that they cover for 10 years. Instead, a standard full occurrence policy is designed to cover bodily injury and property damage that occur during the policy period. The key is that the damage--not the work--must have occurred during the policy period. If the damage happened after the policy has ended, then the policy would not be interested in responding to the claim because the damage did not occur during the policy period. If there was damage done during the policy period but the damage was not noticed for three years, then the claim should still be covered under the original policy because the damage occurred during the policy period.
Then why do we hear about a 10-year occurrence policy if the occurrence form does not talk about 10 years and only talks about covering occurrences that happen during the policy period? The 10 years generally refers to the statute of limitations for reporting a claim. Historically, the statute of limitations for reporting a claim has been 10 years and if you want to make sure that you have a policy that will cover you throughout the time when claims can come against you, then you assume that you want the 10 year full occurrence policy even though “10 years” does not appear in the policy wording. That makes sense, but again, the full occurrence policy still only covers occurrences that happen during the policy period; not occurrences that happen eight or nine years after a policy period.
Now, many carriers do not offer the standard occurrence form but they modify it in one way or another. They typically will add a sunset clause or a manifestation provision. The sunset clause is pretty simple to understand. It basically just shortens the reporting period. If there is a 2-year sunset clause then you have 2 years to report any claims for damage done during the policy period. If there is a 5 year sunset clause, then you have 5 years to report any claims for damage done during the policy period. What is interesting about sunset clauses is that, at least in California, the statute of limitations is based on the type of defect and is often much shorter than 10 years. Here are some examples from California Civil Code section 896:
1. Plumbing and sewer issues 4 years
2. Electrical systems issues 4 years
3. Cracks in Driveways, sidewalks, pathways 4 years
4. Irrigation and drainage issues 1 year
5. Untreated wood post deterioration 2 years
6. Untreated steel fence deterioration 4 years
7. Paint and stain deterioration 5 years
8 Landscaping systems 2 years
9. Dryer ducts 2 years
The manifestation provision is a little trickier. With the manifestation occurrence form you still have the 10-year reporting period as with the standard, but the occurrence has to have become known (or made evident, or obvious) during the policy period. This form would not want to cover a situation where the damage became apparent after the policy period even if the damage occurred during the policy period and they often require that the damage be obviously apparent. That is, unlike a full occurrence policy, the manifestation policy doesn’t want to send out a team of scientists to determine whether or not there was a microscopic crack in a pipe during the policy period that caused damage to occur at a later date. The manifestation policy wants to see that there was a water leak that first occurred during the policy period and it was apparent to anyone who walked in and got his/her feet wet even if the claim wasn’t filed until years in the future.
As you can imagine, you’re generally going to pay more for the standard occurrence form than the modified forms. Some carriers will offer the manifest provision in conjunction with a sunset clause which would reduce the premium even more.
I know this is a bunch of insurance-eze, but these are important concepts for you to understand when purchasing this important coverage, especially when there are many brokers out there who are giving incorrect information on this. I hope that this information will help you in the future.