Legal Definitions - business-risk exclusion

A business-risk exclusion is a standard provision found in many commercial general liability (CGL) insurance policies. It specifies that the policy will not cover losses or damages that arise from the inherent risks of operating a business, particularly those related to the quality of a company's own work, products, or services, or its failure to perform a contract as promised.

These exclusions are designed to prevent insurance policies from becoming a guarantee of a business's performance or the quality of its output. Instead, CGL policies primarily focus on covering accidental bodily injury or property damage to third parties caused by the business's operations or products, rather than the costs associated with rectifying a business's own poor workmanship, defective products, or contractual breaches.

• Example 1: Construction Company's Defective Work

  A roofing company installs a new roof on a client's commercial building. Due to substandard materials and poor installation techniques, the roof begins to leak extensively during the first heavy rainfall, causing significant water damage to the building's interior walls and ceiling. The client demands that the roofing company fix the roof and cover the costs of the interior damage.

  How it illustrates the term: The roofing company's general liability policy would likely invoke a business-risk exclusion to deny coverage for the cost of repairing or replacing the faulty roof itself. This is considered a cost directly related to the company's own defective work – an inherent business risk. However, the policy *might* cover the cost to repair the *damaged interior walls and ceiling*, as this is consequential damage to other property caused by an accidental event (the leak), rather than damage to the company's own work product.

• Example 2: Software Developer's Non-Performing Product

  An IT consulting firm is hired to develop a custom software application for a client. After delivery, the client discovers that the software contains numerous critical bugs and does not perform several key functions as specified in the contract. This leads to significant operational delays and financial losses for the client, who then seeks compensation from the IT firm.

  How it illustrates the term: A business-risk exclusion in the IT firm's general liability policy would typically preclude coverage for the costs associated with reworking the faulty software, the client's lost revenue due to the software's non-performance, or any contractual penalties the firm might owe for failing to deliver as promised. These are risks inherent to the firm's professional services and the quality of its deliverables, rather than accidental damage to third-party property or bodily injury. (Note: Professional liability insurance, also known as Errors & Omissions (E&O) insurance, is specifically designed to cover such professional negligence, but a general liability policy would typically exclude it under business-risk provisions).

• Example 3: Manufacturer's Defective Product Batch

  A toy manufacturer produces a large batch of children's bicycles. After several units are sold, it's discovered that a critical component in the steering mechanism is defective, making the bicycles unsafe to ride. The manufacturer initiates a recall to prevent potential injuries and replace the faulty parts.

  How it illustrates the term: The manufacturer's general liability policy would likely invoke a business-risk exclusion to deny coverage for the cost of recalling the defective bicycles, the expense of replacing the faulty components, or the financial losses incurred from scrapping the unsellable inventory. These are costs directly related to the quality and performance of the manufacturer's own product and the inherent risks of its business operations. If, however, a child had been injured due to the defective steering, the medical costs for the injury might be covered, but the cost of the defective bicycle itself would still be excluded.