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Cross Liability Coverage

A feature of insurance contracts overlooking multiple customers represented in the form of a clause on commercial insurance policies

What is Cross Liability Coverage?

Cross liability coverage is a feature of insurance contracts covering multiple customers represented in the form of a clause on commercial insurance policies. It allows each party to be seen and treated as if they own separate policies, thus allowing them to gain coverage in the event that a claim is made against the other.

 

Cross Liability Coverage

 

Understanding Cross Liability Coverage

A cross liability coverage is seen as a standard addition to any commercial general liability (CGL) policy in order to distinguish between the individual insureds.

If a café wants to establish a branch in a new location and is taking up an insurance policy for the same, the financial institutions may push for their manufacturing or sourcing company to be part of the policy, too. Such a practice provides the bank and the café owners with protection in case there is any property, bodily damage, or other kinds of negative consequences on the customer that is paying for the café’s product and service.

Even though cross-liability coverages allow parties to function independently in some situations, the total policy coverage applies collectively to all parties.

Sometimes, certain umbrella policies come with exclusions for insureds vs. insureds’ disputes where cross-liability coverages lose their purpose of allowing one party to claim against the other despite being covered under one contract.

 

Examples of Cross Liability Coverage

 

Example 1

Using our previous example of the cafe, let’s see how cross liability coverage functions in a real-world scenario.

Assume that the café’s owners recently signed a deal with a food manufacturer that provides them with condiments for sandwiches offered to customers.

In an unfortunate situation, a legal claim was filed against the café for food poisoning, and the investigation reveals that it was from the condiments offered at the cafe.

In such a situation, the cafe is liable to file a claim against the condiment supplier while the supplier is covered under the same insurance contract. It is dependent on if the insurance policy includes a cross liability clause.

Essentially, what the clause has done is allowed the two parties – the café’s owners and the supplier – to act and function as two separate entities covered by separate policies despite truly being covered by the same insurance contract.

As discussed previously, sometimes, there are exclusions that disallow this unique situation and prevent the parties from enjoying cross liability coverage benefits.

 

Example 2

Let’s take another real-life scenario to see where cross liability coverages apply and benefit the parties involved.

A recently married husband and wife bought a second car as an anniversary present to themselves. In finding an appropriate insurance policy, they decide to take one with a cross liability coverage.

One day, when the husband was reversing, he drove into his wife’s car, causing serious damage.

Since they are both covered under a contract that allows for cross liability coverage, the wife is eligible to claim the equivalent amount for repairing her car since she can claim the money against her husband while he is covered through their insurance policy.

 

Severability of Interest

A severability of interest clause outlines that the same insurance policy clauses apply separately to the individual insured parties. Similar to the cross-liability coverage discussed previously, severability of interest also allows for a claim from one insured party to the other to be covered under the clause. It is important to keep in mind that there are certain coverage limits that are defined for each of the parties based on certain criteria.

For example, a chief financial officer may have a higher insurance coverage limit. The main difference here compared to cross liability coverages is the discrepancy in coverage limits that can be applied to different insured parties compared to the cross liability coverage, which is standard across the insured.

 

Related Readings

CFI offers the Certified Banking & Credit Analyst (CBCA)® certification program for those looking to take their careers to the next level. To keep learning and developing your knowledge base, please explore the additional relevant resources below:

  • Insurance Expense
  • Life and Health Insurers
  • Maximum Foreseeable Loss
  • Named Beneficiary

Financial Analyst Certification

Become a certified Financial Modeling and Valuation Analyst (FMVA)® by completing CFI’s online financial modeling classes and training program!